Improve company performance with demand forecasting

Australia’s evolving labour market and industrial shifts have pushed our imports to exceed the US $200 billion per annum, adding a layer of complexity to the business landscape – where, how, and for how much to import. Manufacturers face the decision of whether to import or continue manufacturing, and this decision has become a trade-off between costs, efficiency, and value-adding activities. Our imports are made up mostly of vehicles, machinery, and electronic equipment, and come primarily from China, the US, Japan, South Korea, Thailand, and Germany.
What does this mean for inventory management? In most cases, longer lead times. The difficulty here is that it greatly extends the planning horizon, and one needs to deal with a longer period of uncertainty in demand. This increases the importance of a proper forecast.
This article describes four steps that will help you with improving your companies’ inventory based on demand forecasting.

1. Make a forecast

Surprisingly, there are still companies that do not really forecast but just use intuition to make sure there’s enough stock, regardless of cost. In such cases, there is no dedicated staff or system to inventory management, and it becomes an extra task given to someone with a different role. Of course, this is far from the best way of planning, as excess stock can cause working capital and obsolescence risk to balloon. We believe inventory management is a profession and deserves the right focus – it’s the backbone of every company. Whilst you need to make sure that there is at least a sufficient amount of stock, the industry winners are those who find the right balance between availability and costs.

2. Look ahead, not behind

A forecast can be based upon historic sales, but it’s important that trends, seasonality, and market influences are all taken into account. This works proactively to prevent both excess stocks as well as out-of-stocks. Especially with long lead times, it is impossible to respond quickly to a changing market. In the case that forecasts are too low, this could lead to an out-of-stock scenario, with high-cost air freight being the only quick fix. In the case that the forecast turned out to be too optimistic, this could lead to obsolete stock. Take for example a company that has a forecast solely based on a calculated average of historical sales, and the period being used represents a high-sales season, and it is approaching the low-season period. If this company purchases based on this high forecast and do not take seasonality influences into account, the inventory will exceed the desired level. If seasonality is reflected in the forecast, your inventory will stay within the accepted boundaries for low-season sales.

3. Take external information into account

External information refers to information that influences sales but cannot be observed through historic sales data, such as a promotion, event, product life cycle change or even change in government regulation. Where available and possible, this information should be used to refine forecasts. Adjusting the forecast based on this additional information will increase the accuracy and ensure that these events do not come as surprises. Taking a comprehensive view of the interaction between the business and the inventory, we can achieve optimal levels of stock.

4. Determine the level of service you want to provide

This step does not influence the forecast, but it does influence the calculation of the optimal inventory level you should hold, which is a combination of many things, including the forecast and safety stock. A forecast should reflect the best possible way how to deal with expected demand but is never 100% correct. Therefore, it is important that the calculation takes into account all the relevant data in order to calculate the best possible safety stock. Think about deviation in historic demand, lead time, review time and also the desired service level. Ultimately, this service level determines to what extent fluctuation in demand will be covered.

A proper forecast is a must for companies that want to proactively keep stock levels under control. Enriching the forecast with external information always pays off and leads to a more proactive approach rather than being reactive which could cause problems especially in situations with long lead times. You’d better spend a little bit more time on the forecast and plan your activities well, rather than firefighting and ending up with too little or too much stock.
Planning using Excel is a thing of the past. We have been in the era of inventory management systems for some time now – these systems are highly developed and can support your business with all features you need, allowing you to focus on priorities to manage your inventory.

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