Managing by Exception Secrets Disclosed, It's a Thing - Part One

Inventory control can be compared to betting on horses at the track. Both activities can bring excitement, joy, and certainly disappointment. However, unlike horse racing, inventory control is infinitely more complex, driven by macro and micro forces. We are charged with constantly monitoring inventory movement and making necessary changes to address stocking demands. This requires attentiveness to current events and real-time analysis.

We start by checking if there are any funky sales or usage patterns. A forecast is like a crystal ball that tells us how much of a product we'll sell or use in the next week or month. It's important to get this right so we don't end up having too much or too little inventory.

If we notice that actual sales or usage is way different from what we predicted, we gotta figure out why it happened and whether it's going to keep happening.

Here's what we do:

1. After each week or month, we calculate the forecast error (how much our prediction was off compared to actual sales or usage). We use this formula: (Actual Usage - Forecast Demand) / Forecast Demand.
2. If the result is way too high (over 300% or sales/usage being more than three times the forecast) or way too low (less than 50% or sales/usage being less than half the forecast), that's when we know something's up.
3. Buyers and salespeople should check out the transactions for each of the items that have weird results. They might find:

• We ran out of stock, which caused sales/usage to be lower than we expected.
• A customer stopped using the product for a bit.
• Something funky (like a promo, weird weather, COVID-19, etc.) caused sales/usage to change, and we gotta keep an eye on it for a while.
• A specific project caused sales/usage to go way up one time.
• A new trend has started, and sales/usage will probably keep going up or down for a while.

Once we figure out the cause, the buyer should adjust the actual usage or sales to show what sales would have been in "normal" circumstances. We should use the adjusted usage amounts when we calculate future forecasts. When deciding whether to adjust the usage amount, ask: "How much of this item do we need to have in this location to meet our customers' needs in the future?"

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