Business 101: The Concept
of Opportunity Cost
Over the years, I’ve attended countless classes and seminars on everything ranging from merchandising and display to advertising and promotion. What never ceases to amaze me, however, is that some of the most valuable lessons I’ve learn about dive retailing did not come from any of these specialized programs. Instead, it came during my freshman year at University of Maryland, in Mr. Johnson’s Business 101 course.
Among the very first topics covered was that of opportunity cost — a concept that helps explain why inventory turnover is vital.
It’s difficult to be in this business without hearing about the importance of managing and controlling inventory.
- On the one hand, you can’t afford to lose sales because popular items are frequently out of stock. This much you already know (see below).
- On the other hand, if you tie up too much money in inventory, it can come back to haunt you in numerous ways. The reasons why may not be as apparent.
In this article, we’ll give you some examples of what is meant by opportunity cost and how it relates to inventory control and turnover.
The Cost of Being Out of Stock
John Wall writes:
“Today's customer wants his widget now and if you can’t deliver it, he’ll find it just a few keystrokes away. Teach your customers to shop the Internet and they will stop shopping with you. Although mail-order websites may not be able to deliver immediately, they create the sense of immediacy by enabling buyers to complete the sales process on line. While no dive store can stock everything under the sun, being out of stock on a regular basis is a Kiss of Death to the full-service dive retailer. You'd better have an excellent (not just good — excellent) special-order program in place. You might want to look into a loaner program as well.”
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