The cost of not being able to sell
You are told by the sales department that “our customer decided to purchase 5m€ of products from elsewhere, as we did not have the product in stock and/or the lead time was too long”.
Bad news or terrible news? Terrible if you ask me. In order to comprehend how terrible, it might be good to put it in perspective:
Consider that your turnover is 100m€ and your material costs are 60m€, a gross margin of 40m€ (40%)
Your fixed costs are 30m€, hence a net profit of 10m€
You missed out on an additional sales of 5m€, as you had a problem with your product availability. You would have been able to provide the 5m€ with the same personnel and fixed cost.
This means you missed out on 2m€ in net profit (5m€*40%). Actual profit for the period was 10m€, however it could have been 12m€, a whopping 20% improvement.
Putting that 2m€ in perspective of cost savings, might give you an answer on how terrible that lost sales was:
Your fixed cost are 30m€, however you run a factory and out of that only 20% relate to personnel cost (30m€*20%= 6m€)
In order to compensate on that lost 2m€, you would need to cut personnel cost from 6m€ to 4m€ i.e. lay off 30%
That should give you some insight on how terrible the “cost of not being able to sell” was.
"Not being able to sell" seldom get the attention it deserves
It is difficult to comprehend and put a cost on something which did not happen. These “not being able to sell” are seldom registered anywhere, they are speculative and difficult to validate. In some companies, the problem is even totally ignored and does not even surface to the management team. Focus tends to be on what is sold, its price and cost, unfortunately leaving the speculative ‘not being able to sell’ unattended. In some businesses it is easy to track win/loss in sales, such as in project business, where it is apparent that a tender is lost. However, similar ignorance to failure can be also seen here, as Loss and its reasons seldom get the attention they deserve.
A whole lot more potential than you would imagine
If you choose to ignore “not being able to sell” or you do not emphasize the importance of availability and lead times, you are surely missing out on sales and profit. Note that missing out on this e.g. 2m€ in profit, means 2m€ less for the owners, as banks and others get their fair share regardless. Do not ignore the sounds of money whooshing by your company due to availability or lead time issues.
Next time when talking to sales, ask how well they register queries which did not result in sales and their primary reasons. This will shed some light on the magnitude of the problem and potential at hand within your company.
You are probably missing out on a whole lot more of profit than you would imagine, due to availability or lead time issues. This means, there is huge potential to be found within this area. Good news is, however, that availability or lead time issues can be fixed. A good way to start, is to ask for help in figuring out the magnitude of the problem, and hence the potential.