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Basic principles and demand forecasting

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Lecture 3

Basic principles and demand forecasting

Inventory Control

February, 15th 2010 Hessel Visser

www.hesselvisser.nl

‘s-Gravendeel

Dordrecht

‘s-Gravendeel

Noordhoff

CoLogic

Hogeschool Rotterdam

Enraf-Nonius

Fokker

Kluwer

2 x HTS en TU

Basic education

1950

1960

1970

1980

1990

2000

2010

Logistics Tools for Management

DuPont chart

ABC-analysis

Relative Contribution

Forecasting

Qualitative forecasting

Quantitative Methods

Conclusions

Basic principles and demand forecasting

Definition

DuPont Chart calculates the key components of any business for easy evaluation of performance.

www.businessplans.org/DuPontChart.html

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Definition

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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Definition

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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Definition

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.

Economic forecasts

Address business cycle, e.g., inflation rate, money supply etc.

Technological forecasts

Predict rate of technological progress

Predict acceptance of new product

Demand forecasts

Predict sales of existing product

Dependent versus independent

Only independent demand needs to be forecasted

Dependent demand should never be forecasted

Seat

Handlebars

Wheels

Level

Forecast

Time Frame

Business plan

Market direction

2 to 10 years

Sales and operations

planning

Product lines and

families

1 to 3 years

Master production

End items and

options

6 to 18

Months

schedule

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

Seasonal peaks

Trend component

Actual demand line

Demand for product or service

Average demand over four years

Random variation

Year

2

Year

3

Year

4

Year

1

Weighted moving average

Actual sales

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 Methods

Quantitative Methods

- Used when situation is vague & little data exist
- New products
- New technology

- Involves intuition, experience
- e.g., forecasting sales on Internet

- Used when situation is ‘stable’ & historical data exist
- Existing products
- Current technology

- Involves mathematical techniques
- e.g., forecasting sales of color televisions

Definition

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

Delphi method

Panel of experts, queried iteratively

Sales force composite

Estimates from individual salespersons are reviewed for reasonableness, then aggregated

Consumer Market Survey

Ask the customer

- Involves small group of high-level managers
- Group estimates demand by working together

- Combines managerial experience with statistical models
- Relatively quick
- ‘Group-think’disadvantage

- Each salesperson projects his or her sales
- Combined at district & national levels
- Sales reps know customers’ wants
- Tends to be overly optimistic

Iterative group process

3 types of people

Decision makers

Staff

Respondents

Reduces ‘group-think’

Decision Makers

(Sales?)

(Sales will be 50!)

Staff

(What will sales be? survey)

Respondents

(Sales will be 45, 50, 55)

- Ask customers about purchasing plans
- What consumers say, and what they actually do are often different
- Sometimes difficult to answer

http://blogs.zdnet.com/emergingtech/?m=200701&paged=1

Definition

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.

Quantitative

Forecasting

Associative

Time Series

Models

Models

Linear

Moving

Exponential

Trend

Average

Smoothing

Regression

Projection

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

Example

Year:20032004200520062007

Sales:78.763.589.793.292.1

Trend

Cyclical

Seasonal

Random

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Tracking the Forecast

Forecasts are rarely 100% correct over time.

Why track the forecast?

- To plan around the error in the future
- To measure actual demand versus forecasts
- To improve our forecasting methods

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 Turnover

Inventory Management

Inventory Costs

Conclusions

Inventory Control

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.