CEO, Smart Software
Without an appropriate Inventory Planning and Forecasting Policy you can’t properly manage your inventory levels, let alone optimize them.
If you don’t have a handle on exactly how demand forecasts and stocking parameters (such as Min/Max, safety stocks, and reorder points, and order quantities) are determined then you don’t really have an inventory planning and forecasting policy
The reality is that many organizations cannot specify how policy inputs are calculated or identify situations calling for management overrides to their Inventory Planning and Forecasting policy.
For example, many people can say they rely on a particular planning method such as Min/Max, reorder point, or forecast with safety stock, but they can’t say exactly how these planning inputs are calculated.
More fundamentally, they may not understand what would happen to their KPI’s if they were to change Min, Max, or Safety Stock. They may know that the forecast relies on “averages” or “history” or “sales input”, but specific details about how the final forecast is arrived at are unclear.
Inventory Planning and Forecasting Work-Arounds Don’t Work
Typically, a company’s inventory planning and forecasting logic was developed by a former employee or long-since-moved-on consultant and entombed in a spreadsheet. It otherwise may rely on outdated ERP functionality or ERP customization by an IT organization that incorrectly assumed that ERP software can and should do everything.
The policy may not have been properly documented, and no one currently on the job can improve it or use it to best advantage.
This unhappy situation leads to another, in which buyers and inventory planners flat out ignore the output from the ERP system, forcing reliance on Microsoft Excel to determine order schedules.
Ad hoc methods are developed that impede cohesive responses to operational issues and aren’t visible to the rest of the organization (unless you want your CFO to learn the complex and finicky spreadsheet). These methods often rely on rules of thumb, averaging techniques, or textbook statistics without a full understanding of their shortcomings or applicability.
And even when documented, most companies often discover that actual ordering strays from the documented policy. One company we consulted for had on-hand inventory levels that were routinely 2 x’s the Max quantity! In other words, there isn’t really a policy at all.
Lack of an Inventory Planning and Forecasting Policy Can Blow Out Costs
In summary, many current inventory and demand forecast “systems” were developed out of distrust for the previous system’s suggestions but don’t actually improve KPI’s. They also force the organization to rely on a few employees to manage demand forecasting, daily ordering, and inventory replenishment.
And when there is a problem, it is impossible for the executive team to unwind how you got there, because there are too many moving parts. For example, excess stock may occur due to:
- An inaccurate demand forecast that relied on an averaging method that didn’t account for a declining demand
- An outdated lead time setting that was higher than it should’ve been
- A forecast override made by a planner to account for an order that just never happened.
In this final example, you may never know who gave the feedback to make that override. Was it a customer or maybe even a salesperson?
If you have any of these problems, the chances are that you are wasting hundreds of thousands to millions of dollars each year in unnecessary shortage costs, holding costs, and ordering costs.
What would you be able to do with that extra cash? Imagine the impact that this would have on your business.