Optimal Inventory quantity for e-commerce websites

Determining the optimal quantity of inventory at a given time, can be an extensive analytical tasks, with input spanning multiple departments. Determining the optimal quantity to hold, means balancing the negative impact of out of stock, with the cost of holding inventory.

Out of stock risk — lost or delayed sales

Beside the poor customer experience, having items out of stock (oos) also leads to lost or delayed sales. Being able to both quantified these lost or delayed sales and effectively manage this out of stock risks are a key to an effective retail and supply chain analytics.

Impact

Out of stock can lead to two main negative conversion factors:

• Empty shelf space impact: having a product that can not be purchased on display, decreases the overall conversion rate
• Desired item loss : Not having the right products on offer will also decrease the overall conversion rate

Some of the key factor in order to understand the impact of having out of stock items n your website, is the overall size of the catalogue and the substitutability of products within the catalogue. While calculating rigorously the impact of each component can be a daunting tasks, there are a couple first order approximations that can help gauge the impact of out of stock products.