Inventory forecasting is critical for the smooth operation of any stock-based business. Managing demand can be tricky, however, if a large part of your inventory is subject to seasonal demand.
Seasonality essentially refers to inventory with repetitive or predictable supply and demand patterns over a period of time. Manufacturers, distributors and retailers all need to contend with seasonal changes to supply and demand – typically the effects of seasonality ripple through the supply chain, affecting virtually every stage of production. How does seasonality impact on your business, and how can your business best manage seasonal demand?
Inventory Pressures and Capital Strain
Seasonal variations in demand and supply can place enormous pressure on growing businesses and their finances. Supply shocks can break fragile supply chains, cause input prices to rise and result in stockouts, missed sales and halted production lines. Peak seasonal demand typically results in similar pressure as businesses struggle to satisfy customer expectations with a very limited pool of stock.
Low demand in the off season can be just as disruptive. A decrease in accounts receivable for several months running can create significant cash flow pressures within a business, potentially compromising the business’ ability to meet all of its outgoings. Failing to carry out a stock take and clear excess inventory before demand slows can exacerbate the problem by burdening the business with higher than necessary inventory carrying costs.
Identifying Seasonal Inventory With A Stock Take
Determining the impacts of seasonal variations in demand and supply on your business is generally a simple process, provided that you have the right data. If your business has not been trading for long, there may be too little data to observe seasonal fluctuations. Likewise, if your business has operated using a paper or spreadsheet-based inventory system with periodic stock take, it may not be possible to precisely identify seasonal impacts. Implementing a real-time, perpetual inventory system is a great way to identify seasonal patterns. These inventory systems are simple to use and keep track of virtually every inventory movement. Rather than tracking inventory as at the date of each stock take, real-time inventory control involves recording a wealth of data to understand the ebbs and flows of your inventory over an entire season or year.
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Clearing Dated Inventory
At the end of each season, your focus should turn to selling down most of your remaining seasonal inventory. As the end of winter approaches, for example, you might consider strategies to clear stocks of jackets, gloves and other seasonal items. Discounting strategies will vary between businesses, with, for example, a business that markets its stock as premium products probably more reluctant to deeply discount inventory that is moving out of season. The value of clearing dated inventory will, of course, depend on the future value of the inventory and the expected inventory carrying costs while the product is out of season. A product that will hold its value well and takes up relatively little warehouse space justifies less discounting than a bulky product that will soon become obsolete.
One of the challenges with seasonal inventory is that businesses typically need to plan well in advance of seasonal pressures. Accurately forecasting inventory requirements two or four months out can be difficult for small businesses, especially those who have a shorter trading history to draw on for insights. Lean inventory management, where stock is ordered just in time for use, can reduce the need to forecast in the medium term. Implementing just in time inventory can be challenging for smaller businesses, who often have longer lead times and less direct supply chains.