Does your company track the impact of lost sales on your inventory costs? Surprised to hear that lost sales is viewed by many companies as a cost of inventory? Do not be shocked! It is important to note that any cost resulting from how inventory is managed, can be seen as a cost of managing inventory. If a company loses a sale because of low inventory counts, or because of a lack of adequate inventory, then that lost sale is a direct cost of inventory. It is ultimately why some companies establish gross profit objectives for their procurement department. If the company loses a sale, then it could lose a customer and that can eventually lead to a loss of market share. So if losing a sale is a cost of inventory, what can companies do to reduce its impact? More importantly, what does it mean when a company encounters too many lost sales due to low inventory counts?
A company’s inventory costs can be classified into two main categories. There are costs pertaining to holding inventory and not selling it, and then there are costs to not having inventory and losing sales & market share because of it. Most companies focus on reducing the impact of the first cost, never realizing just how impactful the second is. To offset these costs, companies invest a lot of time and money improving sales forecasting. In addition, they often aggressively pursue supply contracts with customers in order to support their inventory. Companies must continually try to raise the bar on performance on inventory management in order to offset these aforementioned costs. However, the question remains, why can’t companies match inventory levels to customer demand?
One of the biggest reasons companies lose sales due to low inventory counts is because they often run an inventory strategy that doesn’t address their needs. In essence, their inventory and supply chain approach isn’t conducive to their market or their customers’ requirements. This is ultimately why they either purchase too much or not enough. The best way to reduce the impact of lost sales is to first ensure the company has clearly defined its inventory carrying costs. Next, it must then define the needs of its market and its customer base. Finally, the company must choose an inventory management strategy that reduces the company’s carrying costs, while effectively servicing the company’s market and customers. It’s not easy and finding that happy medium is a struggle. Regardless, companies are better able to manage the cyclical nature of their business cycles when they run an inventory strategy that is inline with their business model.
Be aware of the impact of lost sales on your company’s cost of inventory. Most companies rationalize lost sales as merely the result of poor sales forecasting, bad customer management or a lack of market knowledge. In some cases, these are valid causes. However, losing sales is still a cost of inventory and one that often occurs because the company has not taken the time match an inventory strategy to reduce costs and meet its customers’ order patterns.