Implied Backorder Costs

Abstract Management often has a policy concerning the maximum allowed backorder delay. In effect, this policy tacitly implies a certain backorder cost, which is developed in this paper. This implied cost can be used to ascertain whether the current policy is in the right ballpark. By calculating the implied backorder cost when the allowed delay is set to the smallest value of practical interest (say, one day), management is able to determine the critical backorder cost. An actual value higher than this means that backorders should not be planned.