Webinar: Mastering Multi-Channel Supply Chains with Think 9 brands
Register Now
Exploring Formulas for Inventory Adjustment [Change in Inventory Formula]

Exploring Formulas for Inventory Adjustment [Change in Inventory Formula]

Adapting to change is paramount for success of business operations, particularly in managing inventory. As businesses upscale and market conditions fluctuate, the need for accurate inventory management becomes increasingly crucial. Exploring various formulas for inventory adjustment offers insights into optimising inventory levels. They are also known as change in inventory formula, which improve operational efficiency, and financial reporting accuracy. As the inventory in a business moves in and out, the change in inventory report ensures in-time deliveries and customer satisfaction. In this exploration, we will look at the significance of adapting change in inventory formula to dynamic business environments. As such, they have a significant role in facilitating informed decision-making and uphold competitive edge amidst evolving market dynamics. What is Change in Inventory Formula Inventory adjustment ensures accurate stock records and prevents financial reporting errors. It involves: Physically counting inventory items.     Comparing counts with recorded data. Identifying discrepancies and adjusting records. After management approval, updating financial records. When management detects inventory overstatements or understatements, it's crucial to adjust them promptly for accurate financial information and informed decision-making. That is what the Change in inventory formula is about. It calculates inventory adjustments after changes. It can be done using the Cost of Goods Sold (COGS) formula: COGS = Starting Inventory + Purchases - Ending Inventory Change in inventory formula allows real-time recording, preventing errors, enhancing efficiency, and improving supply chain management. However, frequent adjustments can be time-consuming and resource-intensive. Manual adjustments are prone to human error, risking inaccurate records and financial statements. Proactive inventory management with standardised procedures, regular audits, and robust controls is vital for accurate adjustments and effective stock management. Change in Inventory Formula with Examples The Change in inventory formula is the same as the Cost of Goods Sold (COGS) formula: COGS = Beginning Inventory + Purchases - Ending Inventory Managers use COGS to reflect inventory levels accurately, adjusting it to account for changes in stock items. It can also be simplified as: Inventory Adjustment = Ending Inventory + Increase Inventory Adjustment = Beginning Inventory - Decrease Inventory Adjustment Example #1 A retail store had 1,200 units of a particular product in its starting inventory. During the month, they purchased an extra 800 units and sold 1,500 units of the same product. Calculate inventory adjustments before and after purchases. Given: Beginning Inventory: 1,200 units Purchases: 800 units Sales: 1,500 units Applying Change in inventory formula, Change in Inventory -= Beginning Inventory + Purchases - Sales = 1,200 + 800 - 1,500 = 2,000 - 1,500 = 500 units Therefore, the Change in inventory is 500 units. Inventory Adjustment Example #2 A manufacturing company had an initial inventory of 5,000 units of raw material. During the month, they made additional purchases of 3,000 units. However, due to production requirements, they consumed 6,500 units of the same raw material. Calculate the adjusted inventory level. Given: Beginning Inventory: 5,000 units Purchases: 3,000 units Consumption (Cost of Goods Sold): 6,500 units Using the Change in inventory formula, Change in inventory Level = Beginning Inventory + Purchases- Consumption = 5,000 + 3,000 - 6,500 = 8,000 - 6,500 = 1,500 units The Change in inventory level of the raw material is 1500 units. Inventory Adjustment Reasons Damage: Correcting quantities for damaged items ensures proper inventory valuation. Perishable goods like food, beverages, or chemicals can spoil or expire, requiring inventory adjustment. Expiry: Adjustments remove expired products from records. Scrap or waste: During manufacturing processes, some materials may become scrap or waste, leading to inventory reduction. Theft: Accounting for losses due to theft or shrinkage maintains accurate inventory levels. Inaccurate Recording: Rectifying mistakes in recording, like data entry errors, is necessary. Quality control issues: Products that fail quality checks or do not meet standards need to be removed from inventory. Supplier discrepancies: Differences between the quantity ordered and received from suppliers require Adjustment. Promotions: Adjusting inventory during promotions ensures sufficient stock. Returns: Promptly accounting for sales and purchase returns avoids incorrect stock levels. Obsolete Items: Removing obsolete products reflects their reduced value. Transfers: Modifying inventory levels when transferring stocks ensures accuracy. Changes in inventory valuation methods: Switching inventory valuation methods, such as FIFO or weighted average cost, can require adjusting inventory. Physical Inventory Practices: The timing and methods for full physical counts can affect inventory adjustment needs. Regulatory requirements: Changes in laws, regulations, or industry standards may cause inventory adjustments. Unexpected Production Issues: Actual production output can differ from planned quantities, necessitating inventory adjustment. Benefits of Inventory Adjustments Better Inventory Management Accurate inventory data allows for better inventory planning, forecasting, and decision-making. Businesses can optimise stock levels, avoiding stockouts and stockpiling, and thus improve inventory turnover. Cost Reductions Adjusting inventory cuts losses. It also lowers costs from carrying too much or unsellable inventory. Improved Customer Satisfaction Maintaining accurate inventory levels helps companies. It ensures product availability and helps them better meet customer demand, which leads to better customer satisfaction. Compliance and Auditing Regular inventory adjustments help companies comply with accounting standards. They also help with tax rules and industry-specific requirements. These rules are about inventory management and financial reporting. Operational Efficiency Accurate inventory data makes operations smoother. It helps with planning production, buying, and managing warehouses. Identifying Issues Businesses can find issues like theft, mishandling, or process inefficiencies. These issues cause inventory discrepancies, cautioning companies to take remedies. Tax Implications Adjusting inventory levels can impact tax calculations. It ensures that businesses pay the right amount of taxes on their inventory. Best Practices in Inventory Adjustment Make occasional counts during the period to catch inventory inconsistencies as they occur. Use software applications to simplify organising, balancing, and entering inventory adjustments. Communicate inventory level changes to other parts of the company to manage inventory effectively. Recognize mistakes and learn from them to prevent future issues. Related read: Absorption Costing in E-commerce Conclusion In conclusion, embracing adaptable change in inventory formulas is pivotal in navigating the complexities of modern business landscapes. Different scenarios require appropriate application of the formula to arrive at the net inventory at any point of time. By staying agile and responsive to change, businesses can optimise inventory management practices and sustain long-term success. Suggested read: Learn Reorder Quantity Formula FAQs What is the change in the inventory formula in P&L?The change in inventory formula for Profit and Loss statement is:Beginning Inventory+Purchases-Cost of Goods Sold=Ending InventoryThis formula is used to measure the ending inventory.What is the change in inventory formula cash flow?The change in inventory formula for cash flow is: Beginning Inventory-Ending Inventory+Cost of Goods Sold. Apart from starting and ending inventory, the cost of goods sold is also needed to use this formula.What is a change in inventory costing?Change in inventory costing refers to the change in the monetary value of inventory levels. It happens between accounting periods, due to swings in the cost of materials, labour, or overhead. It impacts the cost of goods sold and gross profit calculations for the period.What does it mean when change in inventory is negative?If there is a negative change in inventory at the end of the period, it means the ending inventory surpasses the beginning inventory. There's more stock remaining at the end compared to its start. 

March 19, 2024

Categories:
Maximising Efficiency: Understanding the Inventory Turnover Ratio Formula

