A Model for Estimating Inventory

AModelforEstimatingInventory
Contents:
OrdersandConsumption 2
Step1of5:Orders
Step2of5:Consumption
Assumption#1:Consumption=Orders
Consumption 3
Inventory Change
InventoryChange 4
Step3of5:InventoryChange
InventoryChangeformula
InventoryChange(continued) 5
Step4of5:BeginningInventory
StartingBalance 6
TotalBalance 7
Assumption#2:TheNadir
GAAP&Totals 8
Step 5 of 5: The Rest of the Channel
Step5of5:TheRestoftheChannel
MethodologyCheck:Consumption 9
Appendix:RandomAccounts 10

PreparedbyScottM.Beber,ExcelModels.com
scott@ExcelModels.com
3102452314
EstimatingInventory
OrdersandConsumption

Note:Allunitsare'BoxesofProductsoldintheUnitedStates'
Note:Allunitsare BoxesofProductsoldintheUnitedStates
Step1of5 :Orders
TrackingOrdersmonthlyisfartoobroadtounderstandbehavior.12datapoints/yearisinsufficient
Moregranularityisneeded.
WeeklyOrdervolumeisinsightful,butitcanbevolatile,especiallyintheshortterm:

Account 1.2.09 1.9.09 1.16.09 1.23.09 1.30.09 2.6.09 2.13.09 2.20.09 2.27.09 3.6.09 3.13.09 3.20.09 3.27.09 4.3.09

MedicalCenterA 0 3 2 0 2 0 2 0 4 0 2 1 1 1

But over the course of a 287week (70month) period a pattern of behavior emerges
Butoverthecourseofa287week(70month)period,apatternofbehavioremerges

Step2of5: Consumption
AccountsmayBuyinorrunlowoninventory,butonaverage,theyorderbasedontheirforeseeableneeds
16 Orders:MedicalCenterA
14
14
12
10
8 Consumption
6
4
2
0
1.2.09
3.2.09
5.2.09
7.2.09

9.2.09
11.2.09
1.2.10
3.2.10

5.2.10
7.2.10

9.2.10
11.2.10
1.2.11
3.2.11
5.2.11
7.2.11

9.2.11
11.2.11
1.2.12
3.2.12
5.2.12
7.2.12

9.2.12
11.2.12
1.2.13
3.2.13
5.2.13
7.2.13

9.2.13

11.2.13
1.2.14
3.2.14
5.2.14
Assumption #1: Consumption = Average Order Size
WeestimateWeeklyConsumptionastheAverageOrderSizeoveratrailing52weekperiod*

*Exceptforthefirst52weeks,whichuseafixedaverageofOrdersoverthesameperiod
Exceptforthefirst52weeks,whichuseafixedaverageofOrdersoverthesameperiod

2
EstimatingInventory
Consumption

BypeggingConsumptiontoamovingaverage,wefactoringrowth

2,500 TotalConsumption
2,000

1,500

1,000

500

0
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14
Consumption FixedAverage

WecanconfirmtheaccuracyofthisAssumptionbyplottingthetrendlineofOrders(inblue)againstConsumption

Consumption&OrderGrowth
i & d h
3,000

2,500

2,000

1,500

1,000

500

0
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14

3
EstimatingInventory
InventoryChange

Wecansumall2,072Accounts togetaTotalOrdercount
Wecansumall2,072Accounts*togetaTotalOrdercount

4,500 TotalOrders
,
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14

Orders Consumption

Theseareorders ;Buthowmuchinventoryalreadyexists inthechannel?

Step3of5: InventoryChange
WeknowCONSUMPTION,andweknowREPLENISHMENT
We know CONSUMPTION, and we know REPLENISHMENT
Fromthis,wecandiscernMOVEMENT

InventoryChange=Onhand+ReplenishmentConsumption

*NumberofAccountshavingOrderactivityinthe287weekperiodfrom1/2/096/27/14
Note:Returnedboxesarecountedasnegativeordersforallcalculations

4
EstimatingInventory
InventoryChange

ApplyingthisformulatoasingleAccount,forexample:
15
InventoryChange:MedicalCenterA
10
5
0
(5)
(10)
(15)
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14

So we just add up all 2 072 Accounts and we're

Sowejustaddupall2,072Accounts,andwe redone?
done?

InventoryChange:Total
12,000
10,000
8,000
6,000
4,000
2,000
0
(2,000)
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14

Notquite

Step4of5: BeginningInventory
Thereare2problemswiththisgraph:
1.It'sphysicallyimpossibleforInventorytorunNEGATIVE,whichitdoes3differenttimes
2.Wedon tknowhowmuchInventorywestarted with
2.Wedon'tknowhowmuchInventorywestarted

5
EstimatingInventory
StartingBalance

Inourexample,wedon tknowthestartingbalance:
Inourexample,wedon'tknowthestartingbalance:

15 InventoryChange:MedicalCenterA

10
5
0
(5)
(10)
(15)
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14

Butwedoknowthelowestleveltheycouldpossibly havestartedwith.
On12/9/11,theywereattheirlowest,whichbydefinitioncannotbelessthanzero.

