fundamentals of forecasting and inventory …

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FUNDAMENTALS OF FORECASTING AND INVENTORY MANAGEMENT© 2019 The Partnering Group, Inc.

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FUNDAMENTALS OF FORECASTING AND INVENTORY MANAGEMENTCOURSE HANDOUT


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TABLE OF CONTENTS

Introduction

Module 1: Overview

Module 2: Managing Inventory

Module 3: Inventory Metrics

Module 4: Forecasting 101

Course Wrap-up

Contacts

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INTRODUCTION

WHAT YOU WILL DO:

This course provides a basic overview of the framework and methodologies used to forecast demand and calculate inventories; included in the course will be key industry calculations for forecasting and inventory KPIs. This course also creates a working knowledge on the impact of forecasting and inventory on business functions and processes. Throughout the course, you’ll have simulations and exercises to test your knowledge.

WHAT YOU WILL ACHIEVE:

• Identify the impact of forecasting andinventory on business planning

• Recognize basic measures of forecast andinventory calculations

• Indicate Inventory management strategies

• Recognize the causes of unproductiveinventory from retail outlets backwardsthrough planning functions

• Apply this course work to your job

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MODULE 1: OVERVIEW

OVERVIEW:

In this module you’ll learn what constitutes inventory. A simple definition of inventory is product held in storage to fulfill future demands…to insure the continued flow of product consumption. And as demand rises, supply chain capabilities such as service capability, forecasting, and transportation are used to manage consumer demand from the retailer shelf back to purchasing.

OBJECTIVES:

• Indicate what constitutes inventory

• Explain why inventory levels are important

• Identify the impact of inventory

3FUNDAMENTALS OF FORECASTING AND INVENTORY MANAGEMENT© 2020 The Partnering Group, Inc.


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MODULE 1: OVERVIEW

INVENTORY LEVELS

OVERSTOCKToo much inventory congests back rooms, shelves, and slows down the run out of product for new items. It also causes excessive spoilage and unsaleables.

EMPTY SHELVESToo much inventory increases out of stocks. And too little inventory reduces sales for manufacturers and retailers by creating out of stocks.

BUYER/MERCHANDISERFrom a buyer/merchandiser/sales force perspective, wrong sized inventory slows down new items moving to shelf and sub-optimizes trade spending.

SUPPLY CHAINAnd across the supply chain, unbalanced inventories increase transport costs as unproductive inventory shuttles across the distribution network.


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MODULE 1: OVERVIEW

IMPACT OF INVENTORY

The contributors listed above cause manufacturers and retailers cash flow or

working capital problems if not addressed.

MODULE 2: MANAGING INVENTORY

OVERVIEW:

In this module you’ll learn about the three components of inventory: cycle stock, investment stock, and safety stock. You’ll also start to explore how to manage inventory levels and different inventory strategies and results.

OBJECTIVES:

• Identify the three components of inventory

• Calculate cycle stock

• Explain investment stock

• Indicate what impacts safety stock

• Identify Pipeline Theory

• Identify why simply reducing lead times and inventorylevels is not always the solution to excessive inventory


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THREE COMPONENTS OF INVENTORY

CYCLE STOCK INVENTORYThe inventory generated by demand and customer orders. Think of it as the inventory required to run the business based on a manufacturers lead time and ordering requirements and consumer demand.

INVESTMENT INVENTORY Purchased to drive additional profit. While forward buying is the most popular form of investment inventory.

SAFETY STOCK INVENTORY Is that which is designed to manage the normal fluctuations in demand variability and service failures. Safety stock protects service level to retail outlets and consumers from normal variations in demand and service.


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PIPELINE THEORY

Pipeline Theory helps explain inventory pockets by looking at all

areas of the supply chain.

Retailer

Retailer Warehouse

Retailer Procurement

Manufacturing


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ACTIVITY BASED COSTING (ABC)• Activity-based costing (ABC) is a process that fairly assigns operating costs to individual

products based on how products “consume” costs throughout the supply chain.

• ABC identifies work processes in the warehouse, during transportation, and at thestore, and then allocates these costs to products based on their “fair share.” Share isdetermined by how much labor, equipment, utilities, inventory, and space the productuses from the time it is received at the back door of the warehouse (or store for DSD)until it’s purchased by the consumer.

