Managing Inventory by Exception – Part II, Interpreting Unusual Usage
Presented by: Jon Schreibfeder, President, Effective Inventory Management, Inc.
In the last newsletter, we discussed the importance of evaluating possible unusual usage in accurately forecasting future demand for products. In the next several newsletters we will look at some specific examples of unusual usage, properly evaluating them and adjusting actual usage to reflect what would have been sold or used under “normal circumstances”. We will start by examining three instances of what might have caused an unusual “spike” in usage and some ideas of how to correct your usage history so that it reflects what might have been sold or used under “normal” circumstances.
An Unusually Large Sale. In August, you forecast that you would sell 250 pieces of a product and actual usage was 800 pieces. How do you investigate what caused the unexpected increase in sales? First look at the individual transactions that generated the sales of 800 pieces:
Did one customer buy an unusually large quantity? Perhaps the typical quantity sold in one transaction is somewhere between 10 and 25 pieces and one customer bought a total of 525 (in one or several transactions) throughout the month. Have the salesperson responsible for the account contact the customer to find out if the quantity purchased was for a one-time need or if this quantity represents what the customer will continue to buy in the foreseeable future. Salespeople soon learn that this is a great opportunity to find out what is going on at customer sites and may discover other products you can supply to fill the customer’s changing needs.
The Effect of Events. Did an event cause an unusual spike in usage? This type of event affects usage but does not occur at exactly the same time every year. That is, they do not have predictable seasonal usage. Events include:
- Holidays that do not occur on the same day every year – Easter is an example of a holiday that is also a short-term event.
- Sales and other programs designed to increase the sales of products.
- Atypical weather or a disaster. For example, does snow or rain significantly increase the sales of some products.
- Pandemics such as the COVID-19 virus.
When an event is identified you must adjust usage history to remove the effects of the event. This is done with the equation:
Actual Usage ÷ (1 + Effect of the Event)
For example, if unusually high usage of 800 pieces was the result of a promotion that increased sales by 25% we will adjust usage history removing the 25% temporary increase in sales by dividing the actual usage of 800 pieces by 125% to determine the adjusted usage quantity of 640 pieces (800 ÷ 1.25 = 640). We would perform the same calculation if an event caused a temporary decrease in sales. For example, a particularly rainy week caused demand for certain outdoor products to decrease by 30%. Dividing the actual usage quantity of 130 pieces by 1 – 30% or 70 percent determines the adjusted usage quantity of 186 pieces. Keep in mind that adjusted usage should always be used in place of actual usage in all forecasts of future demand.
Please note that it is important to record the historic effect on the usage of events. For example, when we run a particular promotion sales increase an average of 25%. Or, when it rains all week sales of specific products decrease by 30%. We can use this information to adjust future demand forecasts when those events occur again.
The COVID-19 virus is an example of this type of unusual usage. But as we have seen, its effect on the usage of specific products changes over time. You might have experienced a tremendous spike, or decrease in sales of an item last March, followed by a gradual return to “normal” usage. It is important to closely monitor sales each month and adjust the percentage adjustment as necessary.
Adjusting usage for spikes inactivity is an important task in ensuring that the historical data you use to forecast future demand of products is as accurate as possible. It has repeatedly been proven that accurate historical data leads to accurate forecasts. And accurate forecasts are a key component in achieving the goal of effective inventory management.
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)!