How do you adjust inventory so that you never lose customers due to delays while minimizing excessive inventory that isn’t generating profit? Here is a simple view of how to forecast demand, following yesterday’s IMT on Logistics & Transportation.

Let’s say you have mastered the path toward becoming a lean manufacturer (it’s ongoing) and how to minimize waste through Six Sigma, etc. Let’s say you’ve figured out how to manage supply chains, providing detailed accurate data. And let’s further surmise that you’ve tried various methods for getting your product to market and you know which companies provide the best value while assuring that your customers get their products more quickly than through your competitors.

Another challenge remains: How do you adjust inventory so that you never lose customers due to delays while minimizing inventory so your company’s capital is not tied up and not generating profit?

In other words, how can you maximize turns? The answer isn’t easy, as predicting demand involves forecasting and predicting as well as knowing what’s happening in the market and which trends will continue on expected or anticipated trajectories.

Nearly all service sector industries have at some point felt challenged by lack of information on what customers expect.

If your product type has been on the market for a while, you can use historical data and extrapolate if there is any indication of growth. If you haven’t yet started keeping records, do so. “Compare demand and supply daily. This requires daily measurement,” noted Bob Carlson in an old but nonetheless relevant Managed Care editorial.

Look for seasonality. If there is evidence of seasonality over a number of years, that can be a guide to adjusting inventory throughout the year. If there is such evidence, let your inventory follow the demand highs and lows.

While keeping track of demand, also keep track of pricing. Demand can be raised or lowered frequently with pricing, volume discounts or similar incentives. Remember, continual price cutting leads to lack of funding for R&D. And continuous monitoring of competitor product pricing (through legal and ethical methods, of course) can help a company evaluate its value proposition to customers and potential customers.

Demand will also depend on how many people in the market know of your need for information about their needs. A more practical way of putting this is to some extent, you can maximize demand through marketing communications. If the product benefits are clear and superior, you have a good case for investing funds on making the market aware of unique positive features if any. It’s been proven that for every extra dollar invested in marketing communication for certain health care providers that revenues increase significantly. It’s worth recalling that in the business-to-business world, customers are looking more at value than at simple price. If your product gives more hours of service, some quantifiable improvement in your customer’s product, or requires less maintenance/labor; then you’re offering greater value and the market needs to know this to evaluate performance accurately and precisely.

Also, demand will be affected by distance to customer because it influences delivery. On the retail side, some businesses look at the distances potential consumer customers must drive as seen in a Web calculator created by the University of Wisconsin – Extension (UWEX). Understanding this factor could lead to a decision to store some inventory in warehouses near customers rather than at the source of manufacture. When this is done, the total transportation cost doesn’t change much, but the ability to get the product to the customer quickly helps improve the value index for the customer.

While both predicting demand and adjusting inventory levels play an important role in any business, they also affect governmental agencies.

For example, the U.S. Air Force (USAF) has initiated a program it refers to as Expeditionary Logistics for the 21st Century (eLog21). In striving to optimize inventory levels and cost without sacrificing support to the war-fighting commanders, USAF officials found themselves faced with a challenge: the shrinking number of USAF aircraft, which are much older on average than those flown at the time of the first Gulf War (See “Manufacturing War Machines”), have led to “decreasing Mission Capable (MC) rates and Aircraft Availability (AA) rates in the 1990s,” according to an Air Force News article entitled “Inventory Management Gears Up for Process Improvements” this week. “From 2000 to 2006, the MC rate improved 3 percent and the AA rate increased 3.4 percent.”

With eLog21′s installation, according to logistics transformation director Grover Dunn:

Orders can move from the flight line to the source of supply in minutes rather than days. By focusing on process redesign, improving performance, enhancing skills, streamlining IT systems and ensuring our logistics are managed as a single, global enterprise; eLog21 will ultimately change nearly every logistics process, activity and system in use by Airmen today.

AFNews notes that the system provides near real-time visibility. Such transparency permits pinpointing of bottlenecks. As it’s impossible to improve processes efficiently without knowing what to change, the visibility is crucial to reaching goals. “The overall goal of the eLog21 campaign is to realize a 20 percent improvement in equipment available to war-fighters, while also delivering a 10 percent reduction in cost of operations and support,” says Dunn. “These initiatives are expected to decrease the level of supply inventory the USAF is required to maintain without negatively impacting weapons systems availability or support to the war-fighting commander.”