Maximising Efficiency: Understanding the Inventory Turnover Ratio Formula

How efficiently a company manages inventory reveals the levels of holding costs, operational efficiency, stock levels, and customer satisfaction. In fact, Reducing stock-outs and overstocks can lower inventory costs by 10%. So, estimating the efficiency of inventory management is crucial for a business. That's what the inventory turnover ratio formula is about. Gauging the amount of inventory moved gives a peek into a company's inventory operations.  It is the ratio of the cost of sold goods to the average Inventory holding over a period. Seeking to maximise the efficiency of inventory is a good idea for businesses. However, one must use the formula with caution: sometimes, it may not point to mismanagement of inventory. Wondering how? Herein, we will discuss the inventory turnover ratio meaning and its calculation, tips to increase the inventory turnover, and limitations to its application. What is Inventory Turnover Ratio Formula The inventory turnover ratio formula is equal to the cost of goods sold divided by the average inventory held over a particular period. It is also known as the stock turnover ratio. The formula is used to estimate the efficiency of inventory management over a specific duration. In other words,   Inventory Turnover Ratio= Cost of Goods Sold / Average Inventory Here,  The cost of goods sold (COGS) represents the expenses incurred in producing the goods that a company sells within a specified timeframe. It can be retrieved from a company's income statement. Average inventory refers to the mean value of inventory held over the same timeframe. It is important to achieve a high inventory turnover ratio, which indicates efficient stock management. It also means that a company has incurred less storage and inventory holding costs. The inventory turnover ratio formula is an important metric among competitor industries. While comparing different industries is redundant, the benchmark ratio shows variation between them. Average Inventory Formula The inventory turnover ratio formula calculates the average inventory to account for the fluctuating nature of stocks over a particular period. However, the cost of goods sold is mentioned directly on a company's balance sheets.  The average inventory formula is equal to the ratio of the sum of inventory at the beginning and end of a period to the duration of the period. It smoothes out the stock fluctuations to give a mean value.  Average inventory=Beginning Inventory+Ending Inventory / Inventory Holding Period The inventory holding period can be months, weeks, or days, depending on the estimates' requirements. When it is days, the inventory turnover ratio formula also gives output on a "per day" basis. Inventory Turnover Ratio Example Let's put things in perspective through an example to calculate inventory turnover. A company had the following data for a year: Beginning Inventory: $50,000 Ending Inventory: $40,000 Cost of Goods Sold (COGS): $400,000 To calculate the inventory turnover ratio, find the average inventory: Average inventory=Beginning Inventory+Ending Inventory / Inventory Holding Period= $50,000 + $40,000 / 2= $45,000 Now, Inventory Turnover Ratio= Cost of Goods Sold/Average Inventory = $400,000 / $45,000 ~8.89 The inventory turnover ratio for this company is approximately 8.89. Thus, the company sells its entire inventory nearly nine times over within the given period. Constraints of Inventory Turnover Ratio Comparing similar companies is where inventory turnover is most effective. The benchmark ratio shows wide variations for different industries. The formula for the inventory turnover ratio may not reflect reality. A high ratio could also signal stockouts. A low turnover may mean overstocking. For example, from cost-saving bulk orders or product launches. Changes in production costs or raw material prices can impact turnover ratios. Pushing inventory turnover through discounts or closeouts harms profits. It also hurts return on investment (ROI). The method used to value inventory affects the calculation of COGS. Methods include specific identification and weighted average cost. So, different ways to value inventory can lead to different turnover ratios. Seasonal changes can change the inventory turnover ratio meaning and make it less reliable. For example, a high turnover ratio during peak seasons might mean something other than good inventory management. Differences in supply lead times can affect turnover ratios. This is especially true when calculating average inventory levels. Longer lead times mean higher average inventory levels and lower turnover ratios. How to Increase Inventory Turnover Profitably Effective inventory management requires careful forecasting and automation. Merchants should analyse sales data and identify trends to accurately forecast demand. Inventory management software can streamline processes, providing real-time updates on stock levels and facilitating prompt restocking. It is indispensable for businesses to streamline operations and ensure optimal inventory turnover. Companies must adopt effective marketing strategies for enhancing inventory turnover. Targeted marketing efforts can promote sales of slow-moving items and expand market reach. Offering special discounts and promotions for old stock can move the old inventory. However, ensure it doesn't bite on profitability.  Moreover, prioritising fast and reliable shipping is essential for customer satisfaction and repeat business. Partnering with 3PLs is a good idea. Ultimately, it is customer demand that drives efficient inventory management and sales acceleration. Related Inventory Formulas The inventory-to-sales ratio compares inventories with net sales instead of the cost of sales. It is the inverse of the inventory turnover ratio. Similarly, the day's inventory sales (DSI) represents the average number of days it takes to convert inventory into sales. DSI is calculated by dividing the average inventory value by the cost of sales (COGS) and multiplying by 365. It is also known as a stock turnover ratio in days, inventory turnover days, or days inventory outstanding (DIO). The stock turnover ratio formula in days is, Stock Turnover Ratio (in days) = 365/Inventory Turnover Ratio The stock turnover ratio formula in days gives the average number of days it takes for a company to sell its entire inventory. Conclusion The inventory turnover ratio formula gives a peek into a company's stock management aspects. Every company must estimate this ratio after getting its balance sheets. However, you must have learned that the formula may not represent the truth in all circumstances. That is why going deep into the inventory turnover ratio meaning is important for inventory managers.  For example, gaining on the ratio while compromising on profitability is not a wise choice. A combination of human wisdom and mathematical skill is necessary to get the formula in the right spot. Suggested read: Reorder Quantity Formula FAQs What is the formula of inventory turnover ratio?Inventory turnover ratio formula is equal to the cost of goods sold divided by the average inventory held over a particular period of time. It is also known as the stock turnover ratio. The formula is used to estimate the efficiency of inventory management over a specific duration.Inventory Turnover Ratio= Cost of Goods Sold/Average InventoryWhat is a good inventory turnover ratio?The best turnover ratio is 5 to 10 for most industries. It suggests that inventory is sold and restocked every 1-2 months. It keeps a balance between inventory levels and reordering frequencyHow to calculate inventory turnover ratio from the balance sheet?To calculate the inventory turnover ratio from the balance sheet, divide the cost of goods sold (COGS) by the average inventory. Do this over some time. COGS can be found on the income statement. Average inventory is the ratio of the sum of the beginning and ending inventory, and 2.What is the debtors turnover ratio formula?The debtors turnover ratio formula is a crucial financial ratio. It estimates a company's liquidity and cash flow. To use the formula, divide net credit sales by average accounts receivable. Net credit sales are total sales on credit minus returns or allowances. To find average accounts receivable, average the beginning and ending balances.

March 18, 2024
Unveiling the Cost of Goods Sold Formula: A Comprehensive Guide

Unveiling the Cost of Goods Sold Formula: A Comprehensive Guide

COGS is a crucial accounting measure. It shows the direct expenses linked to making goods or services sold by a company. These expenses comprise raw materials, direct labour, and manufacturing overheads. In financial statements, COGS is subtracted from revenue. This is to calculate gross profit, which shows profitability. A lower COGS compared to revenue signifies higher profitability. It indicates efficient production costs. Decoding the Cost of Goods Sold Formula The cost of goods sold formula is: Cost of Goods Sold = Beginning Inventory + Purchases During the Period - Ending Inventory It is also known as the cost of sales formula, where, Beginning Inventory is the Inventory carried over from the previous period. Purchases during the Period are the cost of acquisitions in the current period. Ending Inventory is the remaining Inventory unsold at the end of the current period. Cost of goods sold formula calculates the direct costs of the Inventory sold. These costs are for an accounting period. Accurate calculation is crucial for determining a company's gross profit and profitability. Components of the Cost of Goods Sold The Cost of Goods Sold (COGS) has several components. They represent direct production costs: Direct materials are tangible components, like raw materials or parts. They are directly used in the final product. Direct labour: Consider wages and benefits for employees directly involved in production. Overhead costs are not directly linked to specific units. Examples are utilities and machinery maintenance. Some businesses may include additional costs like shipping, but inclusion varies. Include only costs for making or buying goods. Cost Of Goods Sold Formula With Example Identify Beginning Inventory: Start by finding the value of inventory at the start of the accounting period. It includes raw materials and finished goods. For instance, if you start with $50,000 of Inventory, you include this amount. Add Purchases: Record the extra Inventory bought during the period. For example, raw materials and finished goods ready for sale. If you buy $150,000 worth of inventory during the year, add this to the inventory at the beginning. Find Total Goods Available for Sale: Add the inventory and purchases at the start. It gives the total value of goods for sale.  For example, $50,000 is the beginning inventory. You add $150,000 in purchases. So $200,000 in total goods for sale. Determine Ending Inventory: At the end of the period, calculate the value of unsold Inventory, known as ending Inventory. If the ending Inventory is $30,000, it represents the remaining unsold value. Calculate COGS: COGS = Total Goods Available for Sale - Ending Inventory Using our example,  COGS = $200,000 - $30,000 = $170,000 Thus COGS for the period is $170,000. Let's take the case of managing a small bakery to put things in perspective.  At the start of the year, the bakery has $10,000 worth of flour, sugar, and other baking ingredients. Over the year, they buy an extra $20,000 worth of ingredients, making a total of $30,000 in goods available for sale. By the year's end, after tallying all sales, they find $5,000 worth of unsold baked goods and ingredients. Using the cost of goods sold formula, the COGS is $25,000. It reflects the direct costs to make the goods sold that year. Cost of Goods Sold Example for Manufacturing Industry Calculation of the cost of goods sold for a manufacturing company is tricky as it involves more components. Before applying the cost of goods sold formula manufacturing, one must calculate COGM (Cost of Goods Manufactured).  In the COGS formula, “Purchases During the Period” is replaced by the cost of goods manufactured. However, the COGS formula remains the same: Suppose a factory that makes widgets had the following figures for an year: Beginning Work-in-Process Inventory (Jan 1)–  $25,000  Beginning Finished Goods Inventory (Jan 1)–  $40,000 Direct Materials Purchased–  $300,000  Direct Labour Costs–  $150,000  Factory Overhead–  $80,000 Ending Work-in-Process Inventory (Dec 31)–  $30,000  Ending Finished Goods Inventory (Dec 31)–  $35,000 The cost of goods manufactured is: Beginning WIP Inventory + Direct Materials + Direct Labor + Factory Overhead - Ending WIP Inventory  COGM = $25,000 + $300,000 + $150,000 + $80,000 - $30,000 = $525,000 Then, cost of goods sold is: Beginning Finished Goods Inventory + Cost of Goods Manufactured - Ending Finished Goods Inventory COGS= $40,000 + $525,000 - $35,000 = $530,000 For this manufacturing company, the cost of goods sold for the year was $530,000, representing the costs associated with the finished goods sold. Best Practices in Using Cost of Goods Sold Formula Track your starting inventory well. The cost of goods sold formula needs an accurate count. It also needs the value of inventory at the start of the accounting period. Use a perpetual inventory system. Update inventory levels continuously. Do this as goods are bought or sold, rather than with periodic counts. It ensures accurate inventory values to use in the cost of goods sold formula. Separate direct and indirect costs. Direct costs, like materials and production labour, are in the cost of goods sold. Indirect costs, like rent and utilities, are not. Use a consistent inventory costing method. Choose either FIFO (first-in, first-out), LIFO (last-in, first-out), or weighted average cost. Apply the method consistently. Account for inventory shrinkage. Adjust for lost, stolen, or damaged inventory. It cannot be sold. Count inventory often. Do cycle counts or an annual physical inventory. This finds and fixes discrepancies. Use technology for tracking. You can implement inventory software or barcoding systems. They give accurate real-time data for accurate application of cost of goods sold formula. Analyse cost of goods sold trends. Monitor the revenue percentage. It can reveal issues with pricing, shrinkage, or inefficiencies. Train staff on proper protocols. Make sure employees understand counting, receiving, and data entry. Cost Of Goods Sold Formula With Sales and Gross Profit Gross profit reflects what's left after subtracting direct costs from revenue. Gross Profit = Revenue - Cost of Goods Sold (COGS) Gross Profit helps assess the revenue available for operating and non-operating expenses. We calculate the gross profit margin by dividing gross profit by revenue. This is a common profit measure. Gross Margin (%) = (Revenue - COGS) ÷ Revenue Companies can increase gross margins by selling more, which lowers per-unit costs. Ordering more raw materials often gets you better pricing. It also cuts the cost of each unit made (COGS). Related read: Reorder Level Formula and Reorder Quantity Formula Conclusion Cost of goods sold formula is crucial for evaluating a company's profitability and efficiency. However, learning best practices is important for precise calculation of COGS. Remember, it also has a role in determining the efficiency of inventory management systems. By maintaining accurate records and allocating costs correctly, businesses can calculate COGS accurately, following accounting standards. FAQs What is cost of goods sold formula?The cost of goods sold formula is:Cost of Goods Sold = Beginning Inventory + Purchases During the Period - Ending InventoryIt is also known as the cost of sales formula.How to calculate cost of goods sold from income statement?COGS usually comes after sales revenue on the income statement. To calculate gross profit, deduct it from revenue. It covers all costs related to producing goods or services offered by the company.How to determine COGS (Cost of Goods Sold) ratio?To find the COGS ratio, divide COGS by net sales. A low ratio signals that costs are small compared to sales.What are the components of the COGS (Cost of Goods Sold) formula?The full form of COGS is Cost of Goods Sold. It represents the expenses to make or buy the products your business sells. It covers raw materials, factory overheads, packaging, and direct labour.

