Normal Distribution Uses for Inventory Forecasting
Accurate forecasting of inventory is strategic for your business. Knowing what you have, what you need and when you need it allows you to plan products and services efficiently. Applying normal distribution analysis to inventory produces forecasts and estimates based on previous performance of your clients and suppliers, refining the way you predict future business activity.
Knowing your sales is the first step to planning your inventory. For example, using past history, you can determine average sales, or the mean, for your previous fiscal year, and the standard deviation, or the amount that each month fluctuates around the mean. These two values determine the normal distribution of demand for your product or service. When forecasting, adjusting the mean up and down gives you best-case and worst-case outcomes, respectively, with a realistic spread of values representing predicted sales.
Ordering large quantities of stock from a supplier is never as simple as purchasing 50,000 pieces and then using 50,000 pieces in manufacturing. Parts may fall below or exceed quality specifications. Likewise, some items may be packed by weight, and piece counts could vary. In both cases, you can sample inventory randomly, determining the mean and standard deviation, to know levels of waste or shrinkage to expect in the future. These numbers are frequently used to leverage price or quality negotiations.
Calculating the mean from your data set is the same as calculating average. To calculate the mean of parts packed in a shipping container, for example, count the number of parts in each of a sample set of boxes. Add the count of each box together, then divide the sum by the number of boxes sampled to determine the mean.
Standard deviation represents the amounts that individual results vary from the mean. From the example above, it is calculated using the counts from each of the boxes. Its calculation is more complex than the mean, though most spreadsheet programs support the formula STDEV for this purpose. Type the formula, "=STDEV(number 1, number 2, ...)" in a spreadsheet cell, where the numbers in parentheses are the values from your data set. If your data is entered into a spreadsheet already, you can replace the numbers with the cell range of your data.