Weneedtoshiftthecurve,soitstartshighenough thatits"Nadir"doesn'tdipbelowzero

InventoryLevel:MedicalCenterA
25
20
20 Nadir
15
10
5
0
0
(5)
(10)
(15)
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14

6
EstimatingInventory
TotalBalance

WehavesolvedthetwoproblemswithBeginningInventory:
1.Inventoryneverfallsbelowzero,and
2.WeknowthelowestpossiblestartingInventory(anylower,andtheNadirwouldbenegative)

Assumption #2: At some point in 287 weeks, each Account hits its absolute lowest level:
A zero balance plus some minimum amount always kept onhand*

FromourestimateoftheMINIMUM startingbalance,andthisestimateoftheMAXIMUM nadirbalance

WeknowexactlywheretoshifttheInventorycurve.
We know the actual level of inventory for ANY point in time
WeknowtheactuallevelofinventoryforANYpointintime

Theregression(trendline,ingreen)ofInventorygrowsatrateofapproximately9.2%,compoundedannually

30,000 InventoryChange:Total(adjusted)
25,000

20,000

15,000

10,000

5,000

0
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14
NotethattheplottingconfirmsourexpectationofBuyinsthatfollowyearenddiscounts(January2nd,201114)

*Currentassumptionis2weeks'supply,basedonaninformalsurveyofAccountmanagers
Currentassumptionis2weeks supply,basedonaninformalsurveyofAccountmanagers

7
EstimatingInventory
GAAPandTotals

Step5of5: TherestoftheChannel
GAAPdatatellsushowmuchInventorywassoldtowholesalers,beforereachingconsumers

6,000
GAAPInventory
5,000
4,000
3,000
2,000
1,000
0
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14

Layeringinallelements

35,000 TotalOutstandingProductVolume
(All U.S.boxesexceptthoseheldbyWholesalers)
30 000
30,000

25,000

20,000

15,000

10,000

5,000

0
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14

Orders Consumption Inventory Inventory+GAAP

8
EstimatingInventory
MethodologyCheck

287 weekanalysiswasspot checkedagainst7significantAccounts :

287weekanalysiswasspotcheckedagainst7significantAccounts*:

ConsumptionCheck Observed F'cast**

Annual LastOrder Curr Rateof Rateof
Account Orders Date Amt. Bal Consump Consump Delta Delta%
MedicalCenterB 635 11/29/13 66 16 1.4 1.3 0.1 6.1%
MedicalCenterC 263 11/29/13 34 10 0.7 0.7 0.0 5.5%
MedicalCenterD 1,179 4/25/14 44 6 2.5 2.6 0.1 4.8%
MedicalCenterE 892 5/23/14 50 36 3.4 3.7 0.2 6.8%
Medical Center F
MedicalCenterF 923 9/27/13 200 77 48
4.8 48
4.8 00
0.0 0 3%
0.3%
MedicalCenterG 1,259 4/4/14 100 55 4.0 4.1 0.1 3.6%
MedicalCenterH 2,824 3/21/14 204 58 12.8 12.1 0.7 5.4%
ALL 7,975 29.5 29.2 0.3 1.0%

Only0.3boxesseparatestheObservedrateofweeklyConsumptionfromourAssumptions

*ThesesevenAccountsrepresent1.9%ofallOrderVolumeforthelast287weeks,sotheyaredisproportionatelylarge
FinalcalculationofConsumptionmadeon6/27/14
**FinalcalculationofConsumptionmadeon6/27/14

9
Appendix(1of2)
AdjustedBalancesfor8randomlyselectedAccounts
100
MedicalCenterI
80
60
40
20
0
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14

80
MedicalCenterJ
60

40

20

0
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14
3
3
MedicalCenterK
2
2
1
1
1
0
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14
10
MedicalCenterL
8
6
6
4
2
0
1.2.09
1 2 09 5.2.09
5 2 09 9.2.09
9 2 09 1.2.10
1 2 10 5.2.10
5 2 10 9.2.10
9 2 10 1.2.11
1 2 11 5.2.11
5 2 11 9.2.11
9 2 11 1.2.12
1 2 12 5.2.12
5 2 12 9.2.12
9 2 12 1.2.13
1 2 13 5.2.13
5 2 13 9.2.13
9 2 13 1.2.14
1 2 14 5.2.14
5 2 14

10
Appendix(2of2)
AdjustedBalancesfor8randomlyselectedAccounts
60
50
MedicalCenterM
40
30
20
10
0
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14

6
5
MedicalCenterN
4
3
3
2
1
0
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14
25
Medical Center O
MedicalCenterO
20
15
10
5
5
0
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14
2
MedicalCenterP
2

0
1.2.09 5.2.09 9.2.09 1.2.10 5.2.10 9.2.10 1.2.11 5.2.11 9.2.11 1.2.12 5.2.12 9.2.12 1.2.13 5.2.13 9.2.13 1.2.14 5.2.14
11