When it comes to inventory management, there are various strategies businesses implement to optimize how they organize, track, and determine inventory levels for key supplies, materials, equipment, and assets. In this article, we’ll define anticipation inventory and help you decide whether anticipation inventory should be part of your inventory management strategy.
What is anticipation inventory?
Anticipation inventory is the inventory that a business keeps on hand in anticipation of demand at a later time and date. Practicing anticipation inventory is a proactive approach because it requires companies to “anticipate” future demand and then stock up ahead of time so the business is ready to satisfy that demand the moment it arises.
Anticipation inventory vs. safety stock
Anticipation inventory and safety stock are different. As noted, anticipation inventory refers to inventory kept on hand to meet future anticipated demand swiftly. This inventory is held to reduce the risk of shortages and stockouts that may occur when demand fluctuates and lead times are uncertain.
On the other hand, safety stock is standard practice in virtually all inventory management strategies. It accounts for regular demand, and consistent, reliable lead times and vendor performance. It’s a reactive practice designed to give businesses a little wiggle room on a regular basis rather than preparing for or capitalizing on an expected increase in demand.
Related: What is Hedging Inventory?
Should Anticipation Inventory Be Part of Your Inventory Management Strategy?
Unlike safety stock, not every business benefits from incorporating anticipation inventory into its inventory management strategy. Here are some key factors to consider when weighing the benefits of anticipation inventory:
1. Demand forecasting accuracy
For anticipation inventory strategies to pay off, businesses must perfect their demand forecasting. Now is the time to assess how accurately you’ve predicted demand fluctuations in the past and how confident you are you’ll be able to predict such fluctuations in the future.
The more predictable these “fluctuations” are for your industry, the more likely you’ll benefit from anticipation inventory. For example, businesses that stock seasonal items are often better suited for anticipation inventory strategies. In fact, anticipation inventory can be a major help in preparing your business for peak periods and avoiding the downfalls of stockouts.
2. Vendor lead times
As with many inventory control strategies, the reliability and efficiency of your vendors and suppliers deeply influence whether anticipation inventory is right for your business. Now is the time to evaluate the usual lead times from your suppliers. Remember, though, that anticipation inventory should not replace your safety stock.
It’s essential all of your suppliers can meet the regular and consistent demands of your business. When evaluating lead times for anticipation inventory, think outside of the safety stock box. Instead, try to gauge whether these suppliers will be able to provide you with inventory quickly should demand increase overnight.
If not, and you can confidently forecast an increase in demand, anticipation inventory could be a strong solution.
3. Cash flow and carrying costs
Inventory control is all about keeping the inventory your business needs on hand to swiftly satisfy customer demand without unnecessarily tying up cash in inventory you simply don’t need yet. The less cash flow your business has, the more difficult it is to justify anticipation inventory.
Try to balance the cost of carrying excess inventory with having it available at a moment’s notice. Because anticipation inventory will tie up your company’s capital, this could impede its ability to finance other aspects of the business, from marketing to operations to payroll.
4. Obsolescence and spoilage risk
Another critical element to consider when deciding whether anticipation inventory is right for your business is the obsolescence and spoilage risk of the supplies and materials you keep on hand. If your business stocks inventory that expires, loses value over time or is likely to fall out of style or become unsellable, anticipation inventory might not be a good investment.
After all, when investing in anticipation inventory, you’ll want to develop a contingency plan. Ask yourself: if we’re unable to use or sell this inventory, what will we do with it? Can we utilize it before it spoils or falls out of favor? Can we recoup our costs? Consider these answers carefully and make decisions about anticipation inventory accordingly.
For items that do not spoil, your suppliers or vendors may even be willing to purchase them back from you should they go unused. Talk to your preferred vendors about this arrangement and see what they say.
5. Your supply chain reliability
Finally, consider how reliable all the players in your supply chain network are. If you’re lucky enough to be a part of a supply chain that’s efficient, transparent, and operating at its best, the need for anticipation inventory is minimal. After all, your suppliers are doing a great job of getting you the inventory you need as soon as you get it—and of keeping you apprised of any hiccups that may occur later down the road.
That said, if your supply chain feels vulnerable and unreliable, anticipation inventory might be a good investment, especially if you have good reason to believe customer demand will change rapidly.
Do you keep in mind that anticipation inventory is not a Band-Aid: it should not be used to smooth over cracks in your supplier network that would be better addressed through a more transparent supply chain and more trustworthy vendors.
Related: Why Supply Chain Traceability Matters
Alternative alternatives to anticipation inventory
When discussing anticipation inventory, it’s also helpful to consider two other types of inventory management strategies that businesses sometimes utilize.
The first is just-in-time inventory, or JIT inventory. JIT focuses on reducing inventory levels kept on hand throughout production, purchasing and receiving those supplies “just in time” for them to be needed. Vendor-managed inventory, or VMI, is the partial or total outsourcing of inventory management to a supplier, which can reduce your business’s need to stock inventory in excess.
About Sortly
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