Strategic Role of Inventory Management and Forecasting in Supply Chain Management

Introduction 

Some of the most important processes in demand and supply planning are inventory management and forecasting because they affect information strategy in the organization and network partners (Poirier, Quinn, and Swink, 2009). Information flows through various components of a business, and the information and data are acquired from forecasting processes. It is essential to note that demand forecasting is not only linked to supply chain management but also enterprise data warehouse. Additionally, it links consumer relationship marketing, marketing, sales, retail operations, and the entire information structure (Poirier, Quinn, and Swink, 2009). Furthermore, demand forecasting is dependent on financial analyses and planning steps that allow a company to develop competitive advantages. However, the success of forecasting is dependent on effective inventory management. For managers to achieve an integrated system, they must understand all processes involving suppliers, the company, middlemen, logistics, and consumers (Poirier, Quinn, and Swink, 2009). All in all, it is crucial to evaluate the strategic role of inventory management and forecasting in supply chain management. 

Inventory Management 

Arguably, the most difficult and essential role of inventory management in the supply chain process is in facilitating and balancing the forces of supply and demand. To efficiently manage processes and flows in the supply chain, businesses must deal with downstream customer demands and upstream supplier exchanges. Such actions put a business in a position where they attempt to create equilibrium of achieving customers’ demands while maintaining an adequate supply of goods and materials ( Melanie, 2018) . Furthermore, effective inventory management plays a crucial role in a company’s ability to function with good profit margins. High inventory turnover ratio means that a business has good inventory management practices and is experiencing high sales. On the other hand, having low inventory means that a business does not achieve the desired service levels, and customers may be sent away without their desired products, or they are directed to other stores. 

Although inventory was perceived as an asset, the Japanese businesspeople changed the perception by creating new concepts such as ‘Just in Time’ (JIT) that viewed inventory as a ‘necessary evil’ ( Melanie, 2018). The most crucial concepts in JIT include effective inventory management, understanding customers’ behavior, identifying reliable suppliers, and getting rid of unnecessary inspection steps. New business concepts, especially JIT, have changed the way businesses view inventory management. Most companies understand that excessive cash that may be stored in unwanted inventory may be effectively used in other areas that could generate profit ( Madhu, 2012) . Many businesses have had successful inventory management by improving the flows of goods and materials in their supply chain. Additionally, such companies have been successful in improving their supply chain by implementing essential JIT principles, such as avoiding the purchase of huge stock and treating it as assets. 

Notably, firms are not only adopting JIT principles but also utilizing integrated supply chain management and creating processes that eliminate or reduce inventories. The notion of integrated inventory management helps many firms through optimization and coordination ( Madhu, 2012) . Such integrated systems allow businesses to optimize links between inventory and supply chain while coordinating inventory management to improve differentiation and reduce costs. However, optimum inventory control management and maintaining low transaction costs has various challenges. Previous experiences have shown that effective inventory management in the business environment and economy is a difficult process. For instance, Dell Computer’s stock plunged significantly in 1993, when the organization predicted a loss ( Madhu, 2012) . The company admitted that there was a big error in demand forecasting that resulted in inventory write-downs. In recognition of such challenges and the need to implement integrated supply chain management, for manufacturers and suppliers to generate fewer stock-outs and lower inventory levels for manufacturers, customers and suppliers, they may be forced to have more inventories while utilizing more staff to administer the JIT concept ( Madhu, 2012) . 

Forecasting 

The success of inventory management is dependent on effective forecasting. Keeping the right amount of product is crucial to all business. Having too much stock means that the business will pay unnecessarily high costs for inventory management and storage while having too little means that the business may run out and customers will be forced to buy goods in other stores ( Kiger, 2018) . Finding the middle ground between demand and supply can be achieved through forecasting. 

Types of Forecasting 

There are three types of forecasting: demand forecasting, supply forecasting, and price forecasting. Demand forecasting analyzes the number of products that customers will desire within a specific quarter, week, or month. It goes beyond predicting customers' needs and wants, and it highlights consumer seasonality, confidence, and cultural trends ( Ahmed, 2019) . Supply forecasting focuses on suppliers’ data, and it is used to project the number of materials they can supply at a particular time. It assists in determining how much goods can be delivered within a specific time frame. On the other hand, price forecasting analyzes how the forces of supply and demand influence prices. 

Benefits of Forecasting 

Improving customer satisfaction: For a company to keep its customers satisfied, they need to provide them with the required products at the right time ( Ahmed, 2019) . The benefit of forecasting in companies will assist in predicting product demand so that they can manufacture enough goods to address customer orders that have a short lead time. 

