While most events that throw businesses for a loop can’t be predicted, some can. Many companies forecast with high confidence how sales of given products will fluctuate over the course of a year. For instance, sales of lawn care products tend to increase in the spring.
Likewise, businesses that are paying attention can often anticipate when the price of a particular material is headed up. A busy hurricane season predicted in the Gulf? It may be wise to stockpile petroleum.
Companies like to prepare for just these types of events. Of course, they need to make sure that the numbers make sense.
What Is Anticipation Inventory?Anticipation inventory or speculation inventory refers to extra finished products or raw materials a business purchases to meet an anticipated jump in demand. Think of a retailer increasing its stock of paper and crayons in late summer to prepare for back-to-school sales, or a candymaker buying extra chocolate before Valentine's Day. Businesses also use anticipation inventory to hedge against expected bumps in prices or shortages of raw materials or components. If it's widely expected that paper pulp costs will increase, a business that makes notebooks might boost its purchases of paper before the expected jump, locking in the lower price.
Anticipation Inventory vs Safety Stock
Anticipation inventory and safety stock are both inventory management strategies that help businesses handle fluctuations in supply and demand. But there are key differences. A business typically holds anticipation inventory to meet a predicted increase in demand. In contrast, the purpose of safety stock is to hedge against unforeseen delays related to suppliers that might mean a shortage of key materials, potentially forcing a delay in production schedules.
- Most businesses that manufacture products hold multiple types of inventory. One is anticipation inventory to meet expected increases in demand, such as seasonal upticks.
- Anticipation inventory also hedge against expected increases in the cost of supplies. A business may increase its purchasing quantity and lock in the current, lower price.
- Companies must calculate the costs of storing inventory against the risk of lost sales.
- Holding too much anticipation inventory carries another risk: obsolescence. If the expected jump in demand doesn’t materialize, the inventory might become unsellable.
- ERP systems can help forecast demand and more accurately determine how much anticipation inventory to carry.
Anticipation Inventory Explained
Companies purchase and hold anticipation inventory to prepare for an expected future event, such as an expected seasonal jump in sales or a forecast increase in the cost of supplies or shortage of a needed raw material.
To save money or to ensure access to needed supplies, the company purchases materials before the expected increase or while the items are still widely available.
Determining how much inventory of any type to maintain requires a solid inventory control system that weighs the costs of purchasing and holding inventory against the risk of lost sales, customer dissatisfaction or production delays if inventory levels are too low.
Why Is Anticipation Inventory Necessary?
Anticipation inventory is needed to help companies reduce their risk of stockouts, lost sales and dissatisfied customers. It also hedges against increases in the cost of supplies or shortages of key raw materials.
Companies that purchase more supplies than they immediately need to guard against a price hike or a shortage in materials may benefit in a few ways. For example, holding anticipation inventory helps manufacturers keep their facilities operating at a steady capacity. By avoiding slow periods and then boosting production, they incur less overtime.
Uses of Anticipation Inventory
Anticipation inventory can be used in several ways. One is to prepare for an expected increase in demand. An example is a retailer stocking up on green t-shirts before St. Patrick’s Day. Another use of anticipatory inventory is to protect against expected increases in the prices of supplies or potential shortages in some materials. In the above example, say the manufacturer of the t-shirts expects cotton prices to rise, or for there to be an interruption in supply. By purchasing more fabric before the price increases, it can keep its costs lower.
Advantages of Anticipation Inventory
Producing and holding some level of anticipation inventory offers businesses several benefits:
- Anticipation inventory helps businesses meet expected increases in demand, minimizing stockouts, lost sales and dissatisfied customers.
- Businesses that build inventory before an anticipated increase in demand can keep workers busy during slow times. They also may be less likely to incur overtime or have to add to staff when demand peaks.
- When a raw material or component is subject to price fluctuations, companies may purchase anticipation inventory when costs are low.
Disadvantages of Anticipation Inventory
While producing and holding anticipation inventory can help businesses manage fluctuations in demand, this approach isn’t without cost.
- It’s often difficult to predict how much demand might change, and errors can be expensive. If the business purchases more anticipation inventory than it ultimately needs, it may wind up selling the inventory at a loss.
- Holding inventory costs money in carrying costs. A company pays for the inventory itself, as well as space to house it, equipment to move it and workers and software to monitor it. Money tied up in inventory can't be used for other projects.
- Another risk is obsolescence. If it’s not sold in a timely manner, the inventory may become obsolete and unsellable, at least at full price.
- Purchasing too much of certain types of anticipation inventory presents risk. Say a retailer expects demand for roses to rise by 20% on Valentine’s Day, but sales increase by only 10%. Typically, the flowers that don't sell will need to be sold at a significant discount before they become unsellable. This risk is less for items that have more stable demand, such as chocolates, or that don’t spoil.
In addition, inventory that doesn’t sell as well as expected — say, because the expected increase in demand doesn’t materialize — often packs a double whammy. Not only may the business need to mark it down to sell it, cutting into revenue, but money tied up in unneeded inventory can’t be used for other initiatives.
Monitor Anticipation Inventory With Software
Software can help businesses modernize their inventory management practices and provide an accurate accounting of the locations of materials, components and finished goods across the supply chain network. Inventory management software also minimizes time spent manually accounting for inventory and reduces human errors. Because inventory software can provide visibility to all of a company’s inventory, it can limit the need to order extra “just in case” inventory.
Software also can help companies determine how demand might change, and thus, the optimal level of anticipation inventory to maintain.
Anticipation inventory helps businesses respond to anticipated spikes in demand or jumps in the costs of supplies. But too much of a good thing can end up costing you, so follow these best practices to achieve balance.
Anticipation Inventory FAQs
What are the types of inventory?
Product businesses may carry different types of inventory. Among the primary types are:
- Raw materials: These are the materials a business uses to manufacture products.
- Work in progress: WIP inventory refers to items in production and includes raw materials or components and packing materials.
- Finished goods: These are completed items that are ready to be sold.
What is speculative inventory?
Speculative inventory is another term for “anticipation inventory.” This is stock businesses hold to meet an expected increase in demand. Anticipation inventory may also help businesses protect against forecast increases in the cost of supplies. Businesses increase their orders of these materials before the price increase takes effect.
What is pipeline inventory?
“Pipeline inventory” refers to inventory in transit between the locations that make up a supply chain network, such as the manufacturer and distribution center. It's also called transit inventory.