Outline Role of Forecasting; Distinguish Between Push Process and Pull Process; Characteristics of Forecasting; Basic Appropriate to Demand Forecasting; Economic Order Quantity; Lead Time, Safety Stock, Maximum Level of Inventory, Minimum Level of

Inventory; Cost of Carrying and Cost of not Carrying.

Role of Forecasting in a Supply Chain

The basis for all strategic and planning decisions in a supply chain Used for both push and pull processes Examples:

Production: scheduling, inventory, aggregate planningMarketing: sales force allocation, promotions, new production introductionFinance: plant/equipment investment, budgetary planningPersonnel: workforce planning, hiring, layoffs

All of these decisions are interrelated

Push Process Pull Process

1. Execution initiated in anticipation of customer order;

1. Execution initiated in response to customer order;

2. Demand is uncertain 2. Demand is certain

3. Speculative process; 3. Reactive process;

4. High complexity; 4. Low complexity;

5. Focus on resource allocation; 5. Focus on responsiveness;

6. Long lead time; 6. Short lead time;

7. Helps in supply chain planning; 7. Helps in order full-fillment;

8. High production, inventory, and transportation;

8. Low production, inventory and transportation cost;

9. Objective is to minimize the cost; 9. Objective is to maximize the service;

10. Push process works well with mass production; 10. Pull process works well with a customer ordering;

11. Example: Trade show; Direct selling; Packaging design to promote purchase; etc.

11. Example: Advertising and mass media promotion; Word of mouth; etc.

Forecasts are always wrong and should thus include both the expected value of

the forecast and a measure of forecast error.

Long-term forecasts are usually less accurate than short-term forecasts; that is,

long-term forecasts have a larger standard deviation of error relative to the mean

than short-term forecasts. Seven-Eleven Japan has instituted a replenishment

process that enables it to respond to an order within hours.

Aggregate forecasts are usually more accurate than disaggregate forecasts, as

they tend to have a smaller standard deviation of error relative to the mean.

In general, the farther up the supply chain a company is the greater distortion of

information it receives.

The following basic six-step approach helps an organization perform effective

forecasting.

Understand the objective of forecasting.

Integrate demand planning and forecasting throughout the supply chain.

Understand and identify customer segments.

Identify the major factors that influence the demand forecast.

Determine the appropriate forecasting technique.

Establish performance and error measures for the forecast.

Economic order quantity (EOQ) is that size of the order, which gives maximum economy in purchasing any material and ultimately contributes towards maintaining the materials at the optimum level and at the minimum cost.In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered at one time for purposes of minimizing annual inventory cost.

Formula of Economic Order Quantity (EOQ):The different formulas have been developed for the calculation of economic order quantity (EOQ). The following formula is usually used for the calculation of EOQ.

Where, A = Demand for the year;Cp = Cost to place a single order;Ch = Cost to hold one unit inventory for a year.

ABC Ltd. is engaged in sale of footballs. The company has a demand for 16,000 units per year.  The annual holding cost per unit is $2.50 and the cost to place an order is $50. Calculate economic order quantity (EOQ)Calculation:We know that,

EOQ =

Lead Time:When the need of the material is felt and an order is placed, it may be delivered instantaneously or it may require some time before delivery is affected. The gap between the date of ordering goods and the date of receiving goods is called lead-time.For example, the lead-time between the placement of an order and delivery of a new car from a manufacturer may be anywhere from 2 weeks to 6 months. In industry, lead-time reduction is an important part of lean manufacturing.

Safety Stock:Safety stock (also called buffer stock) is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stock outs (shortfall in raw material or packaging) due to uncertainties in supply and demand. Adequate safety stock levels permit business operations to proceed according to their plans. Safety stock is held when there is uncertainty in the demand level or lead-time for the product; it serves as an insurance against stock outs.Safety Stock = (Maximum Demand – Average Demand) × Lead Time

Maximum Level of InventoryMaximum level of inventory is maximum quantity of material, which have to keep in store. That inventory level is exceeding the maximum storage limit that leads to the extra expenses in terms of holding cost or wasteful material. Keeping the reserve in excess, which is unreasonable and not changed?Maximum Inventory = EOQ + Safety Stock Minimum Level of Inventory:Minimum level of inventory is that level which is needful for continuing of production without any disturbance. When the inventory will go to the minimum level, production or store department should send the notice of inventory requirement to purchase department.It is the minimum stock kept for future production.Minimum Inventory = Safety Stock

Carrying Cost of Inventory:This is the cost a business incurs over a certain period, to hold and store its inventory. Businesses use this figure to help them determine how much profit can be made on current inventory. It also helps them find out if there is a need to produce more or less, in order to keep up with expenses or maintain the same income stream. Also referred to as carry cost of inventory. Examples include:Storage space costs.Handling costs.Property taxes.Insurance.Obsolescence losses.Interest on capital invested in inventory. Inventory Carrying Cost = Average Inventory Value X Inventory Carrying Rate

Cost of not Carrying of Inventory:Costs of not carrying sufficient inventory, consists of costs that result from not having enough inventory on hand to meet customers’ needs. Costs in this group are more difficult to identify than costs of carrying inventory, but they can include items that are very significant to a firm. Examples of costs in this group are:Customer ill will;Quantity discounts forgone;Erratic production (expediting of goods, extra set-up, etc.);Inefficiency of production runs;Added transportation charges;Lost sales.