March 15, 2024
Navigating India’s Regulatory Landscape with Merchant of Record Services

Navigating India’s Regulatory Landscape with Merchant of Record Services

In an era where digital commerce transcends borders, understanding and navigating the regulatory landscape becomes paramount for businesses aiming to operate in the global marketplace. India, with its vast consumer base and burgeoning digital economy, presents a lucrative yet complex landscape for e-commerce ventures. The concept of Merchant of Record (MoR) services has emerged as a pivotal solution for businesses looking to integrate into this dynamic market seamlessly. This article aims to shed light on how companies can steer India's regulatory landscape with Merchant of Record services. Merchant of Record services not only facilitate the operational aspects of e-commerce but also ensure compliance with the myriad of regulations governing online transactions in India. From tax obligations and data privacy to consumer protection laws, the MoR takes on the responsibility of ensuring that all transactions adhere to the legal requirements of the Indian market. This article delves into the essence of Merchant of Record services, outlines the regulatory framework surrounding these services, and provides insights into what businesses need to consider when opting for MoR services in India. By understanding the intricacies of India's regulatory environment and how MoR services can help in compliance, businesses can make informed decisions, mitigate risks, and capitalise on opportunities in one of the world's fastest-growing e-commerce markets. What Is Merchant of Record Services? Merchant of Record (MoR) services represent a critical component in the e-commerce ecosystem, especially for companies aiming to expand their operations internationally, including in complex markets like India. An MoR acts as the official seller of record for transactions, taking on the responsibility of processing payments, managing tax collection and remittance, handling chargebacks and refunds, and ensuring compliance with local and international financial regulations.  This service is invaluable for businesses that seek to enter foreign markets without establishing a local entity or navigating the intricate web of legal and financial requirements on their own. By leveraging MoR services, companies can offer their products and services to a global audience with minimised operational risk and enhanced customer trust, as the MoR ensures transactions are secure, compliant, and processed efficiently. In the context of India, with its vast market potential and regulatory complexities, MoR services have become an essential tool for international companies looking to tap into the burgeoning e-commerce space while adhering to the country's regulatory framework. Explaining All the Regulations around Merchant of Record Services The regulatory landscape surrounding Merchant of Record (MoR) services in India is multifaceted, involving various legal, financial, and operational regulations. Understanding these regulations is crucial for businesses employing MoR services to ensure compliance and smooth operation. Key regulatory areas include: 1. GST Compliance MoR services must navigate the Goods and Services Tax (GST) regime, ensuring accurate tax collection and remittance on sales. This involves registering for GST, issuing GST-compliant invoices, and filing regular tax returns. 2. Data Protection Laws With the increasing emphasis on data privacy, MoR services are obligated to comply with India's data protection regulations, including the Information Technology (IT) Act and the upcoming Personal Data Protection Bill. These laws mandate strict measures for the collection, processing, and storage of consumer data. 3. Payment and Financial Regulations MoR services must adhere to the Reserve Bank of India (RBI) guidelines related to payment processing, including compliance with payment gateway regulations, Know Your Customer (KYC) norms, and anti-money laundering (AML) standards. 4. Consumer Protection Laws Ensuring compliance with the Consumer Protection Act, which safeguards consumer rights regarding product quality, warranty, and the right to information, is essential for MoR services. This includes adherence to e-commerce rules for transparency, return, refund, and grievance redressal mechanisms. 5. Foreign Direct Investment (FDI) Policies For international businesses, understanding India's FDI policies is critical, especially in the e-commerce sector. MoR services must navigate these policies to ensure that their operations align with investment and ownership regulations. 6. Customs and Import Regulations Businesses utilising MoR services for cross-border sales need to comply with India's customs and import regulations, including accurate classification of goods, payment of import duties, and adherence to import licensing requirements. Things to Keep in Mind While Opting for Merchant of Record Services in India When considering Merchant of Record (MoR) services for entering or expanding the Indian e-commerce market, several critical factors need to be taken into account to ensure compliance, efficiency, and success. Here are key considerations: 1. Regulatory Compliance Ensure the MoR service provider has a deep understanding of and compliance with India's regulatory framework, including GST, data protection laws, and consumer protection regulations. They should also be adept at navigating changes in legislation. 2. Financial Operations The MoR provider should offer transparent and efficient financial operations, including tax collection and remittance, invoice management, and handling of chargebacks and refunds. Understanding their financial reporting capabilities is crucial for your internal accounting and audit processes. 3. Local Market Expertise Select an MoR service with expertise in the Indian market. They should understand local consumer behaviour, payment preferences, and logistical challenges, providing insights that can help tailor your strategy to local needs. 4. Technology and Integration The technological capabilities of the MoR service are vital. Ensure their platform can seamlessly integrate with your e-commerce operations, support your preferred payment methods, and provide robust security measures to protect consumer data. 5. Customer Support and Service The level of customer support offered by the MoR service can significantly impact your brand's reputation. Look for providers that render comprehensive customer service, including efficient dispute resolution and refund processes, to maintain customer satisfaction. 6. Flexibility and Scalability Your chosen MoR service should be flexible and scalable to adapt to your business's evolving needs, whether you're expanding your product lines or entering new market segments within India. 7. Reputation and Reliability Assess the reputation and track record of the MoR service provider. A reliable partner with a history of successful collaborations can provide the stability and support necessary for navigating the Indian e-commerce landscape. 8. Cost Structure Understand the cost structure and fees associated with the MoR services. It's essential to evaluate how these costs will impact your pricing strategy and overall profitability in the Indian market. India's Regulatory Landscape for Merchant of Record India's regulatory landscape for Merchant of Record (MoR) services is shaped by a comprehensive set of laws and regulations designed to ensure transparency, protect consumer rights, and promote fair trade practices within the e-commerce ecosystem. Understanding this landscape is crucial for both MoR services and the brands they represent. Here's an outline of key regulatory areas: 1. Goods and Services Tax (GST) The GST regime requires MoR services to collect and remit taxes for transactions processed on behalf of sellers. This involves obtaining a GST registration, categorising products correctly, and filing regular tax returns. 2. E-commerce Regulations The Consumer Protection (E-Commerce) Rules, 2020 outline specific obligations for e-commerce entities, including the declaration of seller details, return and refund policies, and grievance redressal mechanisms. MoR services must ensure these requirements are met on the platforms they manage. 3. Data Protection and Privacy With the DIGITAL PERSONAL DATA PROTECTION ACT 2023 as a current framework and the proposed Personal Data Protection Bill, MoR services need to adhere to stringent data protection standards, ensuring the security and privacy of consumer data processed during online transactions. 4. Payment and Financial Regulations Regulations under the Reserve Bank of India (RBI) govern payment processing and settlement systems. MoR services must comply with these regulations, including norms related to payment gateways, cybersecurity standards, and fraud prevention. 5. Foreign Direct Investment (FDI) Policy For international brands using MoR services, understanding India's FDI policy in the e-commerce sector is vital. The policy delineates the conditions under which foreign investment in e-commerce entities is permitted, influencing how international brands can operate within the Indian market. 6. Customs and Import Regulations When facilitating cross-border transactions, MoR services must navigate customs regulations, ensuring accurate classification of goods, payment of appropriate duties, and adherence to import restrictions or licensing requirements. 7. Intellectual Property Rights (IPR) Protecting intellectual property within the e-commerce space is critical. MoR services should assist brands in safeguarding their trademarks, copyrights, and patents against infringement and counterfeiting within the marketplace. Conclusion Navigating India's complex regulatory landscape is a significant challenge for international companies aiming to tap into the burgeoning e-commerce market. Merchant of Record (MoR) services emerge as a strategic solution, offering a pathway to enter and operate within this dynamic environment seamlessly. These services not only ensure compliance with India's multifaceted legal and tax obligations but also streamline financial transactions and enhance customer trust through secure and efficient payment processes. For businesses looking to leverage the vast opportunities in the Indian e-commerce space, partnering with a seasoned MoR service provider is a critical step. Such a partnership allows companies to focus on their core competencies, such as product development and marketing, while the MoR handles the complexities of regulatory compliance and financial operations. As the Indian e-commerce market continues to evolve, staying informed, adaptable, and compliant will be crucial to success. With the right MoR partner, international companies can navigate the intricacies of the Indian market, paving the way for sustainable growth and a strong presence in one of the world's most vibrant e-commerce landscapes. Frequently Asked Questions What is a Merchant of Record (MoR), and how does it work in the Indian market?A Merchant of Record is a legal entity responsible for processing consumer transactions, ensuring tax compliance, handling refunds, and managing financial liabilities. In India, an MoR ensures compliance with local laws, including GST, consumer protection, and data privacy regulations, facilitating smoother operations for international e-commerce companies.Why is understanding India's regulatory landscape important for international e-commerce companies?India’s regulatory environment is complex and dynamic, impacting taxation, consumer rights, data protection, and payment processes. International companies must navigate these regulations to ensure compliance, avoid legal issues, and build trust with Indian consumers, making understanding the regulatory landscape essential.How can Merchant of Record services help companies comply with GST in India?MoR services manage the intricacies of GST compliance on behalf of companies, including registering for GST, calculating the correct tax rates for products, issuing compliant invoices, and remitting taxes to the government. This alleviates the administrative burden and helps ensure compliance.What are the key regulatory considerations for MoR services operating in India?Key considerations include adhering to GST regulations, complying with the Consumer Protection Act, ensuring data protection as per the IT Act and upcoming data protection laws, navigating FDI policies for e-commerce, and understanding customs and import regulations for cross-border transactions.Can MoR services help international brands with logistics and fulfilment in India?While MoR services primarily focus on financial transactions and compliance, many partners with logistics and fulfilment providers or offer integrated solutions to help international brands manage the complexities of distribution and fulfilment within India, ensuring timely delivery and customer satisfaction.Are there any specific challenges to using MoR services when entering the Indian e-commerce market?Challenges include finding an MoR provider with deep local market expertise, adapting to rapidly changing regulations, integrating MoR services with existing e-commerce platforms, and ensuring seamless customer experiences despite the intermediary role of MoR services.How frequently do India's e-commerce and financial regulations change, and how can businesses stay updated?India's regulatory framework for e-commerce and finance is evolving, with changes occurring periodically. Businesses can stay updated by partnering with knowledgeable MoR providers, consulting with legal and financial experts specialising in Indian market regulations, and monitoring announcements from regulatory bodies.

