Stockout avoidance optimization
Fulfillment Optimizer helps you optimize an order to avoid stockout and thereby claim benefits.
In a scenario where an order can be shipped either from node A or node B and the stockout avoidance cost optimization parameter is set to 100%, Fulfillment Optimizer takes into consideration a potential stockout situation at the nodes. Based on these considerations, it optimizes the order so that initial investment made to optimize the order results in larger benefits in the future in the form of stockout avoidance.
| Shipping node | Distance of shipping node from shipping address (in miles) | Shipping cost | Processing cost | Load balancing cost | Distance penalty | Stockout avoidance cost | Markdown avoidance cost | Total cost of optimization with inventory model | Total cost of optimization without inventory model |
|---|---|---|---|---|---|---|---|---|---|
| A | 759 | 4.93 | 3.50 | 0.007 | 0.0023 | 11.18 | 0 | 19.6186 | 8.4392 |
| B | 352 | 4.44 | 3.25 | 0.003 | 0.0012 | 77.41 | 0 | 85.1012 | 7.6946 |
- Total cost of optimization with inventory model = shipping cost + processing cost + load balancing cost + distance penalty + stockout avoidance cost - markdown avoidance cost.
- Total cost of optimization without inventory model = shipping cost + processing cost + load balancing cost + distance penalty.
If the inventory model was not used in this example, the ideal node to ship the order from would be node B. However, the inventory model predicts that if the order is shipped from node B today, there could be a stockout at node B in the future. The loss that is predicted due to stockout at node B is $77.41 as compared to the $11.18 at node A. To minimize the loss due to stockout, node A is selected for shipping. As a rsult, the total cost of optimization at node A is $19.6186 as compared to the $85.1012 at node B.
After a few weeks, if the predicted sale occurs at node B, a benefit of $75 is obtained. This means that by investing $0.74 ($4.93 - $4.44 + $3.50 - $3.25) today to ship from a node that is further away, you could obtain a benefit of $75 if a sale occurs at the node that avoided stockout.