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It's Tough Being an Electrical Supply Distributor in Today's Market

It's Tough Being an Electrical Supply Distributor in Today's Market

Electrical_Supply_Distributor.jpgImproving the Accuracy of Your Electrical Supply Inventory Forecast

  1. Increased Competition.
    • Competition continues to increase as new distribution channels evolve and existing distribution channels expand. Twenty years ago most electrical supply distributors existed on "market islands". They may have had a few competitors but they knew how these other firms conducted business.  A number of developments including the Internet, dynamic data processing capabilities, and faster, more reliable transportation have drastically changed the distribution environment. Customers have more options to choose from when looking for sources of electrical supply.
  2. Lower Margins
    • This "buyers market" has forced many distributors to lower their profit margins in order to remain competitive.
  3. More Customer Demands.
    • Lower margins are not the only result of this increased competition. Customers are in a position to demand more value added services and greater product availability.

The result: Electrical Supply Distributors have to provide better material availability and more services with fewer profit dollars. They have to do more with less. In order to accomplish this goal the estimates of future usage of stocked items must be as accurate as possible. In this document we will explore some ideas we have found to be effective in developing accurate demand forecasts for your stock products.

Electrical Distribution

Traditional Forecasting Methods

One of the most common methods distributors utilize to forecast future demand of products is to average the usage recorded over the previous several months.

But averaging past usage does not always result in an accurate forecast of future demand. If the distributor experienced unusually large sales of a product, averaging the usage in the past six months would result in an inaccurate forecast. For example, suppose the distributor experienced an unusual 1,000 piece sale of the product we examined before (i.e. usage in June is 1,080 pieces instead of 80 pieces):

To ensure the accuracy of demand forecasts, it is critical that buyers or salespeople examine possible unusual usage. A report or inquiry should list products whose usage in the month just completed is greater than "x" percent, or less than "y" percent, of the forecast. For example, some distributors will scrutinize any item whose usage is greater
than 300% or less than 20% of the predicted demand. These percentages are not "cast in stone" and should be modified to meet each distributor’s specific situation. There are three reasons why an item would be included on this possible unusual activity list:

  1. Activity that will not reoccur. This includes abnormally large sales as well as unusually low usage that was caused by stock outs, temporary customer shutdowns or some other reason.
  2. The start of a new sales trend. There is a dramatic increase or decrease in usage that is representative of probable future usage of the product.
  3. The wrong formula is being used to forecast future demand of the item.

If the possible unusual usage was caused by activity that will not reoccur, usage should be adjusted to equal what usage would have been under "normal" circumstances. If a new sales trend is detected, you might want to either adjust past usage to reflect current market conditions or override the actual forecast until adequate history that reflects the new trend has been accumulated.

Read more here:  Download Whitepaper



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