If you are in the business of “buying or selling”, or “building or selling” you have probably asked this question many times throughout your process: “How much should I stock keep in stock?”.
This question is very important and drives many business decisions.
This issue brings up a few common problems. if you stock too much inventory you incur additional costs upfront and a strain on your cashflow. Stocking too little inventory may result in lost opportunities with your customers. It may be a challenge to find the perfect balance, but time and experience will guide you along the away. Until then, here's a few tips to get you started.
Forecasting – Be Realistic.
Many companies rely on forecasting to predict sales and preferred inventory levels. The challenge with forecasting is that the data will vary greatly depending who in your organization you ask.
Sales managers who have bonus incentives may provide very optimistic or pessimistic goals in order to achieve a bonus or compensation. As you request this information from your sales team, it is important to let them know the impact of their information will have to the company.
If your organization is large enough it is typically ideal to use forecasts from different departments such as marketing, sales managers, financial analysts and supply chain managers. Each department will offer different insights to the forecast that others may not be aware. The most accurate data will be through the consolidation of forecasting from all these departments.
Most organizations can forecast up to 3 years in the future if enough data is available. However, with the frequent changes to the market, forecasts greater than one year may be less reliable depending on the fluctuations in your industry.
Demand Planning – Use data available to you.
If you have been around for a few years, history is sometimes a good indicator of trends. Historical data along with a forecast will help you plan inventory levels. Some techniques may help you manage your inventory more efficiently:
Item Reorder Points, Min and Max levels
This method uses fixed amounts for triggering, reordering and suggesting purchase amounts. This is a good method of monitoring inventory levels. However, the drawback to this method is that the data requires constant monitoring to ensure the inventory levels are still current. Typical data points used are:
- Reorder Point
Inventory level in which you should place a stocking order.
- Minimum Inventory level
Quantity in which you want to always keep in stock.
- Maximum Inventory Level
Maximum Inventory quantity you want to keep in stock.Typically, the amount ordered under this method is “Max Inventory Level - Current Inventory Quantity = Order Quantity”
Forecast data can be used to plan for current and future periods. Having an accurate forecast can enable supply chain to order with great bargaining power when reaching out to vendors. Data can be used to negotiate planned monthly orders with your vendors with negotiated delivery dates and fixed prices. Again, the drawback with this method is based on the accuracy of the forecasting data. If your organization is young and you want to limit the risks, start with negotiating 3 month or 6 month contracts with your suppliers to limit the exposure of overstocking, and committing to inventory at a price that my fluctuate in the market.
Regardless of which methodology you start with, there are several factors you will need to think about as you make your plans for inventory stock:
- How will I manage my data?
- Do I have enough cashflow to make long term commitments?
- How easily can I edit the plans if a change happens mid-term?
If you are looking for a solution to help manage the demand planning and forecasting processes, NetSuite is an ERP system that has these features and many more built into the system. Contact Concentrus to learn more about NetSuite and discover how NetSuite might be a valuable tool for your business!