March 14, 2024
Empowering Success: Effective Distributor and Consumer Management Techniques in Retail Distribution

Empowering Success: Effective Distributor and Consumer Management Techniques in Retail Distribution

For large-scale businesses and manufacturers, distributors and consumers are pillars of success. For example, Reliance, the biggest retailer in India, wouldn't have scaled to the top without the trust and support of both its distributors and consumers. However, effective distributor and consumer management hinges on a strategic approach and tangible methods.  Whether it is communication, product supplies, or an expanding distributor network, factors like trust, reliability, and quality do play a role. Employing time-tested techniques is crucial for long-term success with retail distribution and customer retention. Effective distributor and consumer management also builds businesses to a higher level. What is Retail Distribution and Consumer Management Distributor and Consumer Management in retail involves overseeing the processes and relationships involved in getting products from the manufacturer to the end consumer. Both are interconnected– effective distributor management percolates to customer management, and effective consumer management involves the other.  Retail distributor management is crucial for manufacturers and retailers as it enhances profitability by accelerating product turnover. It involves activities such as packaging, inventory control, storage, retail distribution networks, and logistical support. Similarly, prioritising consumer satisfaction through comprehensive management systems is essential for business success and growth. Retail consumer management requires grasping customer needs, preferences, and behaviour to improve product innovation, pricing, and marketing strategies. Effective distributor and consumer management is crucial for maximising efficiency, reducing costs, and meeting consumer demand profitably. Clear Communication Successful distributor and consumer management hinges on effective communication- 82% of customers anticipate a prompt response to their sales or marketing questions. Communication is not just about completing a task! It is a crucial interpersonal skill that establishes trust in distributors beyond transactions. However, effective communication is not possible without a communication plan.  So, delineate a plan for when and how you'll engage with the retail distribution network and consumers. In communications with distributors, regular interaction cultivates trust, shows appreciation for their input, and sustains their involvement. In the plan, specify the update frequency, preferred communication channels, and shared information.  Utilise various communication methods, such as emails, phone calls, and face-to-face meetings. Share progress on KPIs and industry updates to showcase expertise and bolster rapport. Encourage distributors to provide feedback. It is a surefire way to forge support and fortify relationships.  Similarly, updates about order status and delivery times, facilitating reviews and acting on them are some of the ways to communicate with consumers. Identity KPIs (Key Performance Indicators) Identifying the most relevant key performance indicators (KPIs) is crucial for effective distributor and consumer management. These KPIs may include sales volume, customer satisfaction, inventory levels, and regulatory compliance. Tracking KPIs over time reveals distributor performance and areas for improvement, as well as whether they need training and support.  To identify the right KPIs, start by defining your overall goals and objectives for the distributor relationships. Then, work backwards to identify the specific metrics that will assess whether you're achieving those goals. The right KPIs will give you a vivid view of your distributor relationships and provide improvement opportunities. Timely Delivery Timely delivery of products makes you reliable for both retail distributors and customers, making distributor and consumer management easy. 98.1% of customers say that delivery experience affects their loyalty to a brand. Because, beyond product delivery, know that you're out there to solve problems.  Improving logistics and supply chain management ensures timely deliveries while upholding profitability. Analyse the supply chain to identify inefficiencies and reduce costs to speed up delivery problems. Smoothen out last-mile delivery challenges.  Prioritising inventory management is vital to maintaining product availability without overstocking or stockouts and utilising demand forecasting techniques and tools to accurately predict sales trends. It also minimises warehousing costs and maximises profits by reducing dead stocks. Ensure Fair Terms  In many industries, following regulations is crucial for business success. It is the most sensitive part of distributor and consumer management. Even a slight non-compliance leads to fines or legal issues, harming your brand. Make sure that retail distributors understand various local and global industry regulations without ambiguity. Communicate every term beforehand. To customers, establish fair and clear rules related to product returns, refunds, and late deliveries.  Audit distributors regularly for compliance with product labelling, export & import rules, and safety standards. Confirm they have the necessary licences for specific regions. Ensure they practise legal compliance. Provide Training and Support Distributors cannot rely solely on products to be successful. Think of them as partners rather than mere procurers. They need support from the manufacturers they work with. Moreover, by educating distributors, you're also educating consumers and providing training on product features, benefits, and target customer profiles. Educating distributors become knowledgeable brand advocates. It is an indirect way to build profitability.  The training should also cover effective sales communication techniques, inventory management strategies, and tactics like upselling or cross-selling to increase sales. However, it can go beyond that to teach handling delivery challenges and partnering with the right 3PLs. The training program must be flexible to accommodate each distributor's unique needs. Use Tech-Enabled Services Training and support, together with technology, complete the distributor and consumer management system. Technology enhances retail distribution management for businesses- tools like data analytics, RFID (Radio-Frequency Identification), and GPS tracking fare high. They can help optimise their supply chain, logistics, and inventory management processes. So, help distributors partner with tech-enabled 3PLs.  These technologies provide real-time data, allowing businesses to make informed decisions that improve the overall efficiency of their distribution operations. Amazon is using robot and drone delivery systems to tackle last-mile delivery challenges. Artificial Intelligence systems are providing 24x7 assistance to customers. Machine Learning tools can process volumes of data for accurate demand forecasting. Whatnot! Technology is simply indispensable for effective distributor and consumer management. Deliver Quality Products Quality products are essential for effective distributor and consumer management. Slack product quality is set to discourage both stakeholders, who will start looking for alternate brands.  It is not just delivering quality products. Consistently exceed customer expectations to ensure satisfaction, loyalty, and a strong brand reputation. High quality also reduces complaints, returns, and warranty claims for both distributors and manufacturers. In the long run, it becomes a competitive advantage, allowing premium pricing and higher profits. Satisfied customers promote products through word-of-mouth, reducing marketing costs. Employ Data Analytics Data analytics tools play a vital role in retail distributor management. They provide data-driven insights into distributor performance, sales trends, and stock levels. Optimising supply lead times is crucial. Businesses can also optimise inventory levels and forecast demand accurately. They can easily identify top-performing distributors. By revealing inefficiencies in the supply chain, data analytics allow for streamlining and cost reductions.  Additionally, data on customer preferences and buying behaviour can inform tailored product development and marketing strategies for each distributor. By onboarding data analytics tools, businesses can make informed decisions. This improves operational efficiency and fosters stronger relationships with one's distributor network, ultimately driving profitability and growth.] Suggested read : What is Physical Distribution in Supply Chain Management Conclusion In the end, ensuring the highest standards in distributor and consumer management sets the tone for a business's long-term success. Techniques like evaluating distributor KPIs, optimising product delivery times, ensuring quality products, clear communication, and regulatory compliance ensure a strong retail distribution network. Similarly, tech-enabled services and data analytics, along with regular training and support, accelerate business operations [signup] FAQs What is the role of communication in distributor and consumer management?Effective communication plays a vital role in distributor and consumer management. It fosters strong relationships with distributors by conveying expectations, goals, and feedback. Consumers need clear product information and marketing messages. Addressing their concerns builds trust and loyalty. Open communication across the supply chain and with end-users is essential. It aligns efforts and meets customer needs.What are the helpful technologies in retail distributor and consumer management?Data analytics, Predictive analytics, Artificial intelligence, Machine Learning, GPS for delivery tracking, RFID (Radio-Frequency Identification), inventory management software, and supply chain management software are some of the helpful technologies for effective distributor and consumer management.What is the impact of neglecting distributor and consumer management in retail?Bad supply chain operations.Inventory shortages or overstock issues.Poor customer experience and dissatisfaction.Loss of brand loyalty and customer churn.Increased costs and reduced profitability.Missed opportunities for growth and expansion.

March 13, 2024
What is Demand Analysis [2025]

What is Demand Analysis [2025]