Reducing inventory stock-outs: Firms should understand the significance of demand forecasting even if they are using the JIT concept or when they are working with long lead time suppliers such as China or India ( Ahmed, 2019) . When purchasing goods or materials from long lead time suppliers, it is essential to send them a demand forecast so that manufacturers or suppliers can acquire raw materials in anticipation of customer demands. Even in JIT systems, demand forecasting is essential when timing purchases to correspond with anticipated sales. 

Scheduling production more efficiently. Businesses require more robust master scheduling and Sale and Operation Planning (SOP) to plan their production schedules effectively ( Ahmed, 2019) . The solution may not be in complex analytical software but in the ability to observe and use current trends to predict the future. Adaptive businesses should closely monitor how clients purchase and consume their products. Furthermore, businesses should be willing to adapt and respond to the changes. 

Reducing product obsolescence costs: By identifying, removing, or repurposing obsolete inventory in the storage, inventory on hand will automatically reduce. Additionally, both indirect and direct costs of keeping obsolete inventory will be minimized ( Ahmed, 2019) . Having a reliable and standard technique of forecasting ensures that excess stock is not ordered and it reduces the risks associated with the obsolete stock. 

Improving promotion and pricing management: In some companies, running many promotions concurrently may cause the cannibalization of both non-promoted and promoted products. Integrating related forecasts and distributor level forecasts allow a business to achieve better outcomes and the flow of goods in terms of stock fill rates and availability ( Kiger, 2018) . Furthermore, improving a company’s ability to forecast has a positive impact on price changes as well as gross margin and revenue if timed well. It is essential to note that businesses do not require super algorithms and special software to start forecasting ( Kiger, 2018) . They will simply need an excel spreadsheet to start with. However, the benefits of inventory management and forecasting can only be achieved through strategic information sharing. 

Information Sharing 

To achieve a proper balance between supply and demand, most businesses use sales and operation planning processes (SOP). The main objective of sales and planning processes is to ensure demand management functions of a business, such as marketing and sales forecasting, are together with other essential company functions such as procurement, manufacturing, level strategic plans, supply chain, and logistics. The process involves discussions about the company's sub-assembly inventory, inventory at hand, work in progress, and in-transit inventory ( Melanie, 2018) . The discussions ensure that the marketing functions are effectively planned while getting a clearer picture of the company’s inventory levels. Furthermore, operations functions will be updated and allow the company to forecast information and planning for future inventory requirements. 

Businesses can share point of sale data with relevant, mutually beneficial partners. Sales data is captured when barcodes are scanned during checkouts. The information is not only essential to the retailer but also upstream vendors. As products are depleted in the retailer’s inventory, the vendor and retailer will work collaboratively to decide when to reorder goods ( Melanie, 2018) . Demand information is analyzed to identify the best time to replenish orders according to the lead time necessary to transport goods to the store location. Such actions ensure that inventory decisions are used efficiently to determine when supply inflows are necessary to balance demand outflows. 

Conclusion 

The research paper has evaluated the strategic role of inventory management and forecasting in supply chain management. Inventory management and forecasting can be done by large multinationals as well as new businesses that may not have sufficient data. Businesses that have effective inventory management and forecasting techniques have experienced overall cost savings, reduction in inventory wastage, and improvement in production capabilities within the supply chain. However, it required trust and dedication in forecasting calculations as well as collaboration with all other stakeholders. Accurate data collection also ensures better accuracy. It is essential for all business to utilize inventory management and forecasting techniques due to the benefits associated with the two concepts. 

References 

Ahmed, M. (2019). Seven reasons why you need to forecast in the supply chain Retrieved from https://www.supplychaindigital.com/top-10/seven-reasons-why-you-need-forecast-supply-chain 

Kiger, D. (2018). Benefits of Forecasting in Your Supply Chain Retrieved from https://davidkigerinfo.wordpress.com/2016/01/26/benefits-of-forecasting-in-your-supply-chain/ 

Madhu. (2012). Importance of Inventory Management in Supply Chain Retrieved from http://cmuscm.blogspot.com/2011/11/importance-of-inventory-management-in.html 

Melanie. (2018). The Important Role of Inventory Management in the Supply Chain - Unleashed Software. Retrieved from https://www.unleashedsoftware.com/blog/important-role-inventory-management-supply-chain 

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing Greatness: Ten Traits of the best supply chains Retrieved from http://ebookcentral.proquest.com