Inventory Forecasting


Inventory Forecasting Check List

A forecast process provides management the ability to strategically direct its businesses to achieve competitive advantage on a continuous basis by integrating customer-focused demand,  marketing and operations plans for new and existing products with the management of the supply chain.

  • Why do I need to forecast
  • Why do you need sales and operations planning
  • What is sales and operations planning
  • What types of forecasts should we do
  • What is the impact of forecasting on my business

Components of Demand

  • Trend:  growth or decline over an extended period of time
  • Cyclical:  fluctuation around the trend
  • Seasonal:  pattern of change that repeats itself year after year
  • Random:  not accounted for by the other components (trend, cyclical, or seasonal).

Forecasting Methods

Qualitative sales forecasting methods rely more on judgment and intuition than on historical data:  surveys of buyer intentions, such as questionnaires, telephone polls, and consumer interviews.

Delphi technique:  a body of experts, consulted separately, is asked to arrive at a consensus opinion.

Sales force composite: based on the combined estimates of experienced sales personnel.

Quantitative: sales forecasting methods make use of past data to predict future sales.

Market tests: to gauge consumer response (usually to a new or modified product) under actual conditions.

Trend: projections / analysis (also called Time Series) involves forecasting sales based on the historical relationship between sales and time, which is expressed as a growth rate (percentage) and each measure is plotted on a growth curve.

Moving average: all observations are given equal weight and only a few of the previous observations are considered.

Exponential smoothing: gives greater weight to more recent observations and considers all past observations.

Regression analysis: can be used to forecast a dependent variable (i.e., sales) as a result of changes in one or more independent variables (i.e., advertising).

Input-output models: forecast impacts of the change in outputs (sales) of one industry on the out puts of the purchasing industry (i.e., a reduction in supply of aluminium cans produced by the canning industry would effect the supply of canned drinks that would be produced by the drink manufacturers).

Computerised Forecasting

Spreadsheets: such as Microsoft Excel can perform calculations automatically with data.

Forecasting application software:  statistical packages, such as SAS and Mini tab.

Forecasting packages: specifically designed for forecasting applications, such as

  • Mercia Links
  • Manugistics
  • Demand Solutions
  • Focus Forecasting and many more.

Uses for Forecasts

Forecasts can be used for:

  • production
  • production scheduling
  • inventory control
  • purchasing:
  • determination of procurement requirements
  • scheduling of purchases to get favorable prices
  • formulation of marketing strategies for products
  • setting of sales quotas
  • scheduling of advertising expenditures and sales promotions
  • Planning staff requirements
  • establishing of operating budgets
  • cash flow planning
  • capital budget / expenditure decisions

Forecasting Advantages

  • reduced excess inventory
  • achieve fewer stock shortages as a result of when demand exceeds supply
  • fewer unnecessary production line changes to fulfil unanticipated demand
  • less overtime hours through improved predictions in personnel requirements
  • improved customer service levels as supply and demand balance more economic purchasing power

Factors that influence forecast accuracy:

  • availability of product demand history
  • capability of computer system
  • other available history (i.e., new products, design changes, changes in customer base, promotional actions, economic indicators)
  • responsibility for forecasting: a team effort is required (Sales, Logistics and Finance)

Do you have an inventory forecast?

Do you want to exploit opportunities to improve service levels?

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