Why Lost Sales are Ignored
Our last blog highlighted the staggering impact of Lost Sales in most businesses. We outlined some of the methods used to calculate lost sales, and why these methods do not deliver value. We touched on in-stock and Service Attained as two measures that in the past were acceptable inventory ROI measures but, in the market place today, these methods are dated and focus retail in the wrong direction.
With the advancement of inexpensive hardware, we can calculate a very accurate demand forecast across any block of products in our assortment and measure the business at any individual (or group of) product / locations. We can easily track available inventory for any product/location at a moment’s notice. This makes calculating lost sales a simple calculation: sum demand for the days where available inventory <=0. Today, we will review how lost sales impact demand forecasting, service attained, and inventory optimization.
Demand Forecasting must include Lost Sales in the Big Data
Short of throwing a dart on a board or a coin toss, any forecasting method will need historical sales data. Obtaining that historical sales data is one of the critical steps in demand forecasting. If sales data is missing, then the forecast has a higher percent error. Ask yourself: if product A has sold 100 units a day for the past 3 years, what should the daily forecast be for tomorrow? Most people would rightly suggest the forecast will be 100. If the same product started to sell 85 units a day for the next 25 days, and the system generated a new forecast, then one would expect the new forecast to be below 100 units.
A Missed Opportunity is not the same as Lost Sales; a missed opportunity means you had the inventory.
What if the product only sold 85 units and then ran out?
Without a lost sales calculation to impact the demand, the forecast engine would only see the 85 sold units and forecast based on that data. The results would then lower the forecast, which would in turn lower the inventory being sent to that location. The impact is a self-fulfilling prophecy and a vicious cycle; demand will only be what the inventory allows. My point highlights the issue I brought out in the last blog. If Demand is only based on what is requested, then all of the real demand is not realized; remember the tree in the forest analogy?
Lost Sales must to be included in your Demand Forecasting analysis to gauge true demand.
Service Level Attained must use Lost Sales in the Big Data
As I shared in our Lost Sales part 1 blog, service attained has traditionally only included what was requested divided by what was shipped (sold). The issue is that the calculation assumed the only demand was requested demand. In short, this methodology always assumes that demand is zero when you are out of stock. For the many reasons I have shared and you already know, this is just not a real measure. To calculate Service Attained, there must be some measure of demand that was never realized. A better Service Attained Calculation might be shipped divided by (shipped + lost sales). The calculation can be run for both units and cost dollars to get a picture of the real opportunity in your inventory.
Service Attained = Shipped / [Shipped + Lost Sales]
Note: This calculation is useful in either units or currency. Remember to assess based upon ships or sales depending upon your business type.
Lost Sales deliver Value to the Informed Retailer
Today we reviewed how lost sales can add value to demand forecasting and improve the accuracy of a service attained calculation. Lost Sales can help maintain an accurate forecast and quantify a service attained, providing a meaningful measure to inventory ROI.
Lost Sales and Inventory Optimization in the next Issue
In our next blog in this Lost Sales series, we will discuss how Lost Sales can be used in the Inventory Optimization process to drive more value into your supply chain, highlight the key differences between lost opportunity and Lost Sales, and highlight the staggering negative impact Lost Sales for Retail. The facts clearly demonstrate that Lost Sales are costing retailers huge amounts of gross profit and lost customers. The facts also point out why the root cause of lost sales are the fault of the retailer, not the supplier, meaning they can and should be avoided.
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™’?
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