• ABC brings the retailer’s operations into the picture and provides the ability tomeasure the “true” cost to handle, distribute, and sell product.

Warehouse

Receive(truck, rail, backhaul)

Order

Inventory

Inventory

Cross dock

Receive (warehouse,

drop ship, DSD)

Process Invoices

Checkout

Load(pallet, floor)

Clean up

Replenish

Price

Space & Equipment

Shelf space

Select (case, pack, each)

Rotate & face

Put away

Stock (Unit, tray, bin, peg)

Transportation to store

Warehouse Activities

Store Activities

Retailer ABCs

Store

Transportation

MODULE 3: INVENTORY METRICS

OVERVIEW:

In this module you’ll learn why it’s important to measure in-ventory and some important calculations.

OBJECTIVES:

• Identify why you should measure inventory

• Calculate key inventory metrics

• Understand how inventory affects operational costs




WHY MEASURE INVENTORY?

Companies measure inventory in terms of Turns, Days on Hand, and Cash.

Rationale:• Increase available cash (cash flow) by lowering inventory

Example:• Reduce inventory from $200MM to $180MM and you have “freed

up” $20MM in cash that was previously “tied up” in inventory

Results:• Annual profit increases or decreases with changes in cash• More cash on hand to:

- Pay down short-term debt- Invest in Research and Development- Invest in new markets- Purchase cost saving machinery- Introduce new products- Pay big dividends



EXAMPLE INVENTORY METRIC

Calculation:

$500MM/10 = $50MM in inventory

$500MM/12 - $42MM in inventory

Answer:

Cash savings - $8MM one-time benefit

Impact:

Profit impact - $800k on-going savings ($8MM*10%)

A one time $8 million cash savings and then $800 thousand on-going in savings is a

significant impact to the bottom line of Ho Ho Foods.

MODULE 4: FORECASTING 101

OVERVIEW:

In this module you’ll learn why Forecasting is defined as a process, not an event, which identifies the quantities required to meet future sales over time. Forecasting is dependent on a clear demand signal, with minimized noise, in order to create the right production plans, capacity plans, shipment plans, and customer facing activities such as shipments, trade spending, and marketing plans.

Getting the forecast right is important for all trading partners and it’s the primary driver of inventories across the supply chain.

OBJECTIVES:

• Define forecasting

• Indicate how forecasting impacts functional processes

• Define the two ways forecasting quality is measured

• Identify decisions that improve forecasting

• Validate additions and deletions




FORECASTING IS A PROCESS

Forecasting is a process that is dedicated to

Continual Improvement, and the goal is to focus on getting the number close versus perfect.



FORECASTS IMPACT FUNCTIONAL PROCESSES

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Finance Supply Marketing Sales

• Utilizes SKU-levelforecast toproduce detailedcost and profitand forecasts

• Maintain SKU-lev-el data on COGSand GP

• ProductionPlanning is doneby SKU

• Supply assuranceof variouspackagingmaterials, andcompounding/convertingcapacity requiressky-level forecast

• Funding levelsfor advertisingand promotionalspend

• Trade spendplanning

Forecast planning ripples through finance, supply, marketing and sales


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WRAP-UP

Inventory Management and Forecasting is:

• Collaboration between manufacturers andtheir customers

• Calculating common inventory metrics

• Recognizing the relationship between forecast planning andinventory management

In the next forecasting course you’ll learn about:

• Collaborative Planning Forecasting and Replenishmentor CPFR


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CONTACT

TPG’s Category Management Leadership College is an unparalleled capability development program based upon rigorous assessment, Best Practice curriculum and innovative e-based & classroom delivery.

For all technical questions and issues please contact our support desk:Phone number: 1-513-429-2841 Email address: [email protected]

For more information about TPG University please visit www.thepartneringgroup.com or contact TPG at 513-469-6840.

© 2020 The Partnering Group, Inc. All rights reserved.

No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and/or retrieval system, without permission in writing from the copyright holder.

© 2020 The Partnering Group, Inc. 17

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