Lecture 3 Basic principles and demand forecasting Inventory

Lecture 3 Basic principles and demand forecasting Inventory Control February, 15 th 2010 Hessel Visser www. hesselvisser. nl Logistics: Principles and Practice hesselvisser@chello. nl

Who is Hessel Visser? ‘s-Gravendeel Dordrecht ‘s-Gravendeel Noordhoff Co. Logic Hogeschool Rotterdam Enraf-Nonius Fokker Kluwer 2 x HTS en TU Basic education 1950 1960 Logistics: Principles and Practice 1970 1980 1990 2000 2010 hesselvisser@chello. nl

What did I do? Logistics: Principles and Practice hesselvisser@chello. nl

Logistics: Principles and Practice hesselvisser@chello. nl

Basic principles and demand forecasting Logistics Tools for Management 1. Du. Pont chart 2. ABC-analysis 3. Relative Contribution 4. Forecasting 5. Qualitative forecasting 6. Quantitative Methods Conclusions Logistics: Principles and Practice hesselvisser@chello. nl

1 Du. Pont Chart Definition • Du. Pont Chart calculates the key components of any business for easy evaluation of performance. www. businessplans. org/Du. Pont. Chart. html Logistics: Principles and Practice hesselvisser@chello. nl

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2 ABC-analysis 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'. Logistics: Principles and Practice hesselvisser@chello. nl

