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KNOWLEDGE LIBRARY

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27Jun

Warehouse Occupancy Percentage

Optimal storage utilization helps enforce healthy inventory management. In our early work with Honda their...

02Jun

Efficient Procurement Inventory

Efficient procurement inventory (EPI) is often required to realize steep discounts when a special opportunity...

02Jun

Inventory Carrying Rate

The inventory carrying rate (ICR) is the percent of the unit inventory value used to...

26Jun

Inventory Activity Profiling & Data Mining

Suppose you were sick and went to the doctor for a diagnosis and prescription.  When...

27Jun

Inventory Performance Measures

Inventory performance measures include financial, productivity , quality, and response time indicators for evaluating the efficiency and...

Lost Sales Cost (LSC)

Lost sales cost (LSC) is the revenue lost when we are not able to satisfy  customer demand.  The lost sales cost for an item is computed by multiplying the annual sales potential (i.e. sales that would have occurred if all demand was satisfied) by the portion of sales that we were not able to satisfy by the shortage factor.

  • LSC = FAD x USP x (1 – UFR) x SF

In the equation, FAD stands for the forecast annual demand, USP stands for unit selling price, SF stands for the shortage factor, and UFR stands for the unit fill rate (the % of unit demand that is satisfiable from on-hand stock).

For example, if the annual demand for an item is 1,000 units; the unit selling price is $2.00; the unit fill rate is 90%; and the shortage factor is 50%; then the lost sales cost for the item is

  • LSC = 1,000 units/year  x  $2.00/unit  x  (1 – 0.9)  x  0.5  =  $100/year.

The total lost sales cost is the sum of the lost sales costs for all items.

Lost sales cost and be pitted vs. inventory carrying cost to help determine optimal fill and turn rates.

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