Do you know that customer experience is the biggest competitive advantage for 81% of marketers? In fact, ensuring good customer experience is increasingly becoming difficult. However, it doesn’t have to be when businesses strive to understand customer needs and market trends. That’s what demand analysis in retail is all about. It attempts to decode the target market, where a business can successfully launch its products and gain profit margin.  Sounds simple as it may, it involves considerable expertise, skill and data-analysis. Translating the data into concrete business decisions is yet another task. We will explore those details in this blog. Keep readint to get an idea about retail demand analysis, the process, best practices, and challenges in demand analysis. What is Demand Analysis and its Meaning Businesses that enter new markets have to evaluate customer needs, market sentiments, competitors, and target markets for making several decisions. It is known as demand analysis. It is a crucial and calibrated step to assess target markets and how they can gain maximum profitability.  Demand analysis reveals concrete data regarding customer demands, and buyer personals. Based on the data, companies make decisions on budget allocation, production planning, marketing and advertising, product pricing and innovation, etc. Demand analysis varies depending on the type of product, maturity of a business, capital, and resources. The Importance of Demand Analysis in Retail Business success depends on identifying and satisfying customer needs. Analysing consumer behaviour is crucial for holding appropriate inventory levels. This analysis provides essential insights for decision-making processes: budget decisions, marketing and advertising costs. Demand forecast requires analysis for better outcomes. Businesses can decide product pricing based on consumer demand trends. With the help of demand analysis, companies can set up production planning. Demand analysis serves as a foundational element in business strategy. It guides effective lead generation by giving insight into customer needs. It gives a view into new markets to release products or services. Demand analysis helps in effective inventory control. Steps in Demand Analysis 1. Market Research The first and foremost thing businesses attempting demand analysis is to dive deep into the target markets. Market surveys are the most used traditional method to understand consumer needs. Survey your customers about the new product and find out how satisfied they are. If consumers express dissatisfaction, it is time to develop on the product or bring something new.  While consumer surveys are common for market research, use a variety of methods like interviews, focus groups, public events, observations, experiments, and secondary data analysis. It ensures the credibility of collection data.  Interestingly, most companies analyse just 12% of their gathered data. They miss out on 88% of potential opportunities and threats. Effective use of data is one of the biggest competitive advantages out there. So, not just gather data, but act on it. Create concrete buyer personas in numbers. It will also reveal opportunities in secondary markets where the audience might need your product or service. 2. Evaluate the Business Cycle After market research, the focus must become internal i.e. evaluating the business cycle and maturity. There are three stages in a business cycle: Emerging stage when there is high demand but low supply, Plateau stage when the supply meets the demand, and declining stage where demand is going down.  In other words, some products seem to have a lifetime cycle, while others have short. For example, the oldest beer brew has been popular in the market since 1040. But some breweries have gone bankrupt.  Analyse the market and business life cycle to measure stability. Determine if the market is growing, stable, or declining. Similarly, assess your business's maturity level. Integrate this into product demand analysis. If the market grows but you can't match it, consider how to sustain profitability. 3. Aiming at a Product Niche When doing a product demand analysis, it is crucial to be specific. Avoid painting a better picture by considering the entire market or a bigger part of the market. Customers are not just looking at the quality, pricing and unique features of a product. They are looking for brands they can connect with. Brands that share personal values and motivations along with the product needs. So identifying a niche and tailoring a product for that niche wins the game. It also helps customers differentiate your products from that of competitors. 4. Define the USP After knowing the markets, it is time to differentiate yourself from them. Businesses must develop products or services with an aim to solve customer problems rather than make profits. It automatically increases demand.  Identify trends and seek growth opportunities ahead. Consider societal aspects such as wages, costs of related products, and tax adjustments. 5. Competitor Analysis Start by identifying the market competitors and their market share. It also gives insights into market demand by highlighting the best selling products, how they’re winning the sales game, and increasing market shares. You can also understand what new products they are launching and how.  But, it also depends on which stage of the business cycle you are in. For emerging brands, there will be few competitors. As your business matures, the competition will be tough. Demand Analysis Example A company is planning to launch a new electric vehicle (EV) model. Here's how they would use the steps in demand analysis: Market Research: The company surveys consumers to understand preferences for EV features like range and price. Evaluate the Business Cycle: They analyze if the economy is in a growth or recession phase to predict purchasing behavior. Aiming at a Product Niche: They target environmentally-conscious urban professionals willing to pay a premium for an eco-friendly car. Define the USP: The company highlights its EV’s "longest battery range" and "affordable luxury." Competitor Analysis: They study competitors’ pricing, features, and strategies to identify their competitive advantage. Challenges in Demand Analysis Understanding the consumer behaviour, preferences, and costs involves complexity. From employing different market research methods to accuracy of data, demand analysis requires skilled expertise.  Time consumption is another challenge as gathering data can be lengthy. Depending on the response time of the customers, it can take unsustainably longer. This analysis often relies on subjective judgement rather than concrete data. So translating it into business decisions is cumbersome and tricky. Data-driven decisions often require sophisticated technologies like AI, analytics, and ML. It is capital-intensive. On the other hand, with help of such technologies, businesses can make decisions 5X faster. Best Practices in Demand Analysis Regularity: Consumer needs and market sentiments change rapidly in today’s world. That is why businesses must conduct demand analysis regularly to gain updated information. Depending on the product type, conduct the analysis at least once a month. Variety in Data-collection Methods: Use a variety of data collection methods for maintaining accuracy and consistency. Comprehensive Data Collection: Gather data from all market segments to understand consumer response. It helps make informed marketing decisions for your products and services.  Thorough Analysis: After achieving data collection, thorough analysis is required to narrow down the essential data and eliminate fallible data.  Data-driven Decisions: While expert opinions are crucial, always depend on data-driven decisions before consulting them. There is no place for guess work. Related read: Methods of Demand Forecasting Conclusion Entering retail markets without demanding analysis is shooting in the dark. It is a very unsustainable way to enter target markets. Given the volatility of markets and increasing consumer awareness, businesses that want to stay longer must focus on detailed demand analysis. Without that, they’re staking business reputation and brand value in the long-run. FAQs What is demand analysis in economics?Demand analysis is research done by companies to understand customer interest in a product. It helps them decide if they can enter the market and make a profit.What are different types of retail demand analysis?There are four types of demand analysis: Market demand analysis, product demand analysis, consumer demand analysis, and organisational demand analysis.What are the consequences of ignoring market analysis?Mismatch between inventory levels and customer demand, resulting in excess stock or shortages.Ineffective pricing strategies, missing market opportunities or driving away customers.Inefficient production planning, leading to higher costs or inability to meet demand.Poor marketing and sales efforts due to lack of understanding customer needs.Decreased profitability, customer dissatisfaction, and loss of market share.How often should retail businesses conduct demand analysis?Retail businesses should do demand analysis often. It helps keep pace with changing consumer needs and market trends. The recommended frequency for demand analysis varies by product type. Do it at least once a month to keep the information fresh for smart decisions.What is demand analysis in managerial economics?Demand analysis in managerial economics studies consumer behavior to understand factors influencing demand. It helps managers predict how price, income, and other changes impact demand, aiding in better decisions for pricing and production.

March 12, 2024
Unveiling the Functionality of a Typical Inventory Model

Unveiling the Functionality of a Typical Inventory Model

Inventory management is central to maintaining sufficient stocks while controlling the flow of costs. But can we determine exactly how much inventory to hold at any given time? If we can, then all organisations can benefit from the wisdom of how to stock and maintain. That is what inventory models or inventory control models are about.  They seek to determine a business's exact inventory to meet customer demands, sell in the marketplace, and avoid stockouts. It also means there are no excess stocks. In this blog post, we will examine the details of inventory models, including types and examples. Finally, we will assess which inventory control model might suit your business. What is an Inventory Model In simple terms, inventory management is keeping the right stock at the right levels, at the right time, in the right place, and at the right costs. Inventory management models use mathematical models to concretise these operations. They enhance existing inventory systems while increasing the efficiency of poor systems.  Inventory control models start by identifying the issue. It can be a need for proper inventory management software, human error, and supply chain disruptions. Market demand and economic factors can also influence an organisation's inventory levels.  Inventory management models provide precision by identifying selling items, necessary stock levels, and required quantities. With this information, businesses can reduce operational costs, lower storage expenses, and save money. Types of Inventory Models Poor inventory management can result from all sides. Some are static, like supply chain disruptions, staff unavailability, storage costs, or lack of communication. However, factors like demand surges and economic factors are not static. Accordingly, inventory management models are either deterministic or probability-based.  Deterministic models assume that the factors behind inventory management are static, while probabilistic models work based on variable factors. While the latter is more realistic, deterministic inventory models are useful in maximum business cases to give practical results. The eight types of inventory models are: Economic Order Quantity (EOQ) ABC Analysis Inventory Production Quantity Reorder Point Model Fixed Order Quantity  Safety Stock Just-in-Time Inventory Turnover Ratio Whatever the inventory model, it should answer the following questions: What is the appropriate amount of inventory to order? Where can I reduce costs? Which inventory items are selling quickly? How much deadstock do I have? Which inventory is raising my holding costs? Economic Order Quantity (EOQ) The most dreaded part of inventory management is controlling costs while avoiding stockouts. As the name suggests, the Economic Order Quantity (EOQ) model aims to reduce costs. The EOQ calculates the best amount of items a business should order. It minimises costs and maximises value when restocking.  The formula for EOQ in inventory management: EOQ = √2DSC/c D = Annual Demand C = Carrying Cost S = Ordering Cost Example: A company sells 1000 mobiles a year. The annual holding cost per mobile is $5, and order placement cost is $2. Now the EOQ for the case is, EOQ= √2*1000*2/5, which is approximately equal to 28.3.  By keeping inventory slightly more than 28 units, companies can keep costs at a minimum while meeting demand. The EOQ model assumes a consistent demand for an item and availability for restocking. It doesn't account for seasonal or economic fluctuations. Staying true to the nature of the model, EOQ considers fixed costs of inventory units, ordering charges, and holding charges; there is no place for stockouts. However, the EOQ model requires continuous monitoring of stock levels. It is the most basic model based on a one-item business. Though it can be applied to multiple items in a company, it doesn't allow correlation between them. It also needs to consider the limitations of capital availability. ABC Analysis The ABC inventory model seeks to optimise stock levels by assigning priorities to different items. By knowing the most significant product at a time, businesses can allocate funds accordingly. Stocks are sorted into A, B, and C categories based on the 80/20 principle, also known as the Pareto principle. Category A: Inventory in this category gets the most cash but is only a small part of a business's total stock. It accounts for 20% of the stock and brings 70% of the revenue. With tight inventory controls, the "A" type stock gets the highest priority. Category B: Stock that is not essential for a business's survival but holds importance comes under the "B" type inventory. It represents 30% of your inventory and contributes 25% of your revenue. Category C: The type "C" represents 50% of the items with only 5% income. While it doesn't yield as much profit as Categories A and B, it maintains stability. Inventory management for "C" is relatively simple due to its lower revenue generation. Inventory Model Example: For instance, in a company, A items could include specialised equipment, B items could be office supplies and C items might be consumable office stationery. Based on ABC analysis, the priority is assigned to A items. ABC analysis is viable for dynamic organisations where items constantly change costs. However, accurately identifying the most significant stock can be daunting and result in unintended cash flows. For best results, it is often used in conjunction with the JIT model. Inventory Production Quantity Inventory or Economic production quantity (EPQ) augments the EOQ model. The inventory production quantity model reveals the number of items they should order in a single batch to reduce holding and setup costs. It assumes the provider delivers each order in parts rather than one full shipment. The inventory model formula for production quantity is, EPQ=√2KD/h(1-x) K =Ordering/Setup cost per production run D = Annual demand rate h = Annual holding cost per product t = Cycle length P = Annual production rate x=D/P Inventory Model Example: Annual demand = 15,000 Setup cost = $500 per production run Holding cost = $50 per item per year Number of working days per year = 240 Annual production rate = 25,000 x=0.6 EPQ= √2*15000*500/50(1-0.6), which is equal to 866.02 (rounded). The company must order 866 units in a single batch for optimal inventory costs. Reorder Point Model (RP) The Reorder Point inventory control model determines the inventory level at which a new order should be placed to maintain optimum stock levels. Based on lead time and average demand, stock levels are ensured until the next shipment time. Inventory model formula for Reorder Point: Reorder Point= Supply Lead Time x Average Daily Demand RP Inventory Model Example: Lead Time = 10 days  Average Daily Demand = 40 units/day Reorder Point= 10x40=400 units. So, the company should order when the inventory level drops to 400 units Fixed Order Quantity  This model is the most basic inventory control system. It seeks to identify the fixed order based on a fixed inventory level. The order quantity is determined using the EOQ model, and the reorder point is calculated using the Reorder point model. Example: EOQ = 490 units  Safety Stock = 295 units Average Daily Demand = 40 units/day  Lead Time = 10 days The reorder point is 400 units in inventory (calculated using the reorder point model). Whenever the reorder point comes, order 490 more units. Safety Stock Safety stock is a buffer to guard against demand and lead time uncertainties. It ensures product availability during unexpected changes. Inventory model formula: Safety Stock Level= (Maximum daily use x Maximum lead time) – (Average daily use x Average lead time). Example: Suppose a company sells an average of 10 products daily, with a 14-day lead time. During peak periods, sales reach 15 products daily, and lead time extends to 18 days.  Then the safety stock is (15 × 18) - (10 × 14), which is 130 units. Just-in-Time Model JIT focuses on reducing inventory expenses by scheduling production or ordering goods precisely when they're needed, eliminating stockpiling. So, there is no mathematical formula for the JIT inventory control model. It is a qualitative method that synchronises production and ordering with demand. It can be a general rule that ultimately saves inventory costs significantly. Inventory Turnover Ratio The inventory ratio establishes a relationship between the average inventory and the Cost of inventory sold during a particular period. It uses the following formula: Inventory Turnover Ratio=Cost of Goods Sold/Average Inventory Average inventory is ideal when merchandise fluctuates greatly throughout the year. Comparing the inventory ratio of successive years reveals fast-moving items, slow-moving items, and items with zero demand. Probabilistic Inventory Models Probabilistic inventory methods offer more reliable results than deterministic approaches. They acknowledge demand fluctuations and lead time uncertainties. Three common scenarios exist: Constant lead time with variable demand Constant demand with a variable lead time Variability in both However, more complex models with multiple variables also exist. Using economic and production data, it estimates inventory quantities and their probabilities.  In most cases, probabilistic inventory models considering both probabilistic supply and demand are preferable. There are two methods for procuring inventory stock based on how often orders are placed: single-period and multi-period inventory systems. Single Period Inventory Model The single-period inventory control model assumes that items are perishable. They are ordered once and are in limited demand, such as seasonal products like newspapers or winter clothes. It applies an incremental analysis to find the best order quantity by comparing the Cost of one more unit against the Cost of not ordering it. A probabilistic demand is assumed for calculation. Multi-Period Inventory Model A multi-period inventory or continuous review inventory model involves constant monitoring. When stock hits a set level, a fixed amount is ordered. This model suits high-volume or crucial inventory items.  Periodic review inventory is checked at set intervals, regardless of stock levels. The orders are made to reach maximum levels. This method suits moderate-volume items. How to Choose the Best Inventory Model for Your Business For businesses with consistent demand, the EOQ inventory model is the best. It balances both order quantity and storage costs. When lead times are unpredictable, use the safety stock formula to calculate the best inventory level without running into stockouts. ABC analysis works best for businesses with a broad product spectrum, varying costs and sales volume.  Apply the Just-in-Time model for companies with perishable or low shelf-life items. It is the best bet to minimise inventory costs and overstock. Companies with limited funds may use fixed order quantities for vital items and Just-in-Time (JIT) for less important products. For businesses with storage space limitations, prioritise the fast-moving items and use the JIT model. Dropshipping is also the best alternative. The Reorder point model, in combination with Safety stock, is the best for businesses that deal with unreliable suppliers to keep inventory costs at a minimum. Before finalising a model, it's smart to confirm the choice with industry experts or through trial testing. Growing businesses can only cram some models to determine the best inventory levels. Try multiple methods one by one and start evolving in the application. There is no hurry! Related read: Change in Inventory Formula Conclusion Inventory management models serve as a tangible resource for companies to control costs and prevent stockpiling and stockouts. However, what is the best inventory model for a business? That takes wisdom and iterations. More complex inventory control models may be used for tight control. Ultimately, the choice depends on demand forecasts, order lead time, and review frequency. FAQs What are the four inventory models?The four basic inventory models are Economic Order Quantity (EOQ), ABC analysis, Economic Production Quantity (EPQ), and Reorder Point.What is the best inventory model in operation research?Economic Order Quantity (EOQ) for constant demand, (s, Q) for continuous review, (R, S) for periodic review, Newsvendor for perishables, and Multi-Echelon models for supply chains are some of the best inventory models in operation research. Every model gives the best results by identifying the problem and selecting the trade-offs.What does a typical inventory model address?A typical inventory model should answer the following questions:What is the appropriate amount of inventory to order?Where can I reduce costs?Which inventory items are selling quickly?How much deadstock do I have?Which inventory is raising my holding costs?How do probabilistic inventory models differ from deterministic models?Probabilistic inventory models consider variable situations for demand, lead time, and orders, giving more realistic results. However, deterministic models consider static factors such as fixed demand, lead time, or fixed orders per period. Despite their basic nature, deterministic models are useful in several cases.How to choose the best inventory control model for my business?The best inventory control model depends on demand variability, lead times, products, service level requirements, and cost minimisation objectives.

