Exploring the potential influence of inventory forecasting on profitability

Abstract

The level of inventory can play a pivotal role in profitability (Simeon & John, 2018). Therefore, is the model used to do inventory forecasting with crucial in any business that carries inventory? Numerous forecasting models exist, but all are not appropriate to use in just any situation (Heizer et al., 2016). This study investigated the ideal forecasting model to be used in the poultry industry, and more specifically, in a poultry abattoir in a rural area of the eastern Free State of South Africa. The study investigated the different forecasting models to establish which of the models will best suit a rural poultry abattoir. The different forecasting models were compared to each other, and the different pros and cons were measured up against each other. Given the unique traits of a poultry abattoir and the specific demographic location of the company used during this study, and after a thorough literature study, the PROBABILISTIC MODEL was identified as the most applicable model to be used. This identified model considers the uncertain and rather unpredictable variance in demand planning as well as the often-changing lead times. Although this model does have a disadvantage of being difficult to use, computer programs can and will make it a viable and feasible option. The concepts of profitability and forecasting were also investigated and discussed during the literature study to create the necessary reference and understanding of the topic at hand. To understand the variables that influence each other in terms of forecasting, inventory and profitability, it is crucial to understand the influence each has on the other (O'Neill & Sanni, 2018). To ensure that this study was more than just a theoretical exercise, interviews and discussions regarding this topic were done with some key decision-makers in the company as well as an industry expert. In total, the interviewees have more than 112 years of hands-on experience in the poultry industry. Some insightful inputs were gathered in this process. The data from the interviews were analysed in Atlas.ti to establish which factors influence which. Network maps were drawn up to make this visual. Out of this analysis, it became clear that some factors do influence each other. The financial statements and figures were also analysed. Correlations and regressions were drawn from the data obtained. Causal relationships were established, and statistical significance determined. Data from the interviews indicated that there are other factors than inventory levels that had an even bigger influence on profitability. This was confirmed by the financial statements and figures analysed. In the poultry industry, the influences of feed prices, chic prices and maize prices are so big that the influence of inventory levels is almost not a factor. In conclusion, it is recommended that this study be done on a company that has fewer other influences on profitability to truly establish the impact of inventory levels on a company.