Does your company understand the importance of tracking lost sales as a direct cost of inventory? Maybe you’re unaware that lost sales can be a direct inventory cost. Perhaps you’ve always attributed it to poor sales forecasting. While that does play a role, the simple fact remains that losing sales because your company lacked the proper inventory count, is a cost that can be tracked back to managing that inventory. In fact, losing customers because inventory isn’t available is an extremely important cost of managing a supply chain.
Inventory’s responsibility is to have enough product available to meet forecasted demand, but not so much that the cost to hold those products is too expensive. Granted it’s a juggling act but companies are able to find that happy medium. Interested in knowing how?
Tracking Lost Sales as a Direct Cost of Inventory
When looking at this inventory cost, ask yourself what that lost sale means to your business. Think of the gross profit that’s lost on the sale and how it affects your business. Next, think of the consequences of losing a customer who can’t purchase product from your company and instead, goes to your competition. Finally, think of the ancillary costs to win that customer back. This could include numerous customer visits to rebuild the relationship and additional approaches of reducing product pricing or offering discounts to win the customer business again.
While it’s hard to put a number down for these costs, it’s much easier to track lost gross profit because inventory wasn’t available. In this case, stick with tracking your company’s lost gross profit because it missed a sale. You could track these costs by week, month or by quarter. Tracking these costs is an essential part of outlining your company’s inventory support costs.
The video and graph above is from the post: Supply Chain Management: When Inventory Doesn’t Match Customer Demand
Looking at the above graph, it’s pretty clear that the company’s inventory levels don’t match its customer order patterns or demand frequency. This happens when a company lacks the market visibility it needs to accurately predict its customers’ future demand and or when it is apprehensive about bringing in inventory because of a fear of high holding costs. While holding too much inventory can be costly, an argument can easily be made that losing sales is equally as costly. How can your company figure out which affects your bottom line more? Simple, track your inventory holding costs and your company’s lost sales as a direct cost of inventory.
- Track inventory holding costs
- Track lost sales as a direct cost of inventory
To read more about how low inventory can lead to higher costs, please read: Best Business Practices: Avoiding The High Costs of Low Inventory
Inventory is a necessary evil and one that is a constant reminder of the cost of capital. We need inventory to sell product, but we also understand that to hold that inventory for too long is simply a recipe for high holding costs, inventory damage & obsolescence. In addition, it ultimately means a reduction in the gross profit we can derive from sales. However, not having inventory is also a cost and companies must understand the importance of tracking lost sales as an inventory cost. Managing inventory is extremely difficult. However, companies can’t simply assume that low inventory always means low costs. It doesn’t!
To read more about how to track your company's total inventory costs, please read: Sample Inventory Costing Excel Sheet: Graph & Pie-Chart of Expenditures
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