What is the ultimate goal of improving sales forecast accuracy? Is it to strengthen customer relationships by getting customers and sales to work together on purchase commitments? Or, is sales forecast accuracy more important in determining the company’s market visibility and to adopt plans that grow market share and raise the company’s expectations on sales performance? While each of these are important outcomes, perhaps the biggest goal of improving sales forecasts is to help reduce the costs associated with inventory management. In fact, an argument can easily be made that to improve sales forecast accuracy means to successfully lower a company’s inventory costs.
Sales Drives Inventory
A company’s sales department drives its inventory. Sales provides the company with all the information it needs to procure the right amount of parts and raw materials. More accurate sales forecasts means the company ultimately purchases the right amount of inventory. Inaccurate sales forecasts means the company will purchase too much, or too little inventory. Too much inventory, and the copy encounters high holding costs. Too little inventory, and the company misses out on opportunistic sales.
The key is to find that middle ground and while managing inventory is never easy, a company’s sales force can play a proactive role in helping the company reduce its inventory costs. Therefore, accurate sales forecasts ultimately help to reduce a company’s inventory cost of ownership by providing more realistic material and part requirements.
How Are Inventory Costs Derived?
Most companies are surprised to hear just how much their inventory costs them. One simple rule of thumb to use is to focus on any cost that can be traced back to inventory. If it can be applied to inventory, then it is a direct cost of inventory. For example, if a sale is lost because inventory wasn’t available, then that lost sale is cost of inventory. In addition, lost customers can also be a cost of inventory. Again, if the company had a contractual agreement on supply, and didn’t meet its inventory obligation of holding parts, then losing that customer because inventory wasn’t available, is a direct cost of inventory.
Most companies ignore these two aforementioned costs, but they play a pivotal role in driving up the costs of a company’s inventory. Can accurate sales forecasting help reduce these costs? Of course they can! In fact, they can also help reduce the majority of a company’s inventory costs.
The above video is from the post: How Do I Improve Our Sales Forecast Accuracy? The post provides insight into five simple steps to improving your company's forecast accuracy.
Inventory Obsolescence: More accurate sales forecasts means the company has a high inventory turnover rate. They sell their inventory faster and don’t encounter inventory obsolescence.
Outdated Parts & Materials: When sales properly forecasts their customers’ consumption, the company is less likely to run into issues of holding outdated parts and materials.
Damaged Inventory: Because inventory moves quicker and is never held for too long a period, the company reduces the incidence of damage due to mishandling or over-handling. If parts are purchased and sold quickly, then the incidence of damage decreases.
Inventory Holding Costs: Selling inventory faster means the company doesn’t incur high holding costs from the daily cost of money. Instead, parts move quickly and the company’s holding costs are minimized.
A company’s sales team can play a proactive role in helping to mitigate the company’s expenditures. Unfortunately, in a number of companies, the goals and objectives of sales & inventory couldn’t be more divergent. A company’s sales team is incentivized for creating sales, while inventory management is compensated for controlling inventory. To successfully bring these two camps together isn’t easy. However, the position that makes it possible is an inventory analyst. This position measures the responsibilities of both parties and uses strategies that are in the best interests of the company. Sometimes that means increasing inventory levels and sometimes it means decreasing inventory levels.
To provide a clearer picture of how a company’s sales team can play a vital role in reducing inventory expenditures, I’ve included a couple of links to additional sources.
1) To understand the roles and responsibilities of the Inventory Analyst position, please read: Small Business Inventory Asset Management: Using an Inventory Analyst
2) To get a clearer picture of what drives a company’s inventory cost of ownership, please refer to the following post: Sample Excel Sheet Calculating Inventory Holding Costs
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