forecasting and inventory management in supply chains

8/10/2019 Forecasting and Inventory Management in supply chains

1/19

Section

Title

Unit 2- Forecasting and inventory

management


2/19

Section

Title

Learning outcomes

You will be able to understand:

Strategic role of forecasting within the supply chain

Supply chain process control

Role of inventory in the supply chain

Planning and controlling inventory

Just in time, EOQ, MRP , vendor managed inventory


3/19

Section

Title

Demand Forecasting within the supply

chain

Forecasting demand level is important to the firm as awhole as it provides basic inputs for the planning andcontrol of all functional areas.

Understanding demand patterns:

Spatial vs temporal demand: space and timedimensions of demand- logistics problem is to knowwhere demand volume will take place and when it willtake place.- needed to plan warehouse locations,balance inventor levels across the logistics network,allocate transportation resources.


4/19

Section

Title

Demand Forecasting within the supply

chain- understanding demand patterns

Regular demand vs Lumpy demand- In regular

demand, good forecasting is possible as demand

patterns can be analyzed as trend, seasonal and

random components.Lumpy demand is observed when there is a high

degree of uncertainty and low volume overall-

demand pattern is difficult to understand- a special

demand forecasting problem in logistics

Derived vs independent demand-


5/19

Section

Title

Strategic Role of forecasting within the

supply chain

SC managers must understand the following

characteristics of forecasting:

1)Forecasts are not always accurate

2)Long term forecasts are less accurate than short

term forecasts

3)Aggregate forecasts are more accurate

4)The further up the supply chain a company is, thehigher the forecast error( read bull whip effect)


6/19

Section

Title

Strategic Role of forecasting within the

supply chain

Each stage in the supply chain requires accurate

demand forecast to plan its operations .

When each stage in the supply chain makes its

own forecast, these forecasts will be different dueto information distortion along the chain leading

to supply demand mismatch.

When all stages of a supply chain produce acollaborative forecast, it tends to be more

accurate.


7/19

Section

Title

Collaborative forecasting in supply

chains

Collaborative forecasting increases forecast accuracy

and enables supply chains to be more responsive and

more efficient in serving their customers.

It improves the scsability to match supply withdemand.

Areas which can be enhanced through collaborative

forecasting are:Production: scheduling, inventory control, aggregate

planning, purchasing


8/19

S

ection

Title

Collaborative forecasting in supply

chains

Marketing: sales-force allocation, promotions, new

product introduction

Finance- plant/equipment investment, budgetary

planning

Personnel- work force planning, hiring, layoffs


9/19

S

ection

Title

Inputs to collaborative forecasting

Inputs can be from functional areas with in a firm, fromthe various members in the supply chain like vendors,carriers and buyers.

Buyers and marketing , who are close to the finalconsumer can have the best feel of end demand.

Vendors or purchasing personnel are tuned to supplyshortages and capacity limitations affecting productprice and demand levels

Transportation personnel or carriers may be able topredict delivery times that affect customer serviceand sales.


10/19

S

ection

Title

Purposes of inventory

Finished goods:

To meet customer demand- ( retail operation,seasonal/cyclical demand)

Safety /buffer stock- additional amount to meet variations of

demand

In progress/raw material:

To take advantage of price discounts

To meet variations in supplier deliveries

To provide independence between stages in themanufacturing process

Cost of ordering is more than cost of carrying inventory


11/19

S

ection

Title

Types of inventory in SC

In transit inventory- in transit between different stages ofthe supply chain

Cycle inventory- inventory necessary to meet theaverage demand during the time between successivereplenishments. Amount of cycle stock depends on lotsizes, economical shipment quantities, storage spacelimitations, lead times, prices-quantity discountschedules, and inventory carrying costs

Safety inventory- as a hedge against the variability indemand

Shrinkage, dead or obsolete stock


12/19

S

ection

Title

Inventory related costs

3 basic costs associated with inventory

Carrying costs- costs of holding an item in inventory

Ordering costs- costs of replenishing the stock of inventory

Shortage or stock out costs- temporary or permanent loss of

sales due to product not available . Order Fill rate: Inventory fill rate is the percentage of

customers that are satisfied or can be satisfied with theinventory at hand. It is a measure of the ability of a companyto satisfy the demand for its products with its current

products. Service level : Service Level expresses the probability of being

able to service incoming orders (or demand) within areference period without delay from stock on hand.


13/19

Cycle inventory reasons

A supply chain is coordinated if the decisions madeby the retailer and supplier maximize total supply

chain profits.

Cycle inventory exists in a supply chain because

different stages exploit economies of scale to lower

total cost.

Trade promotions lead to a significant increase in lot

size and cycle inventory because of forward buyingby the retailer without a significant increase in the

customer demand.


14/19

Lot & Volume based quantity discounts

In Commodity based products, price is set by the marketand manufacturers can use lot size based quantity

discounts to achieve coordination in the supply chain

and decrease supply chain costs.

Lot size based discounts, however increase cycleinventory in the supply chain.

Difference between lot size and volume based purchase

is that lot size discounts are based on the quantity

purchased per lot (EOQ), not the rate of purchase.

Volume discounts are based on the volume purchased

on average per specified time period. Volume-based

discounts are compatible with small lots that reduce

cycle inventory.


15/19

S

ection

Title

Inventory planning and controlling in

SC cycle inventory

Inventory planning and control involves the management

and control of all the types of inventory using suitable

strategies.

1)Using a convenient lot size close to EOQ . Total orderingand holding costs are relatively stable around the economic

order quantity.

2)Aggregating across products, retailers, or suppliers in a

single order allows for a reduction in lot size for individualproducts because fixed ordering and transportation costs

are now spread across multiple products , retailers or

suppliers.

3)Replenishment orders in multi stage supply chains can be


16/19

S

ection

Title

Inventory planning and controlling in

SC Safety inventory

2 questions to consider when planning safetyinventory:

1) What is the appropriate level of safety inventory

to carry?2) What actions can be taken to improve product

availability while reducing safety inventory?

Appropriate level of inventory is determined by the

following factors: The uncertainty of demand and supply

The desired level of product availability


17/19

S

ection

Title

Safety inventory reasons/behavior

As the uncertainty of supply or demand grows,the required level of safety inventories increase.

As the desired level of product availability

increases , the required level of inventory alsoincreases.

Both fill rate and cycle service level increases asthe safety inventory is increased.

Safety inventory increases with an increase in thelead time and the standard deviation of periodicdemand.


18/19

S

ection

Title

Strategies to reduce safety inventory

1) A change to continuous monitoring ofinventory from periodic monitoring can help reduceinventories.

2) Physical aggregation and virtual aggregationusing information centralization helps reduce cycleinventories

3) BY segregating inventories into fast moving and

slow moving items. Slow moving items can bestocked at a centralized location. Fast moving itemscan be decentralized.


19/19

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ection

Title

Strategies to reduce safety inventory

contd.,

4) Product substitution: substitution refers tot eh useof one product or satisfy demand for a different product.

2 instances where substitution may occur:

Manufacturer-driven substitutionmanufacturers or

supplier makes the decision to substitute.Customer-driven substitutions- customers make thedecision to substitute.

5)Component commonality : Significant amount of

inventory in the supply chain is held in the form ofcomponents. Use of common components in a variety ofproducts helps in aggregation strategy leading toinventory reduction.

6)Product postponement strategy

forecasting and inventory management in supply chains

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