Role of Inventory Management and Forecasting in Matching Supply and Demand

Role of inventory management and forecasting in matching supply and demand
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Role of inventory management and forecasting in matching supply and demand
Inventory is one of the most capital-intensive investments that all business organizations make. As such, supply chain professionals usually employ inventory management systems in order to manage their inventory more effectively whilst satisfying customer demand, and in the end optimizing their inventory investment. Inventory management is understood as a system that is utilized in overseeing the flow of services and products in and out of a company. Inventory management, in essence, matches supply to demand through dynamically allocating inventory to where it is most needed (Segura 2011). Having high inventory levels adds to the expenditure and increases overall overhead costs. According to Chan and Prakash (2012), an effective way of managing inventory is to determine the company’s inventory demands. Effective management of inventory is at the center of supply chain management excellence. The management of several sorts of inventories, including raw materials, partner inventories, and finished goods actually sits at the junction of demand and supply. This paper discusses critically why inventory management and forecasting plays an integral role in matching demand and supply.
Inventory management and forecasting
Inventory management and forecasting plays a role in matching supply and demand since it is helpful in ensuring that the business organization actually has sufficient supply on hand that will satisfy demand. Most business organizations need to be exact in terms of ordering supplies to satisfy their customers’ demand. It is worth mentioning that overestimating the demand results in bloated or distended inventory as well as high costs. On the other hand, underestimating the demand implies that a lot of valued customers will not receive the merchandise they want. Through proper inventory management and forecasting, a business organization will ensure that it has just an adequate amount of supply to satisfy the demand (Jaber 2009).
Forecasting
Forecasting basically provides an estimate of the future demands; the goal being to minimize forecast error. When forecasting, it is important to take in to consideration the factors which influence demand and whether they would continue to influence demand. Improved forecasts, as Mercado (2010) pointed out, benefit every trading partner in the supply chain. In general, better forecasts bring about lower inventories, reduced stock-outs, reduced costs, smoother production plans, as well as improved customer service. Suppliers need to accurately forecast demand so that they may be able to produce and deliver the right amounts at the right cost and at the right time (Mercado 2010). Effective inventory management and forecasting enables suppliers to match supply and demand to attain optimal levels of quality, cost, and customer service that allows them to compete with other supply chains.
The main forecasting techniques are qualitative forecasting and quantitative forecasting. Qualitative forecasting: this technique is based on intuition and opinion. It is commonly utilized when data is unavailable, limited, or not relevant at present. Qualitative forecasts depend on the available information as well as the experience and skill of the forecaster (Bloomfield & Kulp 2013). Quantitative forecasting: this technique employs historical data and mathematical models in making forecasts. The main quantitative methods are (i) time series forecasting – this method is based on the supposition that the future is actually an extension of the past. To predict the future demand, historical data is utilized; and (ii) associative forecasting – this is based upon the supposition that the future demand is predicted by one or more factors – that is, independent variables (Segura 2011).
High inventory
If the company overestimates the demand, it is most likely to end up with more inventory than is really needed (Khader et al. 2014). This could in turn increase the company’s costs of storage and labor if the staff members have to transport inventory to another storage location in order to provide room for new inventory. Segura (2011) stated that if a company supplies products that are perishable, the business owner might incur an additional loss because of the deterioration of unsold inventory. In a situation such as this one, the business owner may have to sell inventory at a discount, which will reduce the income and profit margins of the company.
Shortage of inventory
Assume that the company has all of a sudden found itself overwhelmed with considerable orders. This could actually be a good problem to have; that is, if the company has an adequate amount of inventory to satisfy the demand. However, it is not a very nice problem if the business owner failed to forecast the amount of supply his company would require and wind up with an inventory shortage (Bloomfield & Kulp 2013). In a situation like this one, some discontented and unhappy customers and clients may take their business somewhere else. One alternative, as Chan and Prakash (2012) pointed out, is to make a big, last-minute rush order, even though this often results in much higher supplier prices that serves to reduce the net income and profit margins for the business.
When business owners have inventory problems, the issue in most cases revolves around 1 of 2 things: overstocks or out-of-stocks. On the surface, these two issues seem not to be related; overstocks resulting from unanticipated low sales while out-of-stocks from unanticipated high sales, but they are in fact the flip side of one and the same problem (Bloomfield & Kulp 2013). Both overstocks and out-of-stocks are caused by insufficient planning and sales forecast. Usually, the first response of business owners is to add an extra layer of inventory in order to get rid of the out-of-stock problem, only worsening the overstock problems. The problem is usually that business owners do not forecast sales/demand.
Fernandes, Gouveia and Pinho (2013) stated that when most retailers focus on how much to purchase, they often begin by looking at how much they have bought previously. However, they should begin with a sales forecast as well as an inventory plan.
[(Forecasted Sales + Ending Inventory) – Beginning Inventory] = Merchandise Receipts
If a business owner knows the amount of inventory she wants to end the month with, and the amount of inventory the business owner is expecting to sell during the month, and then deduct the amount of inventory she will begin the month with, she can compute the amount of inventory her business needs to bring in during the month. Put simply, everything begins with a solid and proper sales forecast. From there, it is possible to plan the amount of inventory the business owner will need to have in order to support that plan (Obermaie...