Companies Miss the Staggering Impact of their Lost Sales
Most companies are totally blind to the amount of lost sales they accumulate each year. Without a Lost Sales measure, a company loses significant opportunities to the competition in the forms of repeat business and gross margin dollars. The real impact of lost sales is often further hidden by the false securities of in-stock reports and service level measures that are based on fill rate.
How often do you review a lost sales report? Do you know how the lost sales are calculated and if they are accurate? Most legacy systems lack a true measure of ‘Lost Sales’ for the many reasons listed above. Many companies miss out due to the age of legacy software (often more than 5 years). The hardware cost to run product/location data even 5 years ago would prevent most companies from buying software that needed mega expensive hardware. Legacy software left out these types of calculations as the customer market that could afford to pay for mainframe hardware was extremely small.
The problems with calculating and utilizing lost sales are not new: inability to determine what is a lost sale, the lack of ability to correctly calculate product/location lost sales, and the inability of legacy systems to use the big data collected surrounding lost sales in the demand forecasting process.
Lost Sales are not Unfilled Orders, Demand Fill Rates are not Service Attained
Many companies use demand filled over total demand (product requested / product shipped or sold) as a service level measure. Unfilled demand becomes a backorder or lost sales. The issue with this measure of service is an assumption that all demand is known and included. The reality is that, sometimes, not all demand for a product is recorded. If a customer wants a product, does not see the product (some web sites hide out of stock product), and does not tell the company they want the product, then there is no knowledge of the demand. If a tree falls in the forest and no one hears it fall, did the tree make a sound? If no one walks up to a manager and says I want the product you are out of today, does that mean the demand forecast should be zero?
If this measure of demand is really total demand, then we would state the demand forecast should equal the product requested. This process devalues the demand forecast (sound familiar?) due to the assumption that product requested = total demand.
Are Website Shopping Carts Really Lost Sales?
This latest trend is abysmal – we see several consulting and technology developers ‘claiming’ lost sales are measured by any products left in a web shopping cart at check out. Imagine, if every time you were forced to place a product in a cart to get a price, you created lost sales. Think of the mayhem caused by processes that measure lost sales by abandoned web carts.
Do you use Rain Checks with Lost Sales?
Major legacy systems use rain checks as a basis for lost sales. Ask yourself this question: what percent of the time do you ask for a rain check or to be advised when a product is back in-stock? Most people do not ask except in extreme situations. That means the ‘rain check’ is often a horribly understated measure of what business was lost by being out-of-stock.
What are Lost Sales?
The lost sales are based on unfulfilled demand during the time when the available inventory <= 0. Lost Sales calculations need the following accurate data by product and location:
- Is this an Active Product / Location in the Assortment?
- Available Inventory <= 0
- Sum of Demand Forecast (must be greater than zero) during the time period when Available Inventory <= 0
- 4 week Forecast Accuracy Measure?
Lost Sales Calculation: Sum of Demand Forecast for active product when Available Inventory <= 0.
Note: The total can be further weighted by a confidence interval; often 4 week forecast accuracy is used as the basis.
Accurate Demand Forecasting delivers Real Lost Sales for Demand Driven Retail.
My wife and I recently went shopping for Halloween costumes at a popular chain of party stores. I was surprised by the number of out-of-stock stickers I saw in the store. The costumes out-of-stock were not ‘new’ ideas based on recent movies; they were, rather, costumes one would think to be core, repeatable products. The reality is the retail chain did not have accurate lost sales data from previous events, and the resulting demand forecast was underperforming the market. If this retailer had collected lost sales and applied them in the demand forecasting process and service level measures, then they would have collected a larger part of the market.
Review this example of a product/location with a demand forecast of 100 units a day and available inventory of 0. When you stop and think about those two numbers, it makes sense that you will accumulate 100 lost sales units for this product/location on each day the available inventory is less than or equal to zero. If you run a forecast accuracy report (ex: FA = 90%) and use that to define a confidence interval, you might weight the final lost sales number based on forecast accuracy to a resulting 90 lost sales units a day. A simple calculation of gross profit * 90 lost units delivers the effective lost profit margin. The lost sales gross margin dollars also are an indicator of potential permanent damage where consumers have chosen to shop other locations for better service in an ongoing basis.
Find the Lost Sales to add Profit to your Business
With accurate lost sales measures, a company can properly evaluate inventory positions in relation to safety stock and profit margins. Today we have outlined:
- Why Lost Sales have not been measured accurately.
- Three wrong measures of lost sales.
- What should be used to measure lost sales.
- Two scenarios (customer, investment) that demonstrate the real impact of Lost Sales
Later we will continue our Blog Series on Lost Sales with more facts about lost sales impact on demand forecasting, inventory optimization, and repeat customers. Enter your email in the window above to sign up for our blog and get the new blog in your email each week.
Want to learn more about how Lost Sales impact your business and how Data Profits iKIS solution can help you ‘Tighten the Links in Your Chain™’? Sign up for a demo here: