The Dynamic Duo for CPG: Demand Forecasting and Inventory Optimization

Enter the Dynamic Duo

This is where our superheroes swoop in: Demand Forecasting and Inventory Optimization. But here’s the kicker — they’re not solo acts. Nope, these two work best when they’re tag-teaming your supply chain challenges.

Demand Forecasting: The Guide

Let’s bust a myth right off the bat — demand forecasting isn’t a crystal ball. In the real world, demand forecasting errors are unavoidable. Here’s the real deal for Mid-market CPG companies:

1. Erratic Retail Orders: Companies often face wildly unpredictable orders from retailers. One week it’s crickets, the next it’s a tsunami of demand. This erratic pattern makes perfect forecasting nearly impossible.

2. Forecasting Error is Inevitable: Due to the nature of retail orders, evolving consumer preferences, competition, long tail, new products, promotions, and market volatility, there will always be a degree of forecasting error. Yes, advanced AI/ML techniques (including probabilistic models and Neural Nets) have made significant progress, however NO AI model in the world can deliver zero forecast error. Accepting this is the first step to a more realistic approach.

3. A Starting Point, Not the Finish Line: Despite its imperfections, statistical demand forecasting provides a crucial starting point.

So, if demand forecasting isn’t perfect, why bother? Because it sets the stage for our next superhero…

Inventory Optimization: The Agile Responder

This is where inventory optimization truly shines. It’s all about having the right response to the inevitable forecasting errors and demand volatility. For companies, this means:

1. Dynamic Safety Stock: Calculating and adjusting safety stock levels based on demand variability and service level targets.

2. Flexible Reorder Points: Implementing dynamic reorder points that adapt to changing demand patterns and lead times.

3. Risk Mitigation: Balancing the risks of stockouts against the costs of excess inventory.

4. Rapid Response: Quickly adjusting inventory levels in response to unexpected demand spikes or drops.

Better Together: The Power of Integration

Now, here’s where the magic happens. When you combine demand forecasting with inventory optimization, you’re creating a system that’s both proactive and reactive:

1. Statistical forecast goes as input to Collaborative / Consensus Planning.

2. Planner reviews and enriches the forecast for high touch items or alert-based enrichment.

3. Consensus forecast goes into the inventory optimization model.

4. The optimization model calculates appropriate safety stock levels and reorder points, considering the inherent forecast uncertainty.

5. When those erratic retailer orders come in (because let’s face it, they will), your system is primed to respond quickly and efficiently.

🌟 Are you a CPG industry supply chain professional? Reach out to discover how TrueGradient can help you with demand and inventory planning.

Click for demo today or email us at info@truegradient.ai !