Companies that produce or sell goods need to keep inventory stock on hand to meet sales demand. Occasionally they will purposely hold greater quantities of stock in anticipation of events that will or are likely to occur. This excess level of on-hand inventory is called anticipation inventory and it is predominantly held to manage the uncertainty of consumer demand.
Some of the reasons for a company to maintain levels of anticipation inventory include fluctuations in purchasing activity, sales forecast uncertainty and seasonal demand variations. At other times a business may purchase anticipation inventory when they have industrial relations concerns, worries that a shortage might occur or that the cost of purchasing inventory stock is going to increase due to predicted price hikes.
It is common for a business to stock up on anticipation inventory ahead of holiday closures. Retailers will certainly purchase anticipation inventory for high-demand shopping seasons such as Christmas and the peak summer period.
The purpose of engaging in anticipation inventory is to enable a business to better meet varying consumer demand. By stocking levels of anticipation inventory, managers are making a considered estimate of how they expect their customer needs will change.
Anticipation inventory fills the gap when a company has difficulty effectively projecting how much stock to have in stores on a given day.
To establish the right levels of anticipation inventory, managers need to understand what is happening with their inventory stock. By using historic sales data and current consumer hype as a guide, they will attempt to predict future market trends and make decisions based on these forecasts. Through this process the managers develop a better understanding of how products flow into and out of the business, improving inventory analysis and providing opportunities for optimal inventory control.
In manufacturing, building up levels of anticipation inventory is a way for manufacturers to maintain consistent operations when the demand for their products is low. It creates a ‘smoothing’ process that enables the business to maintain a consistent output and a stable workforce.
The biggest concern with anticipation inventory is getting the forecast right. If you over-forecast demand, then there is the chance that customers are less likely to want it the product later. Inventory is expensive to hold and the longer it sits in your warehouse or storeroom, the more expensive it becomes as inventory costs start adding up.
Stocktaking errors can also be costly. Where a simple miscount in cycle inventory may lead to an error in the current stock numbers it will generally not have a far-reaching impact. With anticipation inventory, however, miscounts could create the deception that a product sold well when it really didn’t. This mistake could lead to over-ordering the product in the future to meet a non-existent demand.
Managing inventory stock
The costs of holding inventory can be high, therefore if you are working with anticipation inventory, it is important to manage it in a way that increases the advantages and lowers the risk.
Even using past sales data, there is no guarantee that variations will not occur from one year to the next. An inventory management system with enough flexibility to react quickly to changes big and small will help reduce the impact of variant demand.
The money used to purchase anticipation inventory can’t be used for other purposes and can’t be invested elsewhere. It is crucial to always balance anticipation inventory with other financial considerations.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.