Sunday, September 23, 2012

Forecasting and Inventory Management Practices

The root cause for an inventory management issues is usually either out-of-stocks or overstocks [1]. Good planning and forecasting is the key answer to the problem. 

Consider what happened in Europe, farmers were encouraged to produce beyond demand. This led to fall in the prices and Europe was sitting on a large inventory.Sales forecasting would have avoided the disaster. Forecasting is not always about how much to buy, retailers should be conscious about the inventory they have as well. In an article, “Sales Forecasting and Inventory Management for Independent Retailers”, Ted Hurlbut suggests a simple math manipulation can save you from overstocks. Retailers usually focus on how much to buy from what they have done in the past;

Beginning inventory + Merchandise Receipts – Forecasted Sales = Ending Inventory

Instead, Ted Hurlbut suggests, “ starting with a sales forecast and an inventory plan”.

Ending Inventory + Forecasted Sales – Beginning Inventory = Merchandise Receipts

If retailers have a knowledge of how much inventory they want to end with, expected sales for the month and how much inventory they are going to start with, they could estimate how much they should bring in for the month. This way the retailer would avoid overstocks and out of stocks.

Luckily, European farmers are being paid not to produce certain crops but that is not the only way you attack the inventory surplus problem. With emerging technologies being adopted by everyone around the world, retailers have to catch up on them to compete in the global marketplace. 

What could have Europe possibly done, innovatively rather than paying the farmers to stop producing?

Could you suggest a technology that Europe should adopt, so that the problem never arises?  


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