A common way to categorise inventory is by its function. Anticipation inventory is one of the four basic functions of inventory. It is excess levels of product held in anticipation of specific or uncertain demand. The key difference of anticipation inventory from regular inventory is that there is a reason that can be pointed to for carrying more inventory stock than normally required. However, if anticipation inventory is not carefully managed, it may be costing your business more than you realise.
Reasons for anticipation inventory
Businesses might purchase anticipation inventory because an expected increase in demand or concerns that the price of the inventory stock purchased might increase or a shortage might occur. Businesses may also build up anticipation inventory ahead of a holiday closure such as Easter or if a strike is anticipated to occur. Common examples of anticipation inventory are where retailers build up for high-demand shopping seasons, such as Christmas or summer.
Anticipation inventory in manufacturing
Building up anticipation inventory is a way for manufacturers to maintain consistent operations when the demand for their products is low. This approach avoids making workers redundant during periods of low demand, and the costs of overtime or hiring additional workers when demand is high. This process enables that the business maintains a consistent output and a stable workforce.
Benefits of anticipation inventory
Anticipation inventory fills the gap when it is difficult for businesses to effectively project how much supply to have in stores on a given day. Given the trade-off between meeting demand and risking waste, and potentially not having enough product, customer-focused businesses usually take the former approach. Having to mark down or eventually get rid of excess inventory stock seems to be a more common approach than risking the loss of customers because your business cannot meet their needs. Not having enough product also can lead to negative word of mouth and lost sales.
A word of caution
Carrying inventory can be costly to a business, so a business should always balance inventory stock with other financial considerations. In addition, to the purchase price of the inventory stock, there are other associated costs such as storage costs. As money invested in inventory stock ties up cash flow that could be used elsewhere in a business, striking a balance is imperative.
In an ideal situation, businesses prefer to have stable, strong and growing levels of demand that are predictable. However, consumers demand fluctuates for many reasons. The biggest concern with anticipation inventory is that if you exceed demand, then inevitably your business will need to mark down products or throw out expired, perished or obsolete items. Inventory stock is expensive to hold and manage – the longer inventory stock goes unsold, the more expensive it is to hold and the more likely customer demand will fade. Using effective inventory management solutions will help fill the void of carrying too much anticipation inventory when it is difficult for businesses to project demand. Inventory management solutions will increase forecasting accuracy, based on information from data in real-time that will enable business decision makers to plan more effectively.
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.