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The Art and Science of Inventory Planning – Part II

Demand planning needs to account for many different scenarios such as the following - you're selling an $8.00 widget - a customer wants to buy these widgets but decides to go with another vendor because your price is $3.00 higher than a competitor. Or lets says the buyer wants 8 and you only have a quantity of 5 on hand - they may buy the 5 or decide not to buy because you can't fulfill the total quantity of 8. That extra 3 or 8 widgets that could have been sold but will not be needs to be incorporated into the demand forecast.

What's more, there's a granularity that is needed for demand planning as different SKUs at different locations perform differently. There are multiple methods of calculating this demand that need to take into account seasonality, trends, erratic usage, or maybe an exceptionally large sale. The best predictor is the one that produces the lowest deviation (that's the most accurate.) What good planning systems do is run different algorithms and analysis to determine which is best and most accurate model for your business. Where businesses get into problems is when demand is based purely on what is sold.

What good planning can tell you is what you are going to sell and when, as well as when you should order. Another thing these systems recommend is review cycles - which is how often planners should review these items. The frequency of purchase is driven by volume discounts and incentives. For example, maybe you offer free shipping to incentivize buyers to order $5,000 or more.

This can bump demand, but it can also introduce unnatural spikes. This is why it's important to track GMROI - gross margin return on investment - margins made versus inventory turns. It's important to evaluate buyers regarding trends in inventory and inventory levels in relation to sales.

You must also take into account unique business mandates and requirements. With Amazon and Best Buy, a distributor will lose an account if their fill rates are not 98-99%+. To meet this requirement, distributors are giving up a level of profitability for greater product availability.

Another key issue is serial or lot level which impacts warehouse management operations in the distribution center, and also for kitting and tracking specifics such as environmental factors - VOCs in California, for example, or requirements to use domestic products versus foreign products; these can be tracked with the same SKU, but different iterations.

And when there are deviations to plan, the quicker I know about these deviations, the greater ability I have to act about it. For example, maybe I can spot buy, or "shuffle the deck" by moving surplus inventory from another distribution center. Inventory planning and inventory management is about having insights to build in flexibility and agility into your inventory control and execution.


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