Interview: Discussing Seasonality with an Inventory Management Expert
Demand forecasting can be one of the most difficult areas of your supply chain to master. It’s the same every year; demand for an item will be steady but then will suddenly deviate and skyrocket or plummet. Rest assured, you’re not alone in your struggles – and there’s a solution to get your forecasting under control.
One commonly overlooked demand trend is seasonality. This means that some items are particularly high or low in demand at certain times of the year. For example, classic gift items will see a sharp demand increase before Christmas, and it will slow down after Christmas.
Businesses are generally aware of these changes in demand, but managing them poses a greater challenge for many, and it can quickly affect the entire supply chain if seasonality is not taken into account early in the ordering cycle.
To give you better insight into managing seasonality, we spoke with Peter Drakeley, the Head of Global Customer Success at EazyStock and one of our most experienced supply chain specialists.
Hi Peter, thank you for joining us. Could you please introduce you shortly to our audience and give us your background?
Thank you for having me! I’m Peter Drakeley and I am the Head of Global Customer Success here at EazyStock, it’s my job to look after the team of people that implement EazyStock to ensure that our customers get maximum value from working with the EazyStock solution. I’ve been active in supply chain optimization for almost a decade and have worked with some of the world’s biggest companies, including companies like JCB, Mazda, Safran Group, as well as many SME’s.
OK, thank you very much. So the topic today is seasonality in demand and how to deal with it – is this generally something companies struggle with? For example, especially now before the holidays?
Seasonality can be a big issue for companies in almost all industries, whether it’s seasonal behavior that influences consumer buying behavior, for example Christmas or Black Friday when people tend to buy more, or whether it’s more directly associated with the weather such as increased sales of anti-freeze during winter or garden equipment during spring. In extreme cases I have seen cases where companies make more than 50% of the their total annual sales during a short seasonal burst.
Having a significant proportion of your sales coming from intermittent seasonal peaks obviously means that during those peaks, companies need the right stock to ensure they can meet the increased demand and avoid any lost sales. On the flip side you don’t want to carry so much inventory you end up with an excessive amount of stock when the peak period is over, so yes it’s a tough challenge and a delicate balancing act.
Wow, sounds like an important thing to have under control! What are the different aspects of seasonality you need to address when your company wants to be perfectly prepared?
The main challenges around seasonality are understanding when the peaks will happen, the relative size of those peaks compared to the normal demand, and understanding the level of uncertainty associated with those forecasted peaks. Understanding these 3 elements allows you to proactively increase your inventory in time for the seasonal peaks to the level required by the seasonal demand and with a corresponding increase (or otherwise) in safety stock to ensure you account for any associated uncertainty in the forecast.
In the non-peak periods when sales for seasonal products are typically lower it’s important that you can forecast the size of the sales outside of the seasonal peaks and plan accordingly.
What are the typical challenges companies have with addressing these aspects?
The most important and probably the hardest thing to do if you don’t have the right tools is make an accurate assessment of the 3 factors I described earlier. In order to boost your stocks to account for seasonal peaks, you need to give your suppliers extra visibility into the demand change to give them time to satisfy your increased order volumes. Often one standard lead time of notice for a big increase in normal order volume is not sufficient.
This is where things like being able to do a projection of your orders for a particular time span – usually a year – that factors in trends and seasonal behavior can be a big advantage. You can show a supplier your plan for the full year upfront, and then you can collaboratively identify any challenges either for you or your supplier and create a joint plan to get you the stock you need for when you need it.
Do you have a specific example for a situation a company had in this regard?
Sure! We work with businesses across all types of industries that face various seasonal challenges. One that EazyStock supports is the maintenance part of a well-known energy company. They take out contracts with their customers to guarantee that they will maintain their home appliances and heating equipment.
Every winter as people turn their heating back on they have a big demand for parts as their customers find out things don’t work as they should after an extended period of being turned off. The guarantees they have with their customers don’t allow any room for failures to repair or long delays in repair lead time. They also service many different types of central heating system meaning they have a large range of parts hold.
How could they keep their seasonality in check then, and what can be generally done about that?
They work exactly as I’ve described above. Each part has its own associated forecast and most parts are grouped together into a seasonal group, which calculates aggregated seasonal factors for all parts in that group and adjusts the forecast accordingly. Any parts not in a seasonal group have their own individual seasonal profile calculated and the forecast adjusted accordingly. Parts that do not demonstrate strong enough seasonal correlation are automatically excluded from seasonal forecasting.
Based on the seasonally adjusted forecasts we calculate an order projection (known as an order schedule in EazyStock) which they send to their suppliers to allow their suppliers to be prepared for the peaks and troughs in demand throughout the year.
This process is almost fully automated and anything that displays unusual behavior is highlighted to the user as an “alert” so they can take proactive action based on the data in EazyStock.
Final question: What is your prediction for the future? Will seasonality continue to be a challenge?
Definitely on the consumer side there will always be peak seasons and companies will always compete for sales. Particularly as eCommerce becomes more dominant as a marketplace, consumers will have even more choice with thousands of alternative suppliers just a few clicks away. Long delivery lead times due to stock outs will no longer be tolerated by consumers and so getting the right stock for your peak sales periods will be really important. Companies will also compete upstream to get stock from suppliers who only have a finite capacity to produce; undoubtedly that stock will go to the companies that are most proactive and give the suppliers the earliest notification.
On the B2B/utilities side as more devices are IoT enabled, theoretically it should be easier to create forecasts for parts based on likelihood of breaking down which will ultimately allow more accuracy in normal and seasonal forecasting. In reality there are some big challenges with this, not the least of which that access to this type of data is generally restricted to a small group of businesses approved by the manufacturer. Again, this makes it harder for the companies without access to this type of data to compete unless they can promise on-time delivery at a reasonable price – meaning they must take advantage of the lowest cost shipment methods their suppliers offer and have the stocks on hand in advance rather than rushing the stock in on customer demand.
In both cases, the key to success is getting your seasonal forecasts right and getting visibility of seasonal requirements to your suppliers as early as possible!
Thank you so much for these insights, Peter. To our audience: stay tuned for our next interviews with practical advice in SCM and logistics! Available here on our EazyStock blog. For more tips on how you can bring the latest to your supply chain management, take a look at our white paper on the top mobile apps for your supply chain!