Inventory Planning

Today's topic should be fairly straightforward and not nearly as abstract as the last installment. Inventory planning is simply making an effort to forecast your demand for certain goods and have them available when you need them. By planning ahead, rather than spot-buying day-to-day, corporations save copious amounts of money. It's a principle that carries over to individuals, as well.

Ways to save with forecasting: perhaps you can get an item less expensively by ordering from Amazon, if you know you need it a week ahead, rather than waiting until the day of. Maybe you can have a local store order in for you, rather than taking a trip to the big metropolitan area nearest you (Portland or Anchorage, for example). Each time, these cost savings are going to be small, and may possibly seem insignificant. However, in the long run, you're looking at substantial cost savings and reductions in your home's operating costs.

Trend projection and moving average are two ways of forecasting using historical data. This is a reliable method for items like toilet paper, paper towels, coffee, vitamins, diapers and wipes, toothbrushes, makeup, et cetera. Trend projection might take a year of purchase data, find the monthly average, and then use that average to estimate the next month's demand.

For example: over the last year, we averaged two pounds of coffee per month, so I order two pounds of coffee for the next month.

Or, another option is to just use the previous year's data: Last November, we used one pound of coffee, so I order one pound this November.

Moving average takes a different approach; the planner defines a period of historical data to use for future planning. For example: actual usage in August, September, and October averaged 1.5 pounds of coffee per month, so I order 1.5 pounds for November. Next month, I will use actual usage numbers from September, October, and November to forecast demand for December. The numbers used continue to move with time, hence a moving average.

My preferred method for short-term forecasting is moving average with checks and balances coming from trend projection. Adding in trend projection is helpful because it allows some flexibility for known variants. If, for example, you are hosting Thanksgiving this year, you can account for this variant and order the appropriate amount of coffee for the month.

The other thing to consider is carrying costs. By only purchasing what you need when you need it, you forego the need for extra storage. I watch these shows on "extreme couponing," and I hear people respond as though some magnificent thing has been achieved, but all I see is capital tied up in non-liquid goods and lots of storage costs. Anything saved in the checkout line is lost in opportunity cost and in storing goods that will take years to go through.

Hopefully, as you read, you think of some ways that inventory planning can help you. I've tried to avoid too many specifics so that this is more adaptable to individual situations. Let me know if you have any questions or need some help with application. Have a great week!