March 11, 2024
Differentiating Stock and Supply: Essential Concepts in Inventory Management

Differentiating Stock and Supply: Essential Concepts in Inventory Management

The gamut of inventory management is vast. From keeping track of various operations to successfully executing every step requires awareness and planning. Stocks and supplies are important differential concepts that every inventory manager must be aware of. Especially for effectively managing larger organisations, discerning the difference between stock and supply is crucial for companies, concerned managers and personnel. The mixing of concepts can lead to mismanagement, increased costs, undue pressures of work, and impact customer service ultimately.  While the difference between stock and supply exists, they are both correlated, too. For example, finished stock always calls for new supplies. In this blog post, we will discuss the key differences between stock in inventory and supplies with examples and other related aspects. Stock in Inventory vs Supply Stocks refer to the raw materials that will be transformed into finished goods and the finished goods that are awaiting sale to customers. Supplies refer to inventory that has yet to be purchased from the manufacturer, which will ultimately replenish inventory. However, in its broad sense, supplies also refer to the sum total of items used by a company in its daily internal operations. Stock in inventory includes not only the finished goods awaiting sales but also production inventory that will become finished products and work-in-progress inventory. The total stock of a company at any point in time includes these.  Let’s substantiate the difference between stock and supply through an example: For example, in a soap manufacturing company, the finished soaps come under the stock in inventory. Similarly, raw materials used in production– oils, fragrances, colourants, and other materials– are part of the stock. Soaps under manufacturing are also part of the overall stock owned by the company. But items used for packaging, like tapes, bubble wrap, and boxes, are part of supplies. Moreover, finished soaps will be in stock until they’re sold and bought by customers. Related read: 9 Efficient Ways to Manage Stock Inventory Difference between Stock and Supply MeaningRepresents ownership in the company. Owning stock makes you a shareholder. You are eligible for dividends if the company pays them. You might also get voting rights in company decisions.Supply is the quantity of goods or services companies offer in a market. The law of supply and demand determines the price at which transactions occur.FunctionStocks help generate revenue.Supply meets sudden or unexpected increases in market demand for a product.TimeframeMeasured at a specific point of time.Supply extends to a particular period of time. Total Quantity of GoodsThe total amount of products/services available for sale by a company at a specific time.The total quantity of goods in supply is the quantity of a product or service producers can sell at a specified price within a timeframe.Cost and Time The price of a stock can change over time due to factors like company performance, economic conditions, and investor sentiment.The price of goods or services supplied can change over time due to the interaction of supply and demand.MeasurementStock is measured as the total amount of a product or service available for sale at a specific point in time.Supply is the quantity of a product or service that producers can offer for sale at various prices over a period of time.InterdependenceThe amount of stock replenishment depends on the existing stock. It is always less than the existing stock.A supply can be greater or less than the existing or previous supply.Changes WithPriceProductionNatureDynamicStaticPoint of SaleStock is traded on stock exchanges where investors buy and sell shares.Supply is sold in a market where buyers and sellers interact to establish the price and quantity of goods and services.Product/ServiceStock refers to company shares traded on a stock exchange.Supply is the available quantity of a product or service for sale in the market.ProportionalityIncreases with increase in market demand.Increases with increase in production.Demand InfluenceHistorical sales data and demand forecasts influence stock levels.Existing customer orders and market demands can influence supply levels.RisksSubject to obsolescence, damage, or expiration.Impacts inventory turnover and inventory holding costs.Lost sales and defying customer demands.Impacts supply chain costs and lead times. Other Differences Between Stock and Supply Stock: Represents inventory already purchased by the business.Supply: Represents inventory yet to be purchased by the business. Stock: Stored within the business premises or warehouses.Supply: Provided by suppliers or manufacturers external to the business.\ Stock: Owned by the business and recorded as an asset.Supply: Owned by the supplier until purchased by the business. Stock: Buffer against supply chain disruptions.Supply: Dependent on supplier reliability and lead times. Stock: Depleted through sales or wastage.Supply: Replenishes stock levels when stock is ordered. Stock: Impacts cash flow and working capital.Supply: Does not affect cash flow until purchase. Stock: Requires inventory management and control systems.Supply: Requires supply chain management and coordination. Stock: Requires appropriate storage conditions and facilities.Supply: No storage requirements until received as stock. Stock: Tied to specific product SKUs or identifiers.Supply: This may be aggregate or bulk quantities from suppliers. Managing Stock vs Supply Managing stocks is known as inventory management, whereas managing supplies is part of supply management operations. Inventory management involves the following operations: Receiving inventory at the warehouse. Managing organisation and storage of stocks with efficient utilisation of space. Conducting periodic inventory audits as a control measure. Watching inventory levels and inventory turnover. Inventory control. Demand forecasting.  Find out reorder points and ideal reorder quantities. Stock replenishment. Supply Management Supply management takes all supplies that are not part of stocks or inventory. The difference between stock and supply management again becomes striking here: Supply management is less complicated than inventory management as the former deals with fewer products. Moreover, supply management doesn’t impact customer experience. Typically, businesses allocate a dedicated storage area such as a room, closet, or warehouse for storing supplies, where cabinets, shelves, and labelled boxes are commonly used for organisation. Like inventory management, it's crucial to monitor supply usage and remaining stocks and determine when to replenish supply levels. Difference between Stock and Supply with Examples Example 1 Stock: An electronics store has 50 units of a particular TV model on the sales floor.Supply: The TV manufacturer can produce and deliver 2,000 units of that model per month. Example 2 Stock: An investor holds 500 shares of ABC Corporation in their portfolio at a particular point in time and is ready to sell them.Supply: ABC Corporation has 10 million shares outstanding in the stock market. Example 3 Stock: A sporting goods retailer has 75 units of a new baseball bat model in its inventory. They can quickly become zero after all sales.Supply: The bat manufacturer can supply 10,000 units of that bat model to retailers each quarter. Difference Between Expansion of Supply and Increase in Supply The terms expansion of supply and increase in supply may seem similar. But they have differences. A company wants to expand its supply if it sees an opportunity for a price increase in the product. For example, a company was selling ten units of a product rated at ₹10 each. If the price of the product goes to ₹15 and the company now wants to sell more products (e.g. 15 units), it is known as an expansion in supply.  An increase in supply is caused by factors other than the price of the commodity. These can include increased demand, increased purchasing power, and an increase in the price of substitute or complementary products. Now, the company wants the manufacturer to increase the existing supply to meet the new demand. However, there is no change in the price of the commodity here.For example, a company was selling 10 units of a product at ₹10 each. It also takes 100 products per month. There is a sudden surge in demand. Now, the company seeks to increase the supply to more than 100 products per month. Conclusion The difference between stock and supply might seem insignificant in the context of concepts. But in actual practice, they’re in charge of the biggest operations in any organisation. As mentioned, for scaling organisations, the distinction is crucial to allocate funds and other resources accurately. Learning the impact of both stocks and supplies ensures proper management in replenishing supplies and managing inventory during sales without delays or unexpected stockouts. Ultimately, both have a huge bearing on customer experience. FAQs What distinguishes money supply from the concept of stock?The money supply is quantified by the money in circulation among the public at a specific time, making it a 'stock concept'. Also, the money supply is measured at a particular point in time, reiterating its status as stock.What is stock vs goods?Goods refer to the objects or items traded by a merchant, while stock denotes a bulk of goods usually stored together and commonly kept in a warehouse. Goods represent items bought or sold for money.What is the difference between stock and flow?In economic analysis, variables are typically classified as either stock or flow variables. Stock refers to quantities measured at a specific point in time, while flow denotes quantities measured over some time. So, a supply is a flow concept.What are 5 differences between stock and supply?1. Stock is the quantity of goods held by a business for sale, and supply is the quantity of goods made available to the business for potential sales.2. Stock represents inventory already bought by the business. Supply represents inventory yet to be purchased from suppliers.3. Stock is stored in the business or warehouses. Outside suppliers or manufacturers provide supply.4. Stock is depleted through sales or wastage, while supply replenishes stock levels when stock is ordered.5. Stock incurs carrying costs from storage and handling. Supply has no such costs until the stock is purchased.

