Inventory Management during the COVID-19 Pandemic, Part I
Adjusting Future Forecasts of Products
The world has changed since we sent out our last newsletter in early March. We have been answering many questions concerning how to best manage your inventory under circumstances that have not been experienced in recent times. We will be publishing newsletters twice a month until business activity gets back to normal (yes, we are confident it eventually will). Over the next several weeks, we will provide you with guidance as we develop new forecasting models, policies and procedures that will allow you to achieve effective inventory management in this ever-changing environment.
This week we will look at adjusting future forecasts of products. Most forecasting systems base forecasts of future demand on a “time series model”. That is, they base predictions of future demand on recorded sales or usage history. The theory is “what you sold in the past is a good indication of what you will sell in the future”. But your organization probably experienced an unusual increase or decrease in demand of certain products over the last several weeks. And in all probability, this unusual activity will continue, at least for the immediate future.
Here are some steps that you can take to temporarily modify your forecasts for April, 2020, of items with recurring usage to compensate for the COVID-19 Pandemic. Those are items that are historically sold or used on a regular basis.
- 1) Adjust sales usage in March for the items whose sales have been affected by the pandemic to equal what they would have been under normal circumstances. Some systems (including most of the forecasting spreadsheets we have provided to our clients) will automatically correct for unusually low sales or usage for a month or two using a smoothing algorithm. Other systems allow you to create an unusual usage report or inquiry and then enter usage adjustments (also commonly known as override or filtered usage). For example, if you sold 50 fewer pieces than you normally would, you would add 50 pieces as an adjustment to usage.
- 2) Create an inquiry to calculate the percentage difference between the forecast created for each item for March (calculated before the pandemic began) and actual sales/usage for the month of March. For example, if the forecast for March for a product was 100 pieces and you actually sold 75 pieces) the percentage difference would be “-25%”. On the other hand, if the March forecast was 100 and you actually sold 150, the percentage difference is “+50%”.
- 3) Allow your system to forecast future demand for April as it normally would. Keep in mind that most systems base their forecast on an average of the usage recorded in previous months.
- 4) Reduce or increase the forecast your system calculates for each item’s April forecast by the percentage calculated in step #2. Some systems allow you to do this by entering a “collaborative percentage”. That is, a prediction of how future demand will vary from what you sold or used in the past. If your system does not have the capability that allows you to add collaborative information, you will have to manually adjust the demand forecasts calculated by your system.
- 5) Further adjust the resulting forecasts for other collaborative information from management, salespeople, trade associations and customers.
- 6) Use final forecasts from step #5 in your replenishment planning.
We will be publishing newsletters every two weeks until business activity gets back to normal (yes, we are confident it eventually will). In the next several newsletters, we will discuss adjusting your stock of items with sporadic usage and adjusting your May and future months’ forecasts. In the meantime, please stay safe! And let us know if you have any questions or we can provide you with any assistance.