Accurate inventory forecasting is a key element to a successful distribution strategy. There are a wealth of tips and tools available for estimating the future use of stocked items that are in regular demand. But that leaves out a whole host of items that cannot be traditionally forecast.
In his white paper, “Improving the Accuracy of Your Forecasts,” Jon Schreibfeder explains how to plan for those inventory “wild card” items whose demand cannot accurately be predicted. These items are used sporadically, thereby making them impossible to forecast.
One example of a usage history for this type of item would be one item ordered in February, it gets ordered again in May with a quantity of one, and then again as a single item in September. If you went with a traditional forecasting method with this item by averaging the monthly usage, you would end up with a forecast of a fraction of an item – which not a likely order.
Another example would be an item that is ordered in larger quantities sporadically. If you had a quantity of 25 ordered three times throughout the year, you can’t simply average the usage history because you would not have the right quantity on hand should an unexpected order come in. Likewise, you shouldn’t stock 25 of those items per month because you won’t sell them and they will be a drain on your profit.
It’s easy to identify these “sporadic usage” items: the average quantity sold or used in one transaction is greater than the average monthly usage.
Now that you’ve identified them – you can start using a target stock level (a multiple of the average or normal quantity used in one transaction) to maintain them. If we continue with our example of an item typically ordered in quantities of 25, it would look like this:
- 1 normal usage quantity = maintain a stock of 25 pieces – when the stock drops below the minimum of 25 pieces, you’ll need to order enough pieces to bring the stock back up to 25
- 2 times normal usage quantity should be considered if the product has a long lead-time – when the stock drops below 50, additional items should be ordered
For more tips on improving your forecast accuracy, download this white paper along with 5 other papers focused on Efficient Inventory Management.