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Is Customer Forecasting the Silver Bullet for Your Inventory?

Craig De Kock | February 15, 2017

When it comes to inventory planning, we’re all looking for a leg up that keeps us one step ahead of the demand that’s on the horizon. One tactic that offers some hope of keeping costly stock-outs at bay is customer forecasting. The basic thinking behind this concept is simple: your inventory replenishment planning will be more sensitive and responsive to changes in demand if you factor in your customers changes in demand.

That seems pretty simple, right? You get the demand from as many customers as you can, you add that all together, and then you plan your stock replenishment accordingly. This is the sort of JIT (Just In Time) environment that could keep your overhead low by keeping excess out of the warehouse, and that means more profitability.

Is Customer Forecasting the Silver Bullet for Your Inventory

That all sounds good, but let’s do some math to see how this approach can fall apart rather quickly.

Say you have 10,000 products and you sell product out of 20 locations. Due to longer lead times, you keep a running forecast that looks ahead to the next 12 months. For each of those products, you have 10 customers. That means you need to calculate 10,000 products times 20 locations times 12 months times 10 customers…that’s 24 million forecasts that need to be checked each month!

That’s not just unreasonable; that’s basically impossible, unless you have an army of workers doing the calculations for you. A process that requires that much labor will ruin the profitability you were going to reap from your JIT process.

To be fair, most inventory-based businesses have fewer locations and fewer products than the previous hypothetical. So let’s say your business is a bit smaller and you have one warehouse with a few hundred products that sell to a few primary customers. Here’s what that might look like:

If you have 100 customers buying a product that sells 20 units a month, then each customer’s forecast is so small that you’ll have too much noise to combine these customer forecasts and create a usable total forecast. When you add up hundreds of “noisy” forecasts with the more reliable forecasts, you just end up with a jumbled mess. It’s better to leave that kind of calculation to a statistical engine and carry just a bit of of buffer stock.

It should be noted that if you add up forecasts from customers that are slightly inflated, you could end up with a combined buffer stock that is far beyond your intended buffer stuck level. You should also consider the demand of those customers who don’t provide you with forecasts. The net result is a forecast that’s barely comprehensible and does little to help with replenishment planning.

Let’s go one step further on this quest for useful customer forecasts and ask some questions about the systems needed to make this happen. Will you collect forecast spreadsheets from each customer? How are you going to combine all that data into a single set so you can build your forecast? Who will follow up with your customers if something is amiss, and how will that affect your forecast in the meantime? As you can see, there are more questions than answers here. The odds of this working are simply not in your favor.

What you need is a statistical forecast that takes all the above factors into account without a tedious manual process. Consider all the data that’s held in your ERP, and how useful that could be when fed into a data-based forecast.

If you’re already an Acumatica user, you know that you’ve got a powerful tool at your disposal for sorting through this kind of data. But should you require additional help to build dynamic inventory forecasts to use in replenishment, you’ll want to skip the manual process of compiling individual customer forecasts. That’s the far easier way to prevent stock-outs and keep excess stock to a minimum. You may want to look at add-on tools that work with the data you already have in your ERP to build more accurate forecasts, like those offered to Acumatica users by NETSTOCK.

Inventory replenishment shouldn’t be a guessing game, and it shouldn’t require a massive team spending endless hours collecting individual customer forecasts on outdated spreadsheets. If you employ the right tools for your needs, then you’ll achieve a balance in your inventory that fits with your customers’ needs based on their history with you. That’s the key to inventory optimization and maximizing your profitability in your warehouse.

Craig De Kock

Chief Business Development Officer, NETSTOCK. Craig has programmed, implemented, and consulted in inventory management technologies and methodologies. He has more than 20 years of experience in inventory consulting and product management, including the development of the Optimiza product at Barloworld Optimus.

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