There's a saying that resonates across Africa: "Either you grow or you die." This mantra is well understood by businesses globally, which is why they strive to innovate and expand year after year. For them, the annual budget is more than a plan—it's a roadmap for growth.
Each year, after exhaustive debates, the board finalizes the budget, and it trickles down to the sales, finance, and operations teams. Inventory planners are then charged with a vital task: to ensure the right products are available at the right time and place. Yet, problems inevitably arise, sparking a series of difficult questions:
- Why aren't products available where and when they're needed?
- Why is there too much of what no one wants, and not enough of the new, sought-after items?
- Wasn't the budget supposed to dictate a clear demand plan and why did we not follow it?
The answers to these questions are rarely straightforward.
However just last week I was in a boardroom with a client and this 'Budget' subject came up. This conversation highlighted three struggles inventory planners encounter trying to stick to the budget:
- Granularity is Key: Broad, sweeping budgets fail to address the intricacies involved in inventory planning. The planners work at a granular level, managing individual items at specific sites. Once budgets are broken down to this detailed degree, what was a manageable regional budget becomes an unpredictable challenge at the store level, with the required distribution of stock to meet fluctuating demand turning into an unsolvable puzzle. The outcome? Either inflate your inventory or risk losing sales.
- The Risks with New Products: The launch of new products is a balancing act between anticipation and reality. During budgeting, old and new items are often accounted for together, assuming that as old items sell out, the sales for new replacement items will kick-in and surge. Yet, delays in launch dates, over-optimistic marketing projections, and customer disinterest in outdated stock are common. The result is an accumulation of old inventory and new products not living up to sales expectations.
- Revenue vs. Quantity: Budgets might aim for revenue targets, but inventory planners need to think in terms of stocking units. When discounts are applied, the volume of sales needed to hit financial goals increases, leading to hurried, unplanned orders requiring expensive expedites and frequent stock shortages.
Effective inventory management is a delicate balance of anticipation and reaction. Planners are tasked with making detailed predictions in a landscape that's constantly shifting beneath their feet. To keep up, businesses must foster a culture of agility and continuous learning, where the budget is a guide, not the gospel. They must allow the actual demand and not the budgeted forecasts to drive replenishment. Only then can they hope to match the rhythm of supply with the tempo of demand, giving them the best chance of achieving the budget.
I estimate that approximately 30% of excess inventory is the result of budgets not been meet. So be very careful of following the budget!
Think flow,
Kevin Boake
