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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
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Need help or a consultation?Start optimizing your inventory
levels today! Contact us at [email protected] or visit
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