The economics of the stockout

Chapters

1. 0:23The single number
2. 1:59The crystal ball test
3. 3:14The rule of small numbers
4. 4:36Curves, not numbers
5. 5:49The newsvendor rule
6. 7:13The real catalog
7. 8:40The stress test
8. 10:15The cash dial

Situation

A specialty retailer carrying thousands of items, each planned with one forecast number per month, typed into a workbook. The forecasts ran consistently high, buying stock nobody asked for, while the highest-margin items ran short.

Mandate

Cut the excess inventory without starving the items that earn the most.

Our role

Built the planning model, tested it against the old method, and priced the choices for the CFO.

What we did

• Measured the bias in the client’s own forecasts.Data analytics
• Replaced single numbers with demand curves, each measured from the item’s own sales.Data science
• Set each item’s service level from its margin and holding cost.Operational lane
• Tested both methods against the same simulated futures.Data science
• Built a cash dial: the profit kept at each level of supplier spend.Financial instrumentation

Outcome

Tested against the same simulated futures, the new method held less inventory and earned more operating profit than the old one.

What it meant for the owner

Supplier cash became a priced choice: in a tight quarter, the CFO can see how much profit each level of supplier spend keeps.