Reduce Inventory with Applied Statistics
Statistical demand forecasting techniques have been available to industry for decades, but small- and medium-sized companies rarely use them. There are barriers to implementing these techniques, but these hurdles are quickly becoming lower. In this article, I will discuss statistical forecasting of customer demand and of material demand; and how to start using it quickly and cost effectively.
The key benefit to becoming competent at statistical demand forecasting is significant inventory reduction. The cash preserved from this reduction can be used to finance more value added activities. Plus, judiciously reducing all inventory is one of the fastest ways of converting floor space from inventory storage into space for value added activities, like manufacturing – at very little added expense
At one company where I worked, over the course of four years, the Materials team was able to improve inventory turns by 300% using statistical forecasting and other inventory management techniques. During that same interval, revenue increased by more than 50% without adding a single square foot for material storage. In addition, the value of excess and obsolete inventory (“rottage”) decreased from over 8% of inventory value to less than 0.5% because Sales and Operations coordinated very closely to avoid overdriving customer demand.
There are software vendors that sell extremely expensive demand forecasting software that will integrate with an ERP system. Initial costs to implement these systems include the purchase price of the software, training users and managers, setup and debugging, possible additional software license fees, hiring staff to maintain the software, and hiring staff to use the software. Thereafter, there is the expense of support contracts, renewing licenses, and buying and training for new releases. These expense elements can very quickly total into the hundreds of thousands or even millions of dollars. A small- or medium-sized company simply cannot justify such a large expense.
Economical, PC-based software – and more recently Cloud-based software as a service (SaaS) – with good user interfaces are readily available. These affordable systems greatly reduce one significant barrier to implementing forecasting tools.