A manager explains how to justify inventory spending by calculating what failures would cost. Using option pricing and probability models, you can show that holding extra stock protects shareholder value when supply chains break.
So if you were saying, hey, we need to go and put in more inventory, that's going to cost a bunch of money. They go, well, let's just, you know, how am I going to get a return on that investment? You say, well, the return on the investment is, you know, and there's financial ways of measuring, you know, Black-Scholes or CPM measures around the risk and the probability of disruption and what that means for shareholder value. So you can actually quantify the financial cost of failure based on probabilities and different scenarios and outcomes.
