This is our 3rd in a series from our guest Writer Jon Schreibfeder. Without sounding repetitive I want to point out how fortunate my Newsletter and you, my readership, are to have such an inventory talent share ideas with us. These concepts are important to utilize so you leverage the greatest asset your Company has, your Inventory.

Please be aware that today’s topic is one that I found extremely valuable in understanding the flow of your forecasts. Thanks again Jon for being part of our writing team.

Recently I received a call from a distributor who had a dilemma.  They were running out of a particular popular product every month.  The buyer’s frustration vibrated through the phone line as I spoke to her.  She explained, “We’re doing a pretty good job at estimating future demand of the product.”  The average difference between the forecast demand for the month and actual usage is less than 10%.”

I explored another area, “How consistent are the lead times?  Could shipment delays be causing the stock out problems?”

“No.” she sighed, “The vendor always delivers four business days after we order the product.”

“How many customers do you have for the item?”

“We have several large customers who place a large order for the item each month and several smaller customers who will pick up a few pieces when they need them.”

“When do you receive the large customer orders?”

“Usually within the first 10 days of the month.”

The buyer had just uncovered the problem.  Her replenishment system forecast demand of future usage by month.  For example, in July it predicted sales of 300 pieces or about 10 pieces per day.  Actual usage was 295 pieces.  Though the monthly forecast was accurate customers requested 236 pieces or 80% of total monthly demand during the first two weeks of the month.  They never sold 10 pieces per day.  During the first two weeks of the month they sold about 17 pieces per day and during the last two weeks of the month (when they sold the remaining two weeks of the month they sold 4.2 pieces per day.

We recommended that the company change the time period of their forecast from months to weeks.  In calculating the forecast for non-seasonal products each week we looked at the average usage in the same week during the previous three months.  For example, the forecast for the first week of August would be the average usage of the first week of July, June and May.  We would also apply a “trend factor” to the forecast if we saw a consistent increase or decrease in usage in the weeks we are examining in May, June and July.  That is if we saw that sales were increasing at a consistent rate of 10% during the weeks we are analyzing, we would add 10% to the result of averaging the three weeks of sales.

Weekly forecasting works well for products that experience cyclical patterns of usage throughout a month.   Many of our clients who experience predictable sales patterns within a week will calculate daily forecasts based on sales during the same day in the previous several weeks.  

Remember that accurate forecasts are a key element in your quest to achieve effective inventory management.

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