When we founded Effective Inventory Management (EIM) in 1996, our goal was to help organizations throughout the world achieve the goal of effective inventory management – that is, to meet or exceed customers’ expectations of product availability while maximizing the organization’s net profits or minimizing its inventory related costs.
One of our primary areas of concentration has been the improvement of future predictions of product sales or usage, otherwise known as “demand forecasts.” In previous articles and in Achieving Effective Inventory Management – 3rd Edition we discuss how to develop demand forecasts and replenishment plans for:
- Items with sporadic usage
- Items with recurring usage
- New inventory items
- Products maintained specifically for one customer
But as we have discussed before, the accuracy of any demand forecast is dependent on the “goodness” of your sales or usage history. Does this data truly reflect what would have been sold or used under “normal” circumstances?
Many software packages identify possible unusual usage at the end of each week, month, or other inventory period. The simplest of these systems compare usage in the month just completed to the total usage recorded over the previous “x” months, or inform you if you were out of stock for more than “y” days. More advanced systems bring to the attention of a buyer significant differences between the demand forecast and actual sales or usage recorded during the inventory period just completed. A common feature of both methods is a belief that usage history has been recorded correctly.
But is it safe to make this assumption? As we will see in this article, how usage is actually recorded in your system can have a significant effect on the accuracy of your forecasts.
Usage and Substitutes
Usage should normally be recorded for the product ordered or requested, not the product actually shipped. If you are out of the product your customer orders, you’ve probably disappointed the customer. If you provide another item in its place and record usage for the substituted product instead of the product originally requested, you are setting your company up to disappoint the customer again. Unfortunately most systems record usage based on what was shipped, not what was ordered. If your computer software does not have the capability to properly record usage when a product is substituted, check to see if your sales entry program can be modified to allow the salesperson to hit a function key to specify an alternate product that should receive the usage history for a specific line item.
Record Usage When a Customer Wanted the Product
The following chart records, by week, quantities of a product due to customers, on hand in our warehouse, and actually delivered to customers:
|Week 1||Week 2||Week 3||Week 4||Week 5|
Notice that the company was out of stock in the third and fourth weeks. All quantities ordered during this time period were backordered and shipped when stock was replenished in week five. If we record usage when product was shipped, usage history will reflect a “blip” in usage in week five following no usage in weeks three and four. But this is not when customers actually wanted the product. We don’t want to replenish inventory to satisfy this pattern of product usage. To avoid repeating stocking mistakes in the future, usage should be recorded when customers wanted a product, not when it was actually delivered. To accomplish this some systems will record usage at the time of shipment based on the customer’s required date for the material. Other systems will record usage at the time of order entry.
Usage and Superseding Products
A superseding product replaces an existing stock item. A useful utility program allows a user to add the usage history of a discontinued item to the usage history of a designated superseding item:
|Discontinued – A100 Usage||100||20||12||2||0|
|Superseding – A102 Usage||0||84||93||104||110|
|Total A102 Usage||100||104||105||106||110|
Notice that the usage of product A100 is added to the Usage of item A102. This allows you to accurately account for both the decreasing usage of A100 and the increasing usage of the superseding item.
There is an old expression, “What we sold in the past is a good indication of what we will sell in the future.” This attitude leads to many stocking problems. In order to help develop the most accurate forecast possible, replace the “old” expression with a commitment to be sure that usage is recorded for the product in the time period and in the location to best meet your customers’ future needs.