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Measuring and Mitigating the Costs of Stockouts

Author

Listed:
  • Eric T. Anderson

    () (Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, Illinois 60208)

  • Gavan J. Fitzsimons

    () (Fuqua School of Business, Duke University, 1 Towerview Drive, Durham, North Carolina 27708)

  • Duncan Simester

    () (Sloan School of Management, Massachusetts Institute of Technology, Room E56-305, 38 Memorial Drive, Cambridge, Massachusetts 02142)

Abstract

There is now an extensive theoretical literature investigating optimal inventory policies for retailers. Yet several recent reviews have recognized that these models are rarely applied in practice. One explanation for the paucity of practical applications is the difficulty of measuring how stockouts affect both current and future demand. In this paper, we report the findings of a large-scale field test that measures the short- and long-run opportunity cost of a stockout. The findings confirm that the adverse impact of a stockout extends to both other items in the current order as well as future orders. We show how the findings can be used to provide input to inventory planning models and illustrate how failing to account for the long-run effects of a stockout will lead to suboptimal inventory decisions. We also demonstrate how the findings can be used in a customer lifetime value model. Finally, the study investigates the effectiveness of different responses that firms can offer to mitigate the cost of stockouts. There is considerable variation in the effectiveness of these responses. Offering discounts to encourage customers to backorder rather than cancel their orders is widely used in practice, but that was the least profitable of the responses that we evaluated. The findings have important implications for retailers considering the use of discounts as a response to stockouts.

Suggested Citation

  • Eric T. Anderson & Gavan J. Fitzsimons & Duncan Simester, 2006. "Measuring and Mitigating the Costs of Stockouts," Management Science, INFORMS, vol. 52(11), pages 1751-1763, November.
  • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:11:p:1751-1763
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    File URL: http://dx.doi.org/10.1287/mnsc.1060.0577
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Eric T. Anderson & Karsten Hansen & Duncan Simester, 2009. "The Option Value of Returns: Theory and Empirical Evidence," Marketing Science, INFORMS, vol. 28(3), pages 405-423, 05-06.
    2. repec:spr:annopr:v:240:y:2016:i:2:d:10.1007_s10479-013-1512-3 is not listed on IDEAS
    3. Karthik Balasubramanian & David F. Drake, 2015. "Service Quality, Inventory and Competition: An Empirical Analysis of Mobile Money Agents in Africa," Harvard Business School Working Papers 15-059, Harvard Business School, revised Oct 2015.
    4. Necati Tereyagoglu & Senthil Veeraraghavan, 2012. "Selling to Conspicuous Consumers: Pricing, Production, and Sourcing Decisions," Management Science, INFORMS, vol. 58(12), pages 2168-2189, December.
    5. Thiesse, Frédéric & Buckel, Thomas, 2015. "A comparison of RFID-based shelf replenishment policies in retail stores under suboptimal read rates," International Journal of Production Economics, Elsevier, vol. 159(C), pages 126-136.
    6. Samii, Amir-Behzad & Pibernik, Richard & Yadav, Prashant, 2011. "An inventory reservation problem with nesting and fill rate-based performance measures," International Journal of Production Economics, Elsevier, vol. 133(1), pages 393-402, September.
    7. Eric Anderson & Benjamin A. Malin & Emi Nakamura & Duncan Simester & Jón Steinsson, 2013. "Informational Rigidities and the Stickiness of Temporary Sales," NBER Working Papers 19350, National Bureau of Economic Research, Inc.
    8. Antonio Rosato, 2016. "Selling substitute goods to loss-averse consumers: limited availability, bargains, and rip-offs," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 709-733, August.
    9. Tava Lennon Olsen & Rodney P. Parker, 2008. "Inventory Management Under Market Size Dynamics," Management Science, INFORMS, vol. 54(10), pages 1805-1821, October.
    10. Xuanming Su & Fuqiang Zhang, 2009. "On the Value of Commitment and Availability Guarantees When Selling to Strategic Consumers," Management Science, INFORMS, vol. 55(5), pages 713-726, May.
    11. Vishal Gaur & Young-Hoon Park, 2007. "Asymmetric Consumer Learning and Inventory Competition," Management Science, INFORMS, vol. 53(2), pages 227-240, February.
    12. repec:eee:moneco:v:90:y:2017:i:c:p:64-83 is not listed on IDEAS
    13. Desmond (Ho-Fu) Lo & Stephen W. Salant, 2016. "The strategic use of early bird discounts for dealers," Quantitative Marketing and Economics (QME), Springer, vol. 14(2), pages 97-127, June.
    14. Liberopoulos, George & Tsikis, Isidoros & Delikouras, Stefanos, 2010. "Backorder penalty cost coefficient "b": What could it be?," International Journal of Production Economics, Elsevier, vol. 123(1), pages 166-178, January.
    15. Lejeune, Miguel A., 2013. "Probabilistic modeling of multiperiod service levels," European Journal of Operational Research, Elsevier, vol. 230(2), pages 299-312.
    16. repec:bla:stratm:v:38:y:2017:i:5:p:1134-1150 is not listed on IDEAS
    17. repec:bla:stratm:v:38:y:2017:i:8:p:1569-1587 is not listed on IDEAS
    18. Ilkyeong Moon & Yoon Jea Jeong & Subrata Saha, 2016. "Fuzzy Bi-Objective Production-Distribution Planning Problem under the Carbon Emission Constraint," Sustainability, MDPI, Open Access Journal, vol. 8(8), pages 1-17, August.
    19. Samii, Amir-Behzad, 2016. "Impact of nested inventory allocation policies in a newsvendor setting," International Journal of Production Economics, Elsevier, vol. 181(PA), pages 247-256.
    20. Rezaei, Jafar & Davoodi, Mansoor, 2011. "Multi-objective models for lot-sizing with supplier selection," International Journal of Production Economics, Elsevier, vol. 130(1), pages 77-86, March.
    21. Katsuhiko Shimizu, "undated". "New Strategy Implementation and Learning: Importance of Consensus," Working Papers 0034, College of Business, University of Texas at San Antonio.
    22. Andrés Musalem & Marcelo Olivares & Eric T. Bradlow & Christian Terwiesch & Daniel Corsten, 2010. "Structural Estimation of the Effect of Out-of-Stocks," Management Science, INFORMS, vol. 56(7), pages 1180-1197, July.
    23. Sachs, Anna-Lena & Minner, Stefan, 2014. "The data-driven newsvendor with censored demand observations," International Journal of Production Economics, Elsevier, vol. 149(C), pages 28-36.
    24. Becerril-Arreola, Rafael & Leng, Mingming & Parlar, Mahmut, 2013. "Online retailers’ promotional pricing, free-shipping threshold, and inventory decisions: A simulation-based analysis," European Journal of Operational Research, Elsevier, vol. 230(2), pages 272-283.

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    Keywords

    inventory; long run; stockouts;

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