Companies approach their inventory planning in many different ways - from seat of the pants guessing, team collaboration, and spreadsheets. More and more companies are using forecasts either developed in-house or off-the-shelf forecasting packages.
How do you use or interpret the results of forecasting to establish inventory stocking levels and plan effectively? Generally, forecasts are used to set inventory levels and requirements. The user then manually sets min and max levels and ultimately purchasing and production quantities. This approach can be acceptable if only a few items are involved, but it can be a insurmountable task for hundreds or thousands of items. Relying on just a forecast usually results in untimely stock-outs for many items and excess inventory for others. Both results are very costly to the company.
In addition to a forecast, there are other factors to be considered when deciding how much inventory to stock. One factor is Service Level. This can dramatically affect your investment depending on the service levels you want to achieve. Other factors include budget, carrying costs, planning horizon, lead times, and many more, such as:
- When planning ocean shipments, a large number of possible replenishment options should be examined to determine how to optimally load full containers, while meeting demand.
- Which supplier should be used when one has higher costs and shorter lead times than another?
- Suppliers may offer quantity discounts, so an important decision is “How much extra should I buy now, at a lower price, beyond what I need for the near future to be most cost effective?”
- Positioning inventory properly across the supply chain and across items may be a major consideration. Centralizing inventory allows “pooling” of demand and a smaller total inventory quantity. However, sending inventory out to regional and field sites or retail locations could improve responsiveness to customer demands.
- Your customers supply you with their forecast using you as a ready source of supply. How did they arrive at their numbers? Do you use their numbers entirely or do you adjust them? Should you be planning and forecasting for them instead?
You should understand that forecasting is an important first step, but not the only step in good inventory planning. The entire inventory planning process must work smoothly and be in-sync from forecasting to setting stocking levels, to calculating replenishment levels, to purchasing and production.
In our next installment, we'll discuss some common sense approaches to inventory planning.