Stockouts in Online Retailing

Abstract

Demand uncertainty and supply rigidity often create inventory shortages. Inventory shortages can have adverse consequences on both short- and long-term customer behaviors. Using data from an online grocer, this study has the following three main objectives: First, the authors empirically investigate the true nature of shortage costs by examining how stockouts and fulfillment rates affect customer's purchase behavior in both the short and long run. Second, the authors study how consumers’ reactions to inventory shortages differ across customer segments. They use these observations to illustrate how the seller might benefit from prioritizing fulfillment policies according to customer traits. Third, the authors study how the impact of inventory shortages varies across product categories. Using these insights, the authors discuss how the seller should allocate limited resources to improve order fulfillment across these categories. Overall, the authors find that stockout rates have a dramatic but nonlinear impact on the seller's profitability. This suggests that the firm can achieve many of the benefits of improving fulfillment rates through small decreases in stockout rates. They also find significant differences in how different types of customers respond to stockouts and that prioritizing inventory according to transaction history measures and basket contents can lead to large increases in contribution while only requiring moderate reductions in stockout rates.