Inventory Forecasting and its Flaws

Mar 9, 2022Articles, Productivity, Replenishment

There are many elements and factors that go into inventory management but one of the most common practices is Forecasting, which is based on predicting trends that are compiled on information gathered by past behavior and daily customer input.  Predicting trends using this kind of data is risky at best.  Sometimes it works and sometimes it doesn’t.

If Forecasting fails to choose the right trend, the result often leads to lost sales or high inventory.  Any way you look at it, the risk of poor ROI always exists with Forecasting.

Let’s take a closer look at how Forecasting works.  Forecasting utilizes algorithms that are designed to quickly react when changes in sales are identified. Under normal circumstances statistical variations can be identified as trends. But Forecasting trends tend to be based on random sales behavior that often spikes up and down which can lead to either ordering too much or too little inventory.

If the high and low sales spikes don’t match the forecasting strategy then the algorithms are adjusted which often causes the system to not spot new trends quick enough or just incorrectly.  Consider this analogy: When you drive a car and you rely on looking in your rearview mirror to get somewhere, chances are you don’t get there very quickly.  And even worse, you could get into an accident.

When Forecasting predicts the wrong trend, the immediate tendency is to continue to make adjustments based on the same sources it always relies on: previous sales behavior and immediate feedback from customers. By the time Forecasting determines the direction to take the customer may no longer wish to purchase the inventory that has been ordered. Not only are you burdened with high inventory but new demands by the customer to replenish another raw material shortage.

So, are there alternatives to Forecasting?  Yes, there are.  One is called Min/Max inventory management which is based on the midway level between the minimum and maximum level of on-hand inventory, but that system also has its flaws. Another alternative is the Buffering System that was introduced a number of years ago and highly regarded… but generally ignored due to no other reason than “old habits die hard”.  But with the vast supply chain disruptions that many manufacturers face today, the concept of Inventory Buffering has regained some attention; and for good reason.  We’ll introduce you to the practice of Inventory Buffering in another blog entry.