Inventory Forecasting and Inventory Control Systems

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Why having the ability to plan inventory needs is important.

Inventory is one of those things that you never seem to have the right quantity of. You either have too many of certain items in stock, or you constantly get caught not having sufficient quantities of other items that for unknown reasons generate customer demand in inverse proportion to the stocking levels of these items. What to do…

Playing it Safe vs. Minimal Inventory

Play it safe and keep higher stocking levels, usually done with increasing the minimum stock quantities or establishing safety levels for certain items, and you are unnecessarily tying up cash in inventory and using additional storage space that could be put to better use, both of which have a negative impact on finances and operations. Only purchase minimum inventory levels that you know will be in demand and you will get caught in shortages of material, parts, and other finished goods your customers may be looking for, often not accepting your proposed long lead times. The result is frequently losing sales to competitors who have a better-optimized inventory system or perhaps more sophisticated purchasing rules and policies.

The Art and Science of Inventory Control

It’s been said by many people that maintaining the right inventory levels is more of an art than science. At a minimum, it requires experience and tremendous discipline in managing, tracking, and re-ordering inventory items. This is also true for in-house manufactured items. Whether inventory control is an art or a science, it still requires a well-designed and implemented inventory control system, usually incorporated into the company’s ERP software solution. A warehouse management software application can also be employed and be part of an integrated enterprise software.

The Role of MRP in Inventory Management

MRP (Manufacturing Requirements Planning) is a very popular software application, also part of an ERP implementation, which looks at customer demand (as evidenced by entered sales orders) and recommends, using business rules and other system settings, when to replenish certain inventory items, how many to purchase; suggests vendors to purchase from and more. It can also suggest processing quantities of in-house made items, when to start production, and what materials must be purchased for these proposed production work orders. MRP alone cannot be the only tool to forecast inventory needs, as it only takes into consideration existing customer demand.

Integrating Budget and Forecasting with MRP

With the assumption that an annual budget and periodic reforecasting of sales and expenses exist, the budgeted sales imply that certain inventory items, either purchased or manufactured, will be needed in certain periods of the budget year. These will require procurement of materials and finished goods as well as scheduling labor and work centers in order to meet the sales forecasts. The output of this budget and reforecasts can be an additional input to the MRP system where in-house sales orders can drive MRP to perform as if customer demand already existed. In this setup, products shown in the budget will drive the “make to stock” process, anticipating customer orders.

Using Centage for Inventory Planning

For those who use Centage, and for anyone in SMB (Small and Medium Size Business) who is looking to implement an all-encompassing budgeting and planning solution, the sales module provides a powerful inventory option where inventory needed to fulfill sales can be planned using revenue item forecasts. If Inventory is enabled in the revenue line properties, one can enter the beginning unit quantity, indicate whether or not Centage will replenish the inventory required by the sales forecast and if so the Min / Max replenishment levels as well as the order quantity multiples. Another nice feature is the Lead Time attribute that can be set specific to each inventory item and will assist the system to automatically calculate when these items must be ordered.

Forecasting Inventory Needs

Although this is not a true and complete extension of the MRP software into the budget periods, Centage allows its users to forecast their inventory needs based on forecasted revenue in the sales module. As these revenue forecasts are updated, the inventory requirements will follow these revenue forecast changes. As is always the case in Centage, every change you make in the model will cause all system-generated forecasted financial statements to change accordingly. For example, as revenue line amounts or spreads are adjusted, inventory valuations of all affected items will change on the balance sheet (i.e., total inventory valuation will reflect the specific changes in individual inventory items affected by the budget update). Of course, specific reports pertaining to revenue forecasts can be produced independently from financial statements and greater detail of revenue items can be displayed.

Inventory forecasting is hard to do but given the tools we have at our disposal I think it would be wise for every Centage user to take advantage of these features (available in the advanced version) and put them to good use. It will certainly take some of the guesswork out of the “art” part of inventory forecasting.

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