Stockout cost and its effect on your business
How much will stockout cost? There is an easy answer: a lot!
There has been much scientific investigation on the effects of stockouts and on inventory management. Not so many analyzed the cost of stockout.
A well-known reference for this is a classical paper “Stockout Cost Models: Empirical Tests in a Retail Situation”, by C. K. Walter and John R. Grabner published on the Journal of Marketing in 1975! The authors analyzed a sample of over 1,400 customers for a liquor group of stores. They computed statistics on the expected behavior of customers in case of stockout: switching to another item with a possibly different prize, substituting with a smaller size item, returning to the store later or visiting a different store. From their empirical calculations, they estimated an expected loss of 24.2% of the retail price for a single stockout event. If the stockout situation continues, i.e., if the customer decided to return to the shop days later and again did not found the required item, the statistics on the expected loss roughly doubled to 47.8% of the retail price, due to the augmented probability of losing the customer.
Are you ready to lose 47.8% of your retail price? Shouldn’t you prefer to use a rational forecasting method and an optimized inventory replenishment policy so as to avoid this catastrophic loss?
Just a final notice: these numbers come from a scientific study conducted on a traditional sales channel, many many years ago. Nowadays things have surely changed. But, as you can easily guess, today’s losses are likely to be much much higher. Markets are global and customers have access to many alternatives. A customer returning to you or changing her choice in case of a stockout is less and less likely. It is only too easy to click away from your e-commerce site and find something else somewhere else. Expect to lose much more then 47.8% if you do not adopt a rational replenishment policy