March 08, 2024
Methods of Demand Forecasting: Techniques, Types, and Key Approaches for 2025

Methods of Demand Forecasting: Techniques, Types, and Key Approaches for 2025

Planning is at the forefront of success for any organisation, big or small, commercial or otherwise. What about the supply chain that involves a huge flow of goods, revenues and a company’s properties? Turns out it is critical here. When companies strategically plan for the future by anticipating possible trends in sales, customer purchases, and required inventory, we call it demand forecasting in the supply chain. It is also known as sales forecasting. In fact, it involves more factors than these three. From resource allocation, budget planning, and supplier onboarding to setting a company's whole trajectory, sales forecasting plays a major role. How effectively organisations can forecast depends on the methods used and market awareness. So, in this article, while touching on the importance of demand forecasting in supply chain, we guide you through the popular types, techniques and methods of Demand Forecasting Why Demand Forecasting Inventory Management: Ensures optimal stock levels, preventing overstock or shortages. Resource Allocation: Helps allocate resources efficiently based on anticipated demand. Cost Optimisation: Minimises inventory storage costs, reduces wastage, and enhances operational efficiency through planning. Customer Satisfaction: Enables timely order fulfilment and deliveries for customers. Strategic Planning: Demand forecast enables long-term planning and decision-making, which are crucial for sustainable supply chain operations. Supplier Relationships: Enhances timely collaboration with suppliers by providing accurate demand information. Competitive Advantage: Helps adapt to market changes and fluctuating customer demands and stay competitive in dynamic environments. Popular Methods of Demand Forecasting There are many demand forecasting techniques in use. They can be broadly divided into qualitative and quantitative methods. Quantitative methods use mathematical techniques such as statistics, probability, etc., in the process of demand forecasting. While many companies rely on the combination of two techniques, the choice depends on the scale of business, type of product, forecast period, and data availability. Market Research The most common method of assessing future demand is by directly asking the customers. Of course, indirect methods such as online customer surveys, social media engagement, forums, etc., can reveal new and often surprising insights into what customers want that are not figured in the sales data. Demand forecasting through market research informs about new marketing efforts, customer expectations and needs, and opportunities.  Sample surveys, complete enumeration surveys, and end-user surveys are some of the common tools used for market research. Trend Projection It is a quantitative method of demand forecasting that uses statistical analysis or regression analysis. It is actually a simple and cost-effective method based on past sales data. Predictions are made by extrapolating the data into the future. The basic steps are: Collect historical demand data over a suitable period. Plot the data on a graph to visualise the trend. Use analytical techniques like regression analysis or statistics to quantify the trend line that best fits the historical data points. Extrapolate or extend this trend line into the future to project future demand levels. Different types of trend models are used, such as linear, exponential, quadratic, etc., based on the pattern observed in the data. Trend projection is useful when demand exhibits a clear upward or downward pattern over time.  However, it may not account for factors that could cause deviations from the past trend in the future. For example, when a product goes viral, sales may go up. But trend projection can not account for that. Econometric Econometric demand forecasting exploits the premise that causal factors drive demand. It uses economic, marketing, and other relevant data to draw a relationship between demand and the influencing factors. The complexity increases as the number of factors/variables increases. Forecasting in the premise of multiple variables presents nuanced mathematical equations. Think about what happened during the COVID-19 pandemic. Many people started shopping online because of lockdowns, which became a trend gradually. Similarly, if the economy is doing well, people might have more money to spend on travel and vacations. But if people have more debts, it could be because they spent money on fixing up their homes. Demand Sensing An effective demand planning technique is demand sensing. It utilises machine learning to track real-time shifts in purchasing behaviour. AI and ML software contribute to establishing a data-driven supply chain.  It is advantageous as demand sensing enables quick responses to unforeseen demand changes, enhancing service levels and forecast accuracy. AI-enabled demand sensing tools, such as LEAFIO, Blue Yonder, and SAS, offer real-time visibility into short-term demand, further improving overall operational efficiency. Use of Predictive Analytics Using predictive supply chain analytics, you can forecast demand and figure out factors driving sales. The visibility comes from combining smart technology (like IoT) and machine learning, showing every step of the supply chain to predict future demand. With good ML-powered tools, like Salesforce or Anaplan, you can aggregate old and new data from surveys, social media, customer opinions, and more to get a more solid demand forecast. Delphi It is similar to expert opinion, as the forecast takes the views of experts into consideration. However, it is only a small part. Delphi method is a process of demand forecasting where companies send surveys to industry experts across the world. After compiling the responses, they are again anonymously sent back to the experts for feedback. This process is continued for one or two rounds until a consensus is reached. The final results are used for the demand forecast.  Because surveys are sent anonymously, the Delphi method achieves honest expert opinions. Moreover, multiple compilations ensure that the result goes through refinement, building on each other’s knowledge and opinions.  The sales force composite is a way to predict how much of a product will be needed. It depends on the sales and marketing people as they know the market well. Sales and marketing teams in different areas share their predictions based on what they see in the market. All this information is put together to create an overall prediction for the whole company.  Sales Force Composite However, companies often distinguish predictions based on factors like product price, marketing, customer wealth, and competitors. They might also be specific to a particular region and demographics. Expert Opinion While customer surveys and several other techniques can inform demand planning, expert opinions are invaluable. Their experience might help identify twists and common pitfalls in predictions and assumptions.  Companies that use expert opinion hire an outside expert to accomplish the task. The company and the experts sit together to brainstorm and come up with assumptions. Leadership then makes decisions based on the assumptions for the future. Realted read: Understanding Demand Management Other Techniques of Demand Forecasting A/B Experimentation A/B experimentation or split testing is primarily used in marketing, website design, and product development to compare two versions (A and B) of a product, promotions, website, email subject lines, advertisement, etc., to see which one performs better based on specific metrics like clicks, conversions, sales, etc. Based on a clear preference for one option, companies can enhance their understanding of consumer appeal, aiding in demand prediction. For instance, a study revealed that companies achieve higher sales by setting prices with odd-ending numbers! A/B testing is useful in a limited way for testing promotions, pricing changes, etc., and measuring their impact on demand in a controlled environment. However, it is not considered a mainstream method of demand forecasting in supply chain management. Barometrics It is a very specific and short-term demand planning technique that uses certain indicators to predict trends. Mostly, these methods are used in inventory planning and supply chain management. Leading indicators are used for predicting future trends. For example, an increase in consumer complaints indicates a potential sales drop. Lagging indicators point at future trends based on past data. For example, companies can plan their inventory for the next month based on the sales spike in the previous month. There are coincident indicators based on current events. For example, tracking the inventory based on ongoing sales. Types of Demand Forecasting There are various types of demand forecasting that businesses use to predict future demand. These include active and passive forecasting, short-term and long-term approaches, each designed to meet different business needs and objectives. Active Demand Forecasting It is a popular method for startups and growing businesses. It seeks to achieve aggressive growth by focusing on driving factors such as product development, competition, economic projections, market growth trends, etc. Passive Demand Forecasting This is the most general type of demand planning every established industry uses. It utilises past sales data to project future trends. Unlike active demand forecasting, the passive technique prioritises stability over growth. Short-Term Demand Forecasting When there are sudden surges in sales due to festivities or such factors, organisations must resort to short-term demand forecasts. So, companies can employ this technique while long-term forecast plans are already underway, to quickly adjust to the changing customer demands. Long-Term Demand Forecasting: When companies project trends for the next one to four years, it is called long-term demand/sales forecasting. Typically, it sets the company's trajectory for the set duration. Marketing campaigns, capital investments, and internal supply chain operations are some of the examples.  Internal Demand Forecasting When forecasting demands, companies must also consider internal factors such as inventory, staff, production capacity, machine floor, etc. Past sales data is also helpful for this process. It is often part of strategic planning. Macro Demand Forecasting A macro-level sales forecasting model examines broader external factors like raw economic trends, material availability, the state of logistics, and others that impact various aspects of the supply chain. Considering these factors can help achieve accurate demand predictions. Conclusion Demand forecasting is vital in supply chains, aiding inventory management, restocking decisions, and capacity planning. For instance, warehouse fulfilment services rely on demand forecasts to determine storage space, product quantities, and staffing needs for efficient shipping and inventory replenishment. Accurate forecasting ensures optimal resource allocation and effective inventory management, without which organisations have a hard time serving customers. FAQs What are the two methods of demand forecasting?There are two broad methods of demand/sales forecasting: Quantitative and Qualitative. While qualitative methods rely on expert opinions, market surveys, and judgmental inputs, quantitative methods rely on mathematical models drawn from past data.What are the four steps in demand forecasting?Identifying Markets.Splitting the overall industry demand into segments.Find out the cause of demand in each segment and what might change them.Find out the risks of the forecast and finalise the most effective projections.What is the oldest demand forecasting technique?The oldest method of demand/sales forecasting is the “Consumers Survey Method”, which is also known as Opinion Surveys.What is demand forecasting in economics vs supply chain?In economics, sales forecasting predicts aggregate demand. It focuses on drivers like GDP and consumer behaviour. In the retail supply chain, it focuses on predicting demand within a company and for their products, to plan production, inventory, order fulfilment, and logistics well.What is demand forecasting in managerial economics vs supply chain?Demand forecasting in managerial economics analyses market demand facts like prices, income, and competition to optimise profit. In the supply chain, it predicts product/service demand for operational planning of procurement, production, and distribution to meet customer needs efficiently.What are the methods of demand forecasting in managerial economics?Methods of Demand Forecasting in Managerial Economics include both qualitative and quantitative techniques. Qualitative methods involve expert judgment and market research, while quantitative methods use tools like time series analysis and regression.

