You’ve likely heard the phrase, “a chain is only as strong as its weakest link.” For product-based businesses, whose customers rely on an efficient supply chain that connects source to end user, a stockout harms everyone—often in more ways than you’d think. Ultimately creating a ripple effect, someone has to pay to rectify it.
How Much do Lost Sales Cost You?
When you think of lost sales, it seems simple: revenue you would otherwise have. However, it goes much deeper than that. From increased inventory costs for products that could replace the missed sale to damaged reputation, every missed sale as a result of an out-of-stock item starts to add up.
Direct Costs of Lost Sales from Out-of-Stock Items
Pertaining to the lost income and the increased expenses associated with an inventory shortage, stockout costs are calculated in two ways—sales-related and internal process-related.
- Sales-related: When a customer wants to place an order and there is no inventory available to sell to the customer, the company loses the gross margin related to the sale.
- Internal process-related: When a company needs inventory for a production run and the inventory is not available, it must incur costs to acquire the needed inventory on short notice. Say your customer needs an item as soon as possible. As you won’t charge a customer more for your own mistake, this also requires you to cut into your own profits to save face. For manufacturers, this could mean overtime and production adjustments, which in turn could take away from a different product and create a ripple effect. For distributors, this could mean the payment of a rush fee and delivery fee.
While the idea of direct costs may seem straightforward, lost sales rarely appear on the income statement and rush costs/additional labor often get buried in the Cost of Goods Sold report.
Indirect Costs of Lost Sales from Out-of-Stock Items
Of course, in addition to lost revenue, the ripple effect of lost sales due to out-of-stock (OOS) items will harm everything from the happiness of your staff to your reputation with both customers and suppliers. Some of the indirect costs associated with OOS items include:
- Grievance Handling: If you are out of an item, it’s not just a lost sale. It’s time spent by your sales team either trying to rectify the situation, or reaching out to distributors to find the item, or working to salvage the relationship.
- Damage to Reputation with Your Supplier: Consistency is key, and your out-of-stock items create a negative effect throughout the supply chain. An OOS item results in irregular ordering patterns on your behalf, resulting in your supplier needing to make up for the inconsistency, damaging your reputation.
- Higher Costs in the Long–Term: Your OOS item means that your supplier will need to face an unexpected change, throwing off their production scheduling and creating inefficiencies. Those costs get passed back to you.
- Damage to Reputation with Customers: Word travels fast, and if you can’t provide, customers talk. Especially in an age where Amazon is entering the B2B world, relationships are no longer as tight as they once were. If you start to gain a reputation for your failures, more and more customers may begin to consider your competitors.
The potential for loss is huge, and these four only scratch the surface of the risks.
For today’s product-based business, customers will shop, and if you can’t provide what they need when they need it, they will head to a competitor. However, there is a way to address this—know how to stop the leak.
Your ability to keep a customer requires you to have product information available with a few clicks. Any time spent emailing the warehouse for a substitution is time your customer could be spending talking to your suppliers. However, at Crestwood, we developed a solution that lets you find replacements (and upselling opportunities) directly from the sales order window in Acumatica.
Inventory Substitutions: An Acumatica Add-On from Crestwood
If you are tired of losing out on sales because you had to spend hours waiting for a response on possible alternatives for a customer request or if you feel there might be a better way to recommend products that complement a product, there is. Crestwood Inventory Substitutions is an add-on for Acumatica designed to help sales staff find replacement or complementing items within your inventory, allowing you to avoid losing or even increase your sales through upselling and cross-selling items you have.
Setup is easy—simply define which items make for acceptable substitutes or companion items—and the Inventory Substitutions add-on starts working for you. Leveraging Acumatica’s already-powerful advanced inventory and warehouse management functionality, Inventory Substitutions completes the cycle, delivering this functionality to the sales order screen.
If a product is out of stock, not a problem—your staff has access to replacement items. If someone is about to close a deal, they are provided information on potential add-on items that could improve the customer experience and ultimately drive more sales.
Ready to learn more about this solution? Watch the video below and click here to read about the benefits.