As an organisation, understanding all of the stock and supplies that the business has is a must. You not only understand your own situation as accurately as possible, but that gives you a strong platform from which to make accurate decisions. Because of this, inventory forecasting errors can be one of the biggest threats an inventory business faces. Learn more about what inventory forecasting errors are, some examples of inventory forecasting errors and how you can stop these issues from having such an impact on a business.
What are inventory forecasting errors?
To properly understand what inventory forecasting errors are, you need to understand inventory forecasting. Inventory forecasting is the process of using company data to estimate the amount of inventory that a company would have available at any given time in its operations.
Forecasting errors occur when the forecast is a significant distance away from the initial forecast. This results in the company losing track of the levels of stock in a warehouse and can have significant negative impacts on the business.
Examples of Inventory Forecasting Errors
There are a few examples of industry forecasting errors to consider, including:
Underestimating Lead Times From Suppliers
Lack of stock to fulfil sales orders as a result of delivery times from suppliers taking longer than an organisation expects or was promised. This has become a significant forecasting challenge due to the current state of supply chains.
Scarcity of Raw Materials
Supply chains are being severely disrupted due to raw materials shortages. At present copper is one of the raw materials that is disrupting supply chains and lead times for many industries.
No Contingencies for Delays
No alternative plans for goods to be sourced from secondary suppliers in the event of a delay with the primary supplier.
No Safety Stock
Companies running out of stock because they don’t have a backup supply when the warehouse runs out. With lead times from suppliers longer than ever, it’s essential to have safety stock in case of delays from suppliers.
Inaccuracies in Inventory
When the stockholding on record doesn’t match the actual stock in the warehouse. Also when stock in a warehouse location isn’t physically there and so can’t be used to fulfil sales orders.
Underestimating Seasonal Demand
Running out of stock when demand spikes due to seasons, such as ice cream in summer or woolly hats in Winter. Seasonal demand can be challenging, especially as spikes can occur simply due to the current weather.
Ignoring Sales Order Data
When businesses don’t pay attention to their historic sales order data. By analysing past trends in sales data, businesses can forecast future demand more accurately.
Not Liaising on Promotions
When operations teams don’t liaise with marketing teams on upcoming promotions. Promotional-lead spikes in demand then cause shortages in the warehouse which could have been avoided.
The Issues Inventory Forecasting Errors Can Cause
There are a few different ways that inventory forecasting errors can cause problems for companies, with each adding pressure to the organisation’s management structures and financial health. By understanding the different forms of damage there are, companies can recognise when forecasting errors occur and respond to them. Some of the more common types of damage that errors cause companies include:
Worsened Reputation with Customers
Customers look for one thing in companies that they buy from consistently, and that is a good level of continuity. If a business doesn’t have products in stock due to poor forecasting, customers are left disappointed and ultimately might not come back to the business for future purchases
Disappointed customers can also leave poor reviews for the company, reducing your chance of securing sales in the future since people pay a lot of attention to word-of-mouth marketing. If this does happen, pay attention to your customers, and actively discuss their concerns with them to explain the issue.
If a business doesn’t have the stock it needs at the right time, there is a serious risk of lost sales and thus less profitability. This comes from a few different sources, with missing revenue because people aren’t able to buy products when understocking occurs, and increased costs when companies have to hire more storage space to combat overstocking. Both put a major squeeze on a company’s financial results, which can result in redundancies in the most severe cases.
Warehouse Space Limitations
By their very nature, warehouses have a limited amount of space in them. Forecasting errors can put a severe strain on this limited warehouse space, causing the business to either take the financial loss of disposing of products or spend more money on storing these excess products. Having more stock can be positive when there is plenty of demand for a product to back it up, but if demand is sitting at a standard level there are major monetary risks.
Cash Flow Issues
Stock is cash, and when it’s sitting in a warehouse unsold it puts strain on a businesses cashflow. It’s important to properly forecast the flow of stock in and out of a warehouse to ensure the business has enough cash in the bank to continue to operate. Overstocking often leads to businesses liquidating stock by selling it for less than intended and so reducing margin and profitability.
Tips for Reducing Inventory Forecasting Errors
There are a few steps that companies can take when trying to reduce their inventory forecasting errors, with each closing the gap between reality and the outcomes that your business faces. Some of the main tips for reducing forecasting errors in your business include:
Dedicated Inventory Tracking
If possible, dedicate inventory tracking tasks to specific members of staff or teams in the company. Some companies leave inventory tracking to warehouse staff members that have plenty of other jobs to do, leaving the inventory roles incomplete. Inventory tracking is a job that takes a lot of time, attention, and expertise, so getting people to become specialists in this area is ideal. That includes hiring inventory management specialists and implementing a clear structure within that team, so everyone understands their responsibilities
Hand held scanners can make inventory tracking far more efficient and accurate, with delivered goods being scanned away into locations and then scanned back out to fulfil sales orders. You can learn more about barcoding and warehousing here.
Make sure that you consistently complete audits on your inventory. That involves setting a regular weekly or monthly schedule of when you examine your stock and completing thorough checks to see how much inventory you have and when it is expected to go out. By regularly completing these audits and comparing your real-world stock to the stock that you theoretically have according to your software, you can find systematic errors in your workplace systems and resolve them more quickly than if they were left unmonitored.
Use Enterprise Resource Planning (ERP) Software
ERP software like NetSuite and Sage 200 is designed to take care of all aspects of a business, from accounting and financials to operations such as stock management, resource management and more. Because all areas of the business share one common database, the information in the software is accurate and can be reported on with ease. ERP software will generally feature Supply and Demand Planning modules which track all incoming stock on purchase orders and all outgoing stock on sales orders.
It can recommend when to push purchase orders back due to decreased sales demand, and alternately suggest purchase orders to be raised to meet increased sales demand. This kind of capability is quite simply princess to businesses who deal with inventory.
Why choose Eventura as your ERP implementation partner?
Eventura has been providing robust business solutions to countless organisations for over two decades. We are ERP experts and can identify all of your business needs, and deliver a comprehensive ERP solution that works for you.
As Sage 200 Partners and NetSuite Solution Providers, we can help you identify which solution will fit your business needs the best. Our expert team of business analysts, developers, consultants, technicians and support staff can guide you through your entire project, from initial scoping through to implementation and on-going support.
We’re also managed IT service providers meaning we can help you identify your entire IT infrastructure requirements from day one. If you would like to speak to one of our ERP experts to discuss your options or request a free demo, you can request a free call back here.