Question

what is forecasting inventory level? give an example?

Answer 1

When a Firm holds high level of stocks, more than its required level of processing or consumption and some buffer, then it gives rise to the holding and carrying costs of the Firm, for maintaining overstocked warehouses and the stocks within. On the contrary, when the Firm is holding too less stock, then the scope of meeting effective demand, especially when the demand is volatile, shall also reduce, leading to underutilization of warehouses and processes. Hence it is essential that an appropriate inventory level is maintained, that takes into consideration, in general, the forecasted demand and also provides certain cushion in terms of ‘Buffer stock’ as well, to meet a sudden spur in demand.

This process of predicting the demand for the product that the Firm offers and accordingly maintaining the inventory level, is called as Forecasting inventory level. This is done with the view that the inventory level is well-forecasted and matches that of the demands raised by the customers. For example, a Firm wants to forecast the inventory level of soaps that it produces. For this, it first needs to check its inventory turnover levels and the same is to be matched with the Industry standards. Next, the Reorder Point formula could be applied so that inventory shortages, if any, are dealt with and there is an undertaking of optimal ordering quantity by such a Firm. The Inventory Turnover ratio is also must to comprehend the number of times Firm’s inventory is sold and replenished thus in the business. Faster the Firm sells, better the Inventory ratio. This can help the Soap Firm to forecast the inventory levels in future as well.