Inventory Management Review: What to do about seasonality

June 30, 2005

What to do about seasonality

Without a fairly accurate sales forecast, managing inventory is essentially impossible. There is no way to determine optimal inventory levels and a corresponding production schedule without a projection of sales. Deciding on quantity of shipments received from suppliers is also out of the questions without a forecast. Once the forecast lands on your desk, you can begin to do your work. The first thing you should notice regarding the sales forecast is whether or not the product is seasonal or not. Assuming it is seasonal, there are several issues to consider regarding its production schedule. Ultimately, you need to decide whether or not you want to produce the product at a constant level throughout the year (thus building up inventories and selling them off during the busy season) or whether or not you want to produce products at a level that chases demand (producing the items right before you can sell them).

The first issue to look at is the holding cost of your product. If holding costs are very low relative to the revenue received per unit, it may be worthwhile to produce at a constant level. Even if you only sell the item during the fall, production in winter that is held as inventory during spring summer may be worthwhile if holding costs are low enough. Chances are, if your product is that seasonal, it is not worthwhile to produce at a constant level.

Another issue to look at is how chasing demand may affect your production schedule. If you decide to produce only during four months of the year in order to accommodate the four months worth of seasonal demand that you have, you should consider how intensive those four months will be. If your company produces a plethora of other products, then this may be a simple reallocation of resources. Ideally you would have another product that just so happens to be sold during the remaining seasons. A good example of this is in the lawn mower industry. Unsure with what to do with themselves during the winter season, they began to produce snow blowers, which is a perfect fit as it is a similar design with an opposite seasonality…personally, I feel they should have just sold to the southern hemisphere, but then again, I’m not too sure about how many lawns there are that needing mowing in Paraguay. If however this is the only product your company makes, then there should be some serious considerations regarding the idle time of company resources. Perhaps outsourcing will become an appealing choice once you realize that without outsourcing, you will have 8 months of idle capacity.

Another important factor in determining the choice of production schedules is how your suppliers will respond. Perhaps they will prefer that you produce all at once so you can have large quantities sent to you which may result in quantity discounts. However, it is also possible that your supplier would prefer to produce at a constant level.

These are just some of the factors that will help you determine what do when facing the management of a seasonal product.

--
Did you enjoy this post?

June 30, 2005 in Inventory Basics | Permalink

Comments

How accurate are these forecasts? How far into the future are these forecasts accurate? How much work goes into putting them together?

Let's look at the opposite end of the spectrum. In what situations would it be possible to manage without a detailed forecast? What would the distribution system need to look like? What operational policies would need to be in plac?

The goal, of course is to ensure the right products are in the right place at the right time.

Posted by: Jack Vinson | Sep 7, 2005 6:52:54 AM