The key to successful Demand Driven retail is leveraging the right data in the right places. Lost Sales data has a lot of leverage that, when ignored, can be your demise; however, those that successfully measure and leverage Lost Sales data will see sales and profit gains. Our Lost Sales blog today outlines how lost sales data can be used to improve inventory optimization and highlights how all the pieces are interconnected. We also dive into the differences between lost opportunity and lost sales, the differences and impacts between the two, and close with some sobering statistics from Lost Sales data collected from the industry.
Our first blog on Lost Sales highlighted the staggering impact of Lost Sales in most businesses today. We outlined some of the methods used to calculate lost sales, and why these methods do not deliver value. Our second Lost Sales blog reviewed how lost sales can add value to demand forecasting and improve the accuracy and value for the service attained calculation.
Critical Components to Inventory Optimization (IO): Lost Sales and Demand Forecasting
Inventory Optimization solutions must understand and be able to react to changes in the demand forecast, service goals, and potential lost sales across the time spectrum. Leaving any of these factors out of the IO equation will deliver inaccurate results and poor ROI. As product demand forecast changes due to market trends or seasonality, the potential for lost sales may change. As demand forecast increases, businesses must choose between ordering more frequently and holding more inventory. If the choice is to order more frequently, profits due to scale may be left on the table. Likewise, holding more inventory may upset an optimized balance between acquisition and carrying costs. Carrying costs, acquisition costs, service goals and potential lost sales are all measures and indicators that will drive successful business to profitable inventory optimization.
The Difference between Lost Sales and Lost Opportunities is called Catastrophe
The big storm did not cause lost sales; there will be potential lost opportunity. Why use the word potential? Several studies demonstrate that a store closed due to the storm for 3 days will recoup those sales in the coming weeks. The critical point is the measure of days while a store is closed should result in a lost sales calculation that demand forecasting then uses to prevent the lowering of the demand forecast.
As discussed today, if lost sales are not absorbed into a demand forecast calculation, then the system will lower the forecast, which in turn will lower inventory requirements, which will result in lower total sales. You will quickly note that if you capture lost sales now and then the stores recoup the lost opportunity sales missed due to the storm, then the resulting average daily sales increase plus the lost sales due to the days closed would result in a forecast that is artificially high. Solutions like Data Profits have BI Tools included that filter the sales as they are loaded into the Demand Forecast engine. Use of BI Tools to create and test scenarios leads to informed decision making; likewise, the forecast engine will use more accurate demand history, leading to huge improvements over legacy systems and the ‘best guess’ process used by many today.
5 Frightening Lost Sales Facts:
- 1. In 80% of retail, a percent increase to in-stock has no correlation to a rise in sales.A change in service level improvement will increase sales and profits.li>
- 2. Average retail in-stocks across the year will average 92%
- 3. A shopper with a list of 10 products has only a 52% chance of finding everything on the list with no empty shelves.
- 4. More than 80% of the time, the empty shelf is due to poor replenishment software and process by the retailer, NOT the supplier.
- 5. A typical retailer has Lost Sales greater than 5% due to out of stock which impacts earnings per share by more than .01 over the course of a year.
Why do some choose to be part of the national averages for Lost Sales? Stores lose customers to the web from sheer frustration about stock-outs. Studies show the stock-outs could have been avoided by the retailer with good supply chain software and process improvements.
Data Profits offers an inventory management solution at a cost of less than ½ the competition, at a deployment that is operating in less than 30 days, and with a proven track record. Why are you waiting? It’s time for you to ‘Tighten the Links in Your Chain™’.
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