Role of Inventory Management and Forecasting in Matching Supply and Demand

Role of inventory management and forecasting in matching supply and demand
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Role of inventory management and forecasting in matching supply and demand
Inventory is one of the most capital-intensive investments that all business organizations make. As such, supply chain professionals usually employ inventory management systems in order to manage their inventory more effectively whilst satisfying customer demand, and in the end optimizing their inventory investment. Inventory management is understood as a system that is utilized in overseeing the flow of services and products in and out of a company. Inventory management, in essence, matches supply to demand through dynamically allocating inventory to where it is most needed (Segura 2011). Having high inventory levels adds to the expenditure and increases overall overhead costs. According to Chan and Prakash (2012), an effective way of managing inventory is to determine the company’s inventory demands. Effective management of inventory is at the center of supply chain management excellence. The management of several sorts of inventories, including raw materials, partner inventories, and finished goods actually sits at the junction of demand and supply. This paper discusses critically why inventory management and forecasting plays an integral role in matching demand and supply.
Inventory management and forecasting
Inventory management and forecasting plays a role in matching supply and demand since it is helpful in ensuring that the business organization actually has sufficient supply on hand that will satisfy demand. Most business organizations need to be exact in terms of ordering supplies to satisfy their customers’ demand. It is worth mentioning that overestimating the demand results in bloated or distended inventory as well as high costs. On the other hand, underestimating the demand implies that a lot of valued customers will not receive the merchandise they want. Through proper inventory management and forecasting, a business organization will ensure that it has just an adequate amount of supply to satisfy the demand (Jaber 2009).
Forecasting
Forecasting basically provides an estimate of the future demands; the goal being to minimize forecast error. When forecasting, it is important to take in to consideration the factors which influence demand and whether they would continue to influence demand. Improved forecasts, as Mercado (2010) pointed out, benefit every trading partner in the supply chain. In general, better forecasts bring about lower inventories, reduced stock-outs, reduced costs, smoother production plans, as well as improved customer service. Suppliers need to accurately forecast demand so that they may be able to produce and deliver the right amounts at the right cost and at the right time (Mercado 2010). Effective inventory management and forecasting enables suppliers to match supply and demand to attain optimal levels of quality, cost, and customer service that allows them to compete with other supply chains.
The main forecasting techniques are qualitative forecasting and quantitative forecasting. Qualitative forecasting: this technique is based on intuition and opinion. It is commonly ut...