Lecture 3. Basic principles and demand forecasting. Inventory Control. February, 15th 2010 Hessel Visser www.hesselvisser.nl. Who is Hessel Visser?. ‘s-Gravendeel. Dordrecht. ‘s-Gravendeel. Noordhoff. CoLogic. Hogeschool Rotterdam. Enraf-Nonius. Fokker. Kluwer.
Basic principles and demand forecasting
February, 15th 2010 Hessel Visser
2 x HTS en TU
Logistics Tools for Management
Basic principles and demand forecasting
DuPont Chart calculates the key components of any business for easy evaluation of performance.
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Analysis of a range of items, from inventory levels to customers and sales territories, into three groups: A = very important; B = important; C = marginal significance. The goal is to categorize items which would be prioritized, managed, or controlled in different ways. ABC analysis is also called 'usage-value analysis'.
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Average contribution margin that is weighted to reflect the relative contribution of each operating department of a multi-department firm to its ability to pay fixed costs and to generate income.
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Forecasting is the process of estimation in unknown situations. Prediction is a similar, but more general term, and usually refers to estimation of time series, cross-sectional or longitudinal data.
Address business cycle, e.g., inflation rate, money supply etc.
Predict rate of technological progress
Predict acceptance of new product
Predict sales of existing product
Dependent versus independent
Only independent demand needs to be forecasted
Dependent demand should never be forecasted
2 to 10 years
Sales and operations
Product lines and
1 to 3 years
End items and
6 to 18
Determine the use of the forecast
Select the items to be forecasted
Determine the time horizon of the forecast
Select the forecasting model(s)
Gather the data
Make the forecast
Validate and implement results
Actual demand line
Demand for product or service
Average demand over four years
Weighted moving average
Forecasts are seldom perfect
Most forecasting methods assume that there is some underlying stability in the system
Both product family and aggregated product forecasts are more accurate than individual product forecasts
Qualitative forecasting methods are based on educated opinions of appropriate persons
Jury of executive opinion
Pool opinions of high-level executives, sometimes augment by statistical models
Panel of experts, queried iteratively
Sales force composite
Estimates from individual salespersons are reviewed for reasonableness, then aggregated
Consumer Market Survey
Ask the customer
Iterative group process
3 types of people
(Sales will be 50!)
(What will sales be? survey)
(Sales will be 45, 50, 55)
Time series forecasting methods are based on analysis of historical data (time series: a set of observations measured at successive times or over successive periods). They make the assumption that past patterns in data can be used to forecast future data points.
Set of evenly spaced numerical data
Obtained by observing response variable at regular time periods
Forecast based only on past values
Assumes that factors influencing past and present will continue influence in future
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Tracking the Forecast
Forecasts are rarely 100% correct over time.
Why track the forecast?
Start with Simple Tools
Collect Data in an Early Stage
Integrate Tools as much as possible
It’s all about inventory
Inventory Definitions and Goals
Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. Inventory are held in order to manage and hide from the customer the fact that manufacture/supply delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process that lower production efficiencies if production capacity stands idle for lack of materials.
Stock is the insurance premium for the fear of getting non-sales.
Inventory Management Involves a retailer or any other piece of the supply chain seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check.
1. That point at which time a stock replenishment requisition would be submitted to maintain the predetermined or calculated stockage objective.
2. The sum of the safety level of supply plus the level for order and shipping time equals the reorder point. See also level of supply.
Safety stock: Quantity of inventory used in inventory management systems to allow for deviations in demand or supply.
Although stock is an expensive part of our business, we can’t get it back to zero. Somewhere in the chain we have to have a point where we have to keep a safe quantity of goods available to the customers wishes.