One of the most simple – but important – concepts in the business world is supply and demand. Most companies keep inventory in relation to their customers’ demands. More modern and successful companies keep anticipation inventory so that they can accommodate changes in customer demand in the future. In this article, we’ll cover everything you need to know to decide if anticipation inventory is right for your business.
Anticipation Inventory Explained
Simply put, anticipation inventory is the stock that a company keeps in order to accommodate increased demand in the future. An obvious example is a drink retailer stocking more cold drinks in hot summer months.
This strategy can ultimately help businesses to weather expected spikes in demand.
Companies who use this inventory strategy take advantage of historical data by understanding seasonality, holidays, current events, common trends, and other factors to determine how much demand will increase and when. Also known as smoothing inventory, this strategy ensures that your customers are satisfied when there is a surge in demand.
Anticipation Inventory vs Safety Stock
You might have heard of safety stock or buffer inventory, where companies keep the extra products on hand in case they run into delays with shippers or other problems. Safety stock is held in warehousing and is particularly helpful when facing uncertainty in supply. Anticipation inventory is another speculative strategy, but it’s based on things that you expect to happen (rather than unexpected changes).
The difference is that safety stock is held for unexpected events, and anticipation inventory – as the name entails – is held because you expect a run on your product at certain times.
Why Is Anticipation Inventory Necessary?
Research shows that running out of product (out-of-stocks) causes multiple problems that lead to margin erosion.
Not having a product in stock when people want to buy it affects your sales volume and customer loyalty. In many ways, not having a product available costs you more than just that one sale. Anticipation inventory hedges against all of these issues.
Additionally, companies that purchase extra supplies as anticipation inventory can guard against price hikes or material shortages in the future. This helps manufacturers to keep production at a steady pace.
Uses of Anticipation Inventory
There are multiple ways that business leaders use anticipation inventory. The most common reason is to prepare for an expected increase in demand (like retailers adding more paper and pencil supplies before the back-to-school rush). Smart managers also use this strategy to protect against unexpected cost increases or eventual shortages of some materials.
For example, if a t-shirt retailer knows prices rise every winter, he may buy more inventory in the summer to hedge against increased costs later on. This can keep overall costs lower and produce consistent and streamlined.
Pros & Cons of Anticipation Inventory
There are benefits and challenges associated with any inventory strategy.
Producing and holding some level of anticipation inventory is helpful in many ways, but comes with some costs. Every business should carefully consider this strategy, and talk it over with their 3PL or supply chain partner.
Pros
Some of the things that inventory management professionals like about anticipation inventory are:
- Better meets expectations: Using this management strategy can help better expected increases in demand; as well as help minimize stockouts, lost sales and dissatisfied customers.
- Increases Product Demand: Businesses who focus on building inventory before an expected increase in demand can keep staff busy during slow times. This can help to avoid overtime during busy seasons or having to hire temporary help.
- Price Fluctuations Decreases: Raw materials or components are less subject to price fluctuations. Companies can simply purchase more stock when prices are low.
Cons
Though anticipation inventory can assist with many areas, you should understand that:
- Difficult to predict. It can be difficult to predict how much demand might change, resulting in too much stock (which comes with its own problems).
- Can cost more. Holding inventory often costs money in carrying costs. Remember that you will be paying for the inventory itself, as well as shelf space and opportunity costs.
Has some risks. This strategy can come with some level of risk. If you miscalculate the demand or don’t end up selling as much as you expected, you may need to sell at a loss or watch the inventory become obsolete.
Is Anticipation Inventory Right for Me?
Businesses that sell products tend to leverage several different forms of inventory.
Anticipation inventory is one type that is predictive and can help companies to meet potential increases in demand – but this strategy is not without risk. Improperly forecasting demand can lead to additional inventory sitting on your shelves, which is not a good thing. To know what is right for your company, you may want to talk over various inventory tactics with a supply chain expert and research more using our resource center.
Printbindship offers comprehensive fulfillment and 3PL services, and our staff is happy to walk through strategies that can help to optimize your entire supply chain. Just contact us for a free consultation to get the latest insights tailored to your unique company!