Businesses need right product in the right place and at the right time. If there is no product in place when your customer comes to buy it, you lose an opportunity to sell. And you lose profit that otherwise could have been earned. But is it only that?
A lost sale is one of the key indicators used to measure stock performance and evaluate the cost of the mistake. It also impacts customer satisfaction and loyalty. On the other hand, it shows actual potential for your sales growth. Only, in this case, the power to unleash that potential lays in the hands of inventory managers, not the sales team.
It is commonly agreed that certain level of lost sales is economically acceptable. Total elimination of shortages would require significant investment in stock and would be too costly in comparison with the gains that it brings. Depending on industry affordable lost sales value can vary, but it usually stays within 2%-3% of total sales. Anything less can point to overstock. Anything more shows that you have potential to increase your sales without significant efforts.
Measuring lost sales indicator
Lost sales can be measured in multiple ways. The simplest – is to calculate how many days your product was absent in stock. Dividing that number by amount of days in the year you can get an approximate feeling of how many more you could have sold if the product would have been available.
Lost Sales Indicator = COUNT ( Missing Stock Days ) / 365 * 100
Lost Sales Value = Yearly Turnover * Lost Sales Indicator
More precise way to get lost sales figure is to calculate the difference between daily stock and average daily sale when the stock is lower than the average daily sale. That difference should be calculated on a daily basis and summed for a period of time.
Lost Sales Indicator = SUM ( Average Daily Sale – Daily Stock )
if Average Daily Sale > Daily Stock.
If product sales are sensitive to seasonal fluctuations, Average Daily Sale should be measured in a period that represents the length of the season. In many cases, 90 days is sufficient to cover seasonal implications, but it can be adjusted individually
Lost Sales Indicator = SUM ( Average Daily Sale (90 days) – Daily Stock )
if Average Daily Sale (90 days) > Daily Stock.
It should be noted that Average Daily Sale will also be impacted if the stock was missing during the period when that average daily sale is evaluated. In such case, you can take into account only the days when the stock was available. Or replace missing sales to the average daily sale of a longer period.
Finally, such calculations determine only lost sales from inventory management perspective. It does not represent lost sales in regards to market opportunities, assortment availability or sales quality.
The true value of lost sales
One is to measure lost sales indicator. The other is to evaluate its significance and real costs. It is widely misinterpreted that actual loss of lost sale equals to the profit that was not earned. If there’s no product, so there are no actual costs related, only profit that was not earned. But is it really so?
Imagine, that you have the best sales team, you prepared perfect marketing campaign, you have outstanding logistics, you invested in training and infrastructure. Your sales team did a perfect job to find and attract the customer. And the customer finally came to buy. But what if he finds no product in place?
In this case, all the investment to attract customer instantly turns into wasted money. Even worse, that’s how you usually send your customers to your competitors. And that’s much more than unearned profit. So if you want to evaluate the value of lost sales, multiply your fixed annual costs by lost sale indicator, and you will be close.
Measuring stock performance can reveal sales potential in the areas you didn’t expect. Increasing sales in a highly competitive market by traditional marketing means will require skills, sales efforts, and significant investments in product promotion. All of the cost of potential profit. While sometimes, elimination of lost sales can deliver the same result or even more, only without any additional efforts. Check if you can benefit from that.
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