Note: Running most Fridays in FromGregsHead.com, this is a continuing series of inventory control tips by Jon Schreibfeder. These run Saturday mornings during the BusinessMaker’s Radio Show on Supertalk 97.5. Audio files can be found on the Entrepreneur’s Playbook page of the PKF Texas website.
Last week we talked about forecasting for inventory management. While most distributors use an average of past usage, we’ve also discovered that an average of past usage is just one element of a good forecast formula.
In fact, comprehensive forecasting considers four elements:
- A weighted average of past usage
- An optional trend factor
- Possible collaborative information from customers and/or salespeople
- Identification of the proper time frame for the forecast, also known as the forecast horizon
Accurate demand forecasts are a critical factor in achieving effective inventory management. If you do not have good estimates of future usage, you are forced to overstock in order to maintain a high level of customer service. This is the equivalent of adding “fat” to your warehouse.
It costs a lot of money to maintain this excess inventory, money that probably could be put to better use. In today’s competitive environment you must be “lean and mean” to prosper and maximize your company’s profitability. You need to develop the most accurate forecast of future demand possible for every stocked product in your inventory!