Inventory Projection Models
Most businesses invest a lot of time and energy into projecting their sales, profits and cash, usually with good degree of accuracy – many of us will have worked through the pain of the annual budgeting process often enough to recognise this. However, experience has taught us that businesses are not very good at projecting the future direction of their inventory – that is if they even try to project it at all!
Inventory is critical to businesses performance, yet few businesses invest adequate resources in projecting how it might look in the future. Failure to invest in projecting the future direction of your inventory is like setting off on a road trip without a map…..if you have no idea where you’re heading, don’t be surprised when you get lost or don’t like where you end up!
Focus on your inventory
As we highlighted in our recent ITTR post, the 700+ firms in our sample are collectively holding £7.2BN of inventory, which equates, on average, to 12.8% of their annual revenue. Inventory is a big deal – anything else that equated to 12.8% of your turnover would be micromanaged to within an inch of its life – yet many firms passively sit back and just let inventory happen to them. We know this because 70% of the firms we have analysed have seen increasing relative inventory levels over the last decade.
At Libero we firmly believe the first step to reducing and optimising inventory is to start projecting where it is heading.
In theory it should be relatively easy to build an inventory projection model, after all it’s just a function of stock, supply, demand and cost, all of which can be pulled from your ERP system.
However, as with most things, if it was easy everybody would already be doing it. In reality, building inventory projection models is complex. Many things can hinder the creation of a robust inventory projection model, including……
On the other hand, a well-designed inventory projection model can deliver huge business benefits by highlighting….
Robust Inventory Projection Model
A robust inventory projection model is the first step on your journey to reducing and optimising your inventory.
To know what you need to tackle, you need to know where you’re heading. Inventory projections should be integrated into S&OP/SIOP processes – providing a future state inventory view helps give direction and control to inventory reduction and optimisation efforts.
Inventory projection models enable performance measures to be established – actuals can be logged against projections and variances investigated, which helps drive accountability and allows corrective actions to be put in place. If inventory landed higher than the projection, what were the causes?
There are a myriad of reasons as to why inventory lands higher or lower than planned. However, if you are not projecting how your inventory is likely to move, you have no idea what is really driving the associated movements that are likely to follow. All too often businesses decide their inventory is too high and then start to investigate why – being reactive rather than proactive.
Inventory doesn’t just become excessive, slow moving or obsolete – these things all happen because businesses didn’t look ahead and stop them from occurring. Remember that prevention is better than cure.
Be Proactive
Look at your inventory value today – how does it compare to what you thought you’d have 12 months ago?…..Do you even know?
What will your inventory level be in 12 months’ time?…. If you don’t have that data immediately available then you urgently need to build an inventory projection model to tell you.
And if you don’t… well don’t be surprised when your inventory has increased this time next year!
Get in Touch
Libero are experts in developing inventory projection models that will enable you to see what lies ahead, helping you to take actions that will reduce and optimise your inventory. If you want to know more GET IN TOUCH with us today!
