Supply Chain Planning Benefit Calculator

Lost Sales Ratio is that portion of sales that are lost when the product is out of stock and not available. Typically, branded products have a 40% lost sales ratio, meaning that 40% of the time that the company is out of stock, customers will choose a product from another company, rather than wait or buy a different product that you offer. Procter and Gamble says that among consumer products companies, a lost sales ratio of 28% is considered close to best in class. Commodity products usually have much higher lost sales ratios.

Service Level is the expected probability of not hitting a stock-out or not losing a sale. You can also think of Service Level as the probability of being able to service the customers’ demand without backorders or lost sales. While a 100% service level – i.e. service all customers all the time – might appear desirable, it is usually not a feasible option.

Target Service Level is the service level you are seeking to achieve. It can be higher or lower than your current service level, but in most cases businesses are seeking to improve their service. Typically service level improvement ranges from 1-5pp, but can be higher if the company currently is achieving less than a 90% service level. One gross rule of thumb is that you should be able to reduce stockouts by half and still achieve some inventory reduction. To break this down, a company that is achieving a 90% fill rate should be able to improve to 95%, a 5pp improvement. A company that is achieving a 96% fill rate, should be able to improve to 98%, a 2pp improvement.

The Impact on Net Profit is directly on Net Profit, not only Gross Profit. This is because the additional Revenue carries only direct costs, hence entire gross margin is added to the bottom line.

Average inventory is the mean value of inventory during the fiscal year and is computed by averaging the starting and ending inventory values over that period

Inventory Turn shows how many times a company has sold and replaced inventory during a given period. A company can then divide the days in the period by the inventory turnover to calculate the days it takes to sell the inventory on hand. A low turnover implies weak sales and possibly excess inventory, while a high ratio implies either strong sales or insufficient inventory.

The initial value for Current Inventory Turns is set using the information you provided. It is equal to the Cost of Goods Sold divided by Average Inventory.

Inventory Turn shows how many times a company has sold and replaced inventory during a given period. A company can then divide the days in the period by the inventory turnover to calculate the days it takes to sell the inventory on hand. A low turnover implies weak sales and possibly excess inventory, while a high ratio implies either strong sales or insufficient inventory.

Inventory Holding Cost % should be the sum of both cost of capital and the operational costs associated with carrying the inventory.

• In a low inflation environment, a typical cost of capital is 8-10%.
• Operational costs vary greatly depending on the product. Products with high obsolescence (e.g., fresh food, electronics) should have high inventory carrying costs. Products which require expensive warehousing (refrigerated foods, dangerous goods) will also. A low operational cost may be 5% but can be much higher.
• Total inventory carrying cost % (cost of capital + operational costs) is rarely below 15% and can be much higher.