March 07, 2024
Understanding Demand Management: Exploring Different Types of Activities

Understanding Demand Management: Exploring Different Types of Activities

Demand management is a crucial aspect of supply chain management. Especially, large-scale organisations will thrive only with effective demand planning; it impacts every step of the supply chain. Effective demand management not only ensures customer satisfaction but also impacts the bottom line– a mere 5% reduction in supply chain costs can lead to a doubling of net profits.  However, for perfect execution demand management, various activities such as demand capacity, demand chain, communication, modelling, demand shaping, sensing and prioritising. Let’s learn about the role and benefits of demand management activities in this article. What is Demand Management in Supply Chain Optimised supply chains lead to 15% lower supply chain costs, reduce inventory holdings by 50%, and lead to 3X faster cash-to-cash cycles. Demand management in SCM involves planning, controlling, and regulating various internal and external factors that influence demand. Effective demand management increases operational efficiency in SCM and maximises profitability.  But demand management techniques vary from business to business and type of product. It must be tailored for every organisation to optimise resource utilisation, reduce inventory costs, and improve customer satisfaction. Types of Activities in Demand Management Demand Capacity An important activity of demand management is capacity planning. Organisations must plan their capacity demands so they can meet customer needs with existing resources. They refer to everything from machinery, shop floor, staff, and knowledge to software and outsourced capacity resources. Capacity demands vary for different customers with the type and size of product they’re ordering. Before calculating demand capacity, understanding the maximum capacity of an organisation is crucial. They have to identify the slowest part of production, like a machine, to gauge the maximum output. Calculate it by determining the slowest part's hourly production rate and multiplying it by operational hours. The formula is as follows: Maximum Capacity: Hourly Production Rate × Operational Hours. Consider a manufacturing plant with a slow machine producing 25 items per hour, operating 10 hours a day. The maximum capacity is 250 products daily, limiting the overall daily production regardless of other process speeds. Demand Chain The demand chain model shifts focus from the traditional supply-based approach to meeting customer demands. Instead of monitoring and adjusting product/service supply, it monitors customer demands to keep up with their expectations and create satisfying products or services.  Market attractiveness reports are crucial for demand chain planning, impacting production and sales. Inadequate planning may lead to surplus inventory or sales losses. In service industries, improper planning can result in excess or insufficient staffing relative to demand surges. Demand Communication When companies prioritise communication with suppliers to keep pace with demand forecasts, it is demand communication. Active communication by sharing, analysing, and collecting data among the stakeholders of the supply chain is crucial to plan for changes beforehand.  By keeping suppliers informed about demand changes, organisations can ensure that the right inventory is available on time. Demand communication helps suppliers replenish and maintain their stocks efficiently and cost-effectively. Given the vastness of the supply chain, demand communication also ensures that problems are addressed before they arise and escalate. It prevents delays or unexpected stockouts.  Take the following steps: Implement a consistent communication schedule, whether through daily briefings or weekly email updates. Keep all team members informed about the latest operational developments. This will also create a platform to celebrate successes, address challenges, and develop strategies for the future.Promote a feedback-friendly environment to enhance supply chain efficiency by valuing team opinions and fostering open communication. Leverage technology for efficient communication by adopting systems such as supply chain management software, cloud-based documentation, Internet of Things, and video meetings and conferences. Demand Modelling At this step, organisations start modelling various internal and external factors that impact estimated future demands. While production capacity, human resources, machinery, shop floor, and capital constitute internal factors, evolving market needs, economic trends and even economic policies can be part of external factors. Demand modelling relies on every existing data point, internal and external. The goal is to minimise risks by promoting decision-making based on evidence, resulting in shorter waiting times and improved quality of care. With successful demand modelling, organisations can: Identify high-demand services and reasons for growing waiting lists.Model necessary capacity to match demand.Assess the gap between current and required service capacity.Calculate maximum waiting lists for each service.Identify inefficiencies or resource barriers and plan resource optimisation.Support informed decision-making for service changes. Demand Shaping Demand shaping involves influencing the market demand to meet existing supply needs. Organisations typically use the following techniques to shape the demand: Changes in Pricing: Altering the cost of a product or service can impact its demand. For overstocked goods, lowering prices is a good idea to quickly sell out. Similarly, when there are stockouts, increase the prices. Special Offers and Discounts: To increase demand, offer initial discounts and perks such as 1+1, promotional codes, etc., and withdraw them when supply is scarce. Promotional Activities and Marketing: Ads and marketing create or boost awareness for a product or service. Top brands like Puma nail their advertising when they launch new products. Leveraging the art of advertising makes creating demand easy. But, effective collaboration between planning and marketing teams is crucial for this. Product Innovation: Introducing new or enhanced products or services can stimulate demand.  Creating Scarcity: Limit product or service availability to instil a sense of scarcity. Offering it for a short time can spur demand, and restricting product availability for certain markets also works. Raise the sales incentives for sales reps or distributors, who will then work actively to create demand. Demand Sensing It's a mathematical method that enables businesses to monitor real-time demand for products/services. Additionally, it forecasts customer identity, identifies top-selling items, and assesses how products influence demand. It involves the following techniques: Use POS data analysis that examines real-time sales data from POS terminals. It identifies demand signals and adjusts inventory levels.Watch social media to track activity and sentiment. It uncover trends and shifts in consumer behaviour that might affect demand.Analyse weather data. Use forecasts and history. Predict how weather might impact demand.Economic indicators, like GDP growth and unemployment rates, also show demand patterns.Use Machine learning algorithms to find patterns, trends, and relationships. They can scrutinise large datasets. It helps with data-based demand sensing. Demand Prioritising After making a demand forecast, it is important to prioritise various organisational activities based on their role and urgency. This involves understanding customer needs and market trends, addressing risks, managing resources, and evaluating requests. The objective is to optimise productivity while minimising costs. Some of the aspects involved in demand prioritisation are: Customer Segmentation: Categorise customers based on certain factors, such as profitability, strategic importance, order volumes, or contractual obligations. It helps in assigning priorities.Establish Prioritisation Rules: Define the criteria for prioritising demand. These include customer tier and order size. Also, product margins, delivery dates, and penalty for non-fulfilment.Assign Weightage: Assign weightings based on business objectives and priorities. Use them to determine the importance of each criterion.Demand Scoring: Score each customer demand based on the criteria and weightings to create a ranked list of demands.Allocate Supply: First, allocate supplies to meet the highest-priority demands. Then, work down the ranked list until supplies are exhausted.Communicate Priorities: Clearly communicate the demand priorities and expected lead times to customers. This will set the right expectations and transparency.Monitor and adjust: Continuously watch demand patterns, supply limits, and shifts in customer priorities. Adjust the prioritisation process as needed to align with evolving business conditions.Collaborate with customers: Engage with key customers, especially for high-priority demands. Explore options like order splitting, postponement, or substitutions if needed Related read: What is Seasonal Demand Forecasting? Conclusion In conclusion, looking into demand management activities reveals their critical role. They optimise supply chains and boost business performance. It covers forecasting, demand sensing, data sharing, and analytics. Executing these activities not only ensures adaptability and responsiveness to ever-changing markets, it fosters sustained growth and operational excellence for thriving businesses. FAQs What is transport demand management?TDM, or travel demand management, involves using strategies and policies. These measures aim to improve the way the transportation system works, reducing travel demand or redistributing it across different spaces and times.What are the types of activity within demand management?There are seven types of activities in demand management: Demand capacity, demand chain, demand communication, demand modelling, demand Shaping, demand Sensing, and demand prioritising.What is the importance of activities in demand management?Managing supply chain activities is crucial for aligning supply with demand. It improves forecast accuracy and cuts costs. It will also optimise inventory levels and boost customer service. Plus, it enables strategic planning to gain a market edge.What are the crucial elements of demand planning?When initiating demand Planning within the organisation, crucial decisions need to be made about input data. It includes defining the time series data, determining its structure, establishing data collection methods, and specifying the timing and frequency of data updates.What is the demand cycle?The update frequency of the demand plan is known as the cycle. It plays a crucial role in shaping an organisation’s responsiveness to demand changes. For example, a one-month cycle means adjustments to the demand plan can occur only once a month.

March 06, 2024