Dealing with Forecast Inaccuracies

In my inbox this morning, I found a press release announcing a massive one-day $5 million inventory reduction auction by boating company North Point Water Sports.  Events such as this are not uncommon in the manufacturing industry as excess inventory is a major problem for many companies operating in a make-to-stock environment.

Unfortunately, a fundamental fact about auctions is that if you overwhelm limited demand with too much supply over too short a period you depress pricing.  When a seller needs to liquidate a very large volume of product all at once, they are doomed to suboptimal recoveries as they are forced to trade recovery for velocity of sale.

This weeks Industry Week’s Manufacturing Business Challenge tackled a similar problem.  The case entitled “Unreliable sales projections ripple through company”, deals with a hypothetical ceramics manufacturing company whose incorrect inventory supply forecasts had led to massive excess inventory in most quarters.

The solution for problems such as the ones faced by North Point Water Sports and the hypothetical ceramics company in the Industry Week case is not to just improve forecast accuracy, but to more importantly, to build a business process that minimizes the financial impact of imperfections in the forecast.  This can be accomplished by improving demand management and putting tools in place now to deal with potential future problems.

In the cases above, B-Stock Solutions’ services are one such tool that would have helped avoid the current “worst case” scenario they are facing by creating a process to manage the ongoing liquidation of smaller quantities on a regular basis throughout the quarter or year.  By continuing to liquidate throughout the year, businesses can avoid the inventory buildups that otherwise occur and drive desperation selling resulting in low recovery rates.  By throttling the availability of their excess inventory over a longer period of time, businesses can realize greater recovery on excess inventory and drive operational efficiencies in their business at the same time.

Forecast accuracy is truly one of the great challenges companies in volatile, dynamic industries face.  No matter how much you invest in forecasting, a forecast is based on historical data or imprecise estimates.  Especially in times of economic uncertainty, the past is not always an accurate indicator of the present or future.  However, by investing in tools today to deal with excess inventory problems down the road, like in the case of large appliance liquidation, your business will see increased efficiencies and increased returns in the future.