Why the average based calculations fail when managing inventory?

Why the Average Based Calculations Fail?

When managing your inventory, it is better to stick to the peaks rather than

the averages.

Wondering WHY?

Let’s take an example… 3 types of flow

Smooth Flow (A) – when sales are daily and quantities are similar each day, or

changing in proportion with some trend.

Flow with Peaks (B)

Most of the days have sales similar to flow, but from time to time some unordinary quantities

are sold.

Rare Sales (C)

Different sales quantities + Length of period between each sale

Sum up =

Now take a closer look...

Item A: Smooth Flow

Peak calculations are very close to

the average calculations.

It can be managed with average based

calculations with high accuracy.

So?

So, there are only about

of items with such pattern of

sales.

Difference between average and peak calculation?..if the order is calculated according to the average, there is a high probability of stock out if peak appears...

And?

.... And stock out leads to lost sales

and dissatisfied customers...

....This fact forces to add some reserve quantities to average calculations; The higher the peaks, the more reserve is needed to compensate.

You don’t want to be in this

situation…

Item B: Flow with Peaks

Average calculations do not allow recognizing sales pattern type. This means that the same

reserve will be added for items with flow or near flow patterns.

So what?• This creates overstock.• Decreases inventory turnover ratio.• Consumes precious working capital.

Therefore…

..quantity of items with various peak patterns may create up to 80% of total assortment.

No, I am not joking…

Item C: Rare Sales

Planning of rarely sold product quantities is a huge challenge for companies that use

average-based algorithms.

What could happen?

Huge difference between the average and peak calculations.

And that’s it?

No, that’s not it…

It is also hard to recognize the trend of sales levels.

The shorter period, for which inventory demand is calculated, the more different peak and average calculations will be.

Dream Increace inventory turnover ratios while keeping high service level.

RealityThe more frequent replenishment and the shorter demand calculation period

company has, the less accurate average based calculations will be.

So, thinking if you can make the dream come true?

Nowadays there are more new and effective modern inventory calculation methods, such as Dynamic Buffer

Technology...

And how?

Why it is better?

Fact 1. It allows calculating inventory demand and reacting to the trends even with very complex sales patterns.

Fact 2. At the same time filtering out unnecessary peaks.

Using software systems that work according Dynamic Buffer technology, such as Soft4Inventory, companies: • decrease overstock,• increase service level,• achieve high automation level for inventory management

tasks• And more!

Would you like to learn how much you could save after your inventory levels optimization?

Soft4Inventory CalculatorUsing our web calculator you can calculate the approximate benefits your company might achieve after implementing Soft4Inventory.

Try the Calculator NOW

Interested in learning more about the topic? Read the entire

article

Contact Us

Need help or a consultation?Start optimizing your inventory

levels today! Contact us at ask4soft@soft4.eu or visit

www.soft4inventory.com

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