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The biggest cost element in Supply Chains is often the Cost of Lost Sales.
It is intriguing that the biggest cost element in supply chains is often ignored in our profit improvement projects. That’s because the current financial and cost accounting systems can’t account for it.
Since it emanates from the revenue lost due to stockouts, our current accounting systems have no way to capture it. As a result, it escapes from sight in the profit improvement initiatives. What we end up doing in such projects is focus on other elements, which have a much smaller impact on profits… chupchiks as per Dr. Goldratt. It’s like focusing on haircuts for weight reduction!
The true impact of supply chain initiatives should be felt by the consumers and product availability is the first and foremost among such visible improvements. Improving availability leads to additional revenue, leading in turn to additional throughput and additional profits, since it can be achieved without increasing the operating expenses.
Is your profit improvement initiative focused on internal costs or on consumer benefits? Point to ponder…