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Seasonal variations in consumption occur for many reasons; summer, back to school, various holidays. In fact, most industries experience annually recurring spikes in demand — even healthcare as they prepare for the dreaded flu season. Furthermore, the duration of a season differs depending on geography and demographics.
Having recognized the existence of a seasonal pattern, one must anticipate its future effect on inventories. To understand seasonal differences in consumption, forecasters look at an item’s seasonal index. The calculation of an item’s seasonal index is quite simple. The first step is to calculate the average monthly demand for a given year. The second step is to divide the actual demand by the average demand. The result is the seasonal index.
A seasonal index of 1.2 indicates that 120% of average demand was consumed during that month. A seasonal index of .80 indicates that 80% of the average demand was consumed. Because seasons fluctuate, calculating the average seasonal index over a period of three years will provide a more accurate representation of a season’s impact on consumption.
The seasonal index helps buyers provide an uninterrupted flow of inventory without overbuying. Many buyers also temporarily adjust an item’s safety stock level as well to account for variations from one season to another. Sharing this information with suppliers allows them to maintain their service levels as well — nobody wants to be caught short during periods of peak demand.