Minding Your Inventory Drivers As Recession Lurks
If you’re leading, running, executing, or accountable for the performance of a supply chain and you’re not intimately aware of what your inventories are doing, it’s not too late to get curious.
There isn’t a clear-cut definition of a recession or when we’re in one, or what the repercussions might be, but we can be sure that the inflation we’ve been experiencing and an upward adjustment of interest rates that make purchasing more expensive will have some sort of an impact on consumer demand patters.
What does recession mean right now?
We all exist in a consumer-driven world. Even if your products are not direct consumer goods, they are very likely still impacted by whether the general population is spending money or not.
If your company does not have a Sales & Operations Planning process or does not do meaningful Demand Planning or Forecasting, your purchasing and materials management teams are essentially blind to how they need to be executing in the supply chain. In today’s world, demand may be changing faster than you can actually replenish your materials.
If that’s the case, you’re at huge risk of getting caught with way too much inventory as consumer buying behaviors potentially slow in the coming months in response to actual or anticipated recession.
The 4 Key Drivers Of Inventory, Simply Stated
Demand: The quantity you anticipate selling over a period of time. It’s a look into the future, frequently based on historical behaviors.
Replenishment Leadtime: The amount of time it takes to obtain new product once an order is placed.
Variability: The variability and predictability of demand and replenishment leadtime.
Service Level: How frequently you want to be able to have product in-stock to ship customer orders on-time and in-full.
While these concepts are simple, effective employment is anything but easy. One of the most important drivers to understand is the Demand Forecast, as it is literally the reason you keep inventory and place purchase orders.
Basic Demand Planning In The Absence Of Anything Better
We recommend some basic demand analysis, as per the steps below, at a monthly cadence, if not weekly if your team’s bandwidth allows for it. The sooner you can identify where forecasts are out of alignment, the sooner your purchasing teams can adjust orders and materials planners can adjust inventory needs.
Step 1: Compare Forecasts to Historical
We recommend comparing 3, 6 and 12 months of forecast and historical. The telescoping time horizon will help to understand if there is seasonality and if demand patterns are shifting slowly or quickly.
Step 2: Identify Outliers
Identify the materials that have the largest deviations between forecast and historical. The importance of a material can be judged by how much it can impact the P&L and/or the satisfaction of your customers. More important materials may have a tighter deviation tolerance, such as 10%. Lower-importance materials may not trigger for review unless their deviations exceed 50%.
Step 3: Root-Cause Analyze Key Deviations
Prioritize your effort here – it’s not effective to look for the reasons behind every deviation, which is why we recommend to understand which products are the key drivers of profitability or customer satisfaction. There are many possible reasons a forecast doesn’t match historical patterns, including legitimate changes in demand. But statistical forecasting tools will not anticipate changes that haven’t yet occurred, so be aware of data overrides.
- Statistical forecast model is wrong
- Someone has overridden the statistical forecast
- Promotional lifts have been added to reflect marketing activities
- Supply constraints are limiting shipments
Step 4: Talk to Sales and Operations People
Once there’s an initial understanding of the deviation, we recommend speaking to sales, marketing, or customer service people to better understand the anticipated reality. Is that BOGO promotion still relevant? Is the customer experiencing supply constraints of their own? Does your customer anticipate slowing demand from their customers? Are your operations limited by constraints such as material shortages/labor shortages/machine downtime?
Step 5: Decide What Is The Best Forecast
Someone needs to be responsible for deciding what is the best forecast. Some organizations delegate that responsibility to their sales teams, some to their supply chain teams. Measuring forecast accuracy and bias can be a great way to see who has the “best” forecasting ability, but the fact is that just having eyes on the numbers and having the discussions will improve your ability to anticipate what the business needs.
Our supply chain and operations advisors are experienced in many manufacturing and distribution companies. We help find the best way to optimize your supply chain management and get the results you want.