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Managing by Exception – Part I

Presented by: Jon Schreibfeder, President, Effective Inventory Management, Inc.

Do your buyers feel overwhelmed with work?  Is it necessary for them to closely examine each item in a vendor line to determine whether or not its inventory needs to be replenished? Despite their hard work, do you experience stockouts of common items while other products are overstocked?

Over the next several months we are going to outline techniques that will allow your buyers to be more effective and productive as they manage your inventory.  These practices will decrease stress faced by your employees while providing you the opportunity to improve both customer service and profitability. 

We’ll start by examining unusual sales or usage.  A forecast is a prediction of the quantity of a product that will be sold or used in an upcoming week or month.  Accurate forecasts are critical to achieving effective inventory management.  Whenever actual sales or usage differs significantly from the forecast used to plan replenishment, we have to determine why this difference occurred and if it was unusual activity or the start of a new trend in sales or usage.

At the end of every month or week, you should calculate the forecast error (i.e., the percentage difference between the forecast and actual sales or usage) using the formula:

(Actual Usage - Forecast Demand) ÷ Forecast Demand

Highlight situations where the result is unusually high (e.g., greater than 300% or sales/usage being more than three times the forecast) or unusually low (e.g., less than 50% or sales/usage is less than half the forecast). 

Buyers and salespeople should review transactions for each of the identified items.  They might find:

  • That a stockout occurred which resulted in lower than anticipated sales/usage
  • A customer temporarily stopped using the product
  • An event (e.g., a promotion, unusual weather, the COVID-19 virus, etc.) caused a change in sales/usage that will have to be monitored for several weeks or months
  • A specific project caused a one-time spike in sales/usage
  • A new trend has begun and sales/usage will probably increase or decrease for the foreseeable future

After determining the reason, the buyer should enter an adjustment to actual usage or sales to reflect what sales would have been under “normal” circumstances.  Adjusted usage quantities should be used in place of actual usage when calculating future forecasts.  When deciding whether or not an override to the usage quantity should be entered ask: “what quantity of this item do we want to stock in this location to meet our customers’ future needs?” 

In our next newsletter, we will examine specific examples of adjusting sales/usage to obtain accurate future forecasts.

A Note About Our Upcoming Workshops:

Several clients have asked if we plan to have a virtual option for our upcoming October inventory management workshop and inventory control seminar.  We carefully considered this alternative but have determined that it would not be possible.  This is because we encourage each participant in our sessions to work with their own data, support a high level of interaction, and utilize multiple types of media at the same time.

We are closely working with the venue to assure that we will have a safe, comfortable working environment.  These include:

  • Limiting attendance
  • Practicing social distancing at all times
  • Requiring masks whenever there is an interaction
  • Ample supplies of hand sanitizer and other cleaners
  • Frequent cleaning of the rooms where the workshops are being held
  • Prohibiting individuals with virus symptoms from attending sessions

If you have any questions or concerns or would like to register for the workshops, please let us know.  We look forward to working with you (at a safe distance)!

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