Enigma of sales loss

Current economic slowdown across the world is making it difficult for companies to accelerate their top line. At the same time, it is an irony that we lose considerable amount of sales due to inherent mismatch between actual supplies and volatile consumer demand manifesting at the marketplace. Do we even know how much of potential sales are lost as a result?

Let me admit that quantifying the potential sales loss is not easy. Companies do deploy various techniques to assess it, however, most of these methods are fraught with errors and biases. It is important to understand the underlying cause of these errors and biases so that sales loss can be measured properly and subsequently minimized.

Errors in measurement

In my opinion, there are three main areas which induce inaccuracy in sales loss measurement.

1. Estimating actual demand

Measuring actual consumer demand is difficult in a country like India with ten million retail outlets, most of which do not document their individual sales transactions. Companies, therefore, resort to retail and wholesale orders as a surrogate of consumer demand. Even these orders are under-reported as customers often refrain from ordering those items which are out-of-stock at the distributor. Even salesmen with handheld terminals to capture retail orders get to see distributor stocks for each item and avoid taking orders for the out-of-stock items.

Less progressive companies treat distributor orders as the actual consumer demand with in-built biases like the inherent preference for fast movers and exaggerated orders during promotions.

2. Measuring true sales

Most companies record primary sales to distributors as actual sales and compare it with consumer demand to estimate the sales loss. As we have often seen, primary sales are skewed towards the month-end and represent some amount of push by the sales team.

More progressive companies have switched to secondary sales by distributors as a better representation of actual sales. Even this measurement includes some amount of push to the wholesale trade towards the month-end.

3. Belief in internal capabilities

I have seen many companies across FMCG, Food and Pharma sectors carry a strong belief that actual demand is so dynamic and unpredictable that it is impossible to meet it. As a result, they resort to capping the sales loss measurement in several ways.

The most prevalent capping relates to the sales number agreed in the S&OP process through consensus. Actual demand in excess of the sales plan is kept out of the sales loss calculations since supplies were planned only as per the S&OP plan. Companies with replenishment system in place do consider some amount of excess demand as a potential sales opportunity. However, even this is capped at 5-25% over the S&OP plan depending on the flexibility of their supply chain.

The above reasons, widely prevalent among consumer companies, are mainly due to sub-optimal design of the supply chain and can be addressed through improvements in supply chain design and internal capabilities.

System biases

The way a company’s supply chain is organized in terms of planning, execution and measurement introduces its own hidden biases in estimating the potential sales loss. There and three main reasons for these biases.

1. Responsibility for sales loss

Companies with fragmented supply chain responsibility and poor flexibility find it difficult to pinpoint responsibility for containing the potential sales loss. Should it be demand planning, supply planning, manufacturing, procurement or logistics? As a result, no one takes overall responsibility to minimize it. Local KPIs prevail over the global KPI of customer order fulfilment and the consensus S&OP sales plan is taken as the reference for consumer demand.

2. Trust in customer orders

Many-a-times companies don’t believe in the orders placed by their distributors, wholesalers and retailers, especially for out-of-stock or promotion items. These are often rationed to present a more realistic picture of consumer demand, thereby deflating the potential sales loss calculation.

3. Black swan events

Extremely high demand for certain items during black swan events is often considered as an outlier and ignored for calculating the potential sales loss. Take for example, the demand for hand sanitizers during the current scenario of covid 19 virus. If the supply chain continues to follow the S&OP plan, we are likely to miss out on a major sales opportunity and not even count it as a potential sales loss.

Once we are aware of the biases, it is possible to overcome them and improve the estimation of actual sales loss. Companies would then be on their way to improve upon each of the underlying design parameters and internal capabilities for a continuous and sustained reduction in potential sales loss.

Reflexive Supply Chains come in quite handy, offering targeted solution to each of these underlying causes, thereby leading to acceleration in the company’s top line.