A number of companies don't understand that losing a sale because of an inventory stock out, is a direct cost of managing inventory. For these companies, it’s simply a cost of sales, or worse, it’s nothing more than the cost of doing business. These companies are wrong. Losing sales
because you don’t have the right amount of finished goods is a direct cost of
managing inventory. It means you lose gross profit on sales, you lose customers, and
eventually, you lose market share.
When you look at your supply chain, it’s important to understand that all costs can be broken down into two essential categories: High carrying costs of inventory and lost sales costs of inventory. The first measures the costs of financing, obsolescence, damage, pilferage/theft, storage & handling, and all the miscellaneous costs associated with warehouse management. These are costs of carrying inventory without sales, or put differently, these are the costs of having inventory in slow customer demand periods. The second cost pertains to losing business because of low inventory counts. In essence, losing customer orders because you aren’t carrying enough product is a direct cost of managing your inventory. So why do companies ignore these costs? Simply put, they fail to track their incidence and impact.
Lost Sales and Your Inventory
When thinking of lost sales, think of why it’s so important that your sales forecasts accurately predict the demand within your market. Think of how tracking the amount of lost sales due to stock outs can help to improve your sales forecast accuracy. It’s a way to keep you on track, to stay committed to matching your inventory to your current business cycle, and to ensure your salespeople are embedded in their customer’s business.
Tracking lost sales forces your business development and procurement teams to work closer together. It forces them to ask questions about sales forecasts and procurement’s ability to meet those forecasts. When companies don’t track lost sales as a cost of inventory, they invariably lose touch with their market, their customers' needs and their own business cycles. As such, there are several reasons why you must track the high costs of losing business because of inventory stock outs.
The above video is from the post: Inventory Carrying Costs vs. Lost Sales: Both Destroy Your Bottom Line
- Lost Gross Profit: Every time you lose a sale, you lose gross profit. Tracking your company's lost sales is an essential part of measuring your company's supply chain and your strengths in inventory management.
- Lost Customers: Every time you can’t close an order, it gives your competition an opportunity to steal business. After all, if you don’t have the product available, one of your competitors surely will. Customer retention is directly affected by your ability to maintain a safety stock. If you don't have product, then you're giving your customers reason to look elsewhere.
- Lost Market Share: The more sales and customers you lose because you’re not carrying the right amount of inventory, the more likely you’ll lose market share.
- High Freight: What do you do when you have an important customer and no product to sell? Well, you’ll rush parts into your warehouse, pay overtime to ship them back to your customer, and finally, you’ll cover the cost of freight for being late on a customer shipment. Now, does this cost you money? It absolutely does.
These are serious costs. If you choose to ignore them, then they are guaranteed to remain issues for the foreseeable future. More importantly, you will lose more sales, lose more customers and you'll give up more of your company's share of the market. It’s a continuous feedback loop, one where each lost sale that isn’t captured as a cost of inventory, is yet another reason why your sales forecast accuracy isn’t improving and your customers continue to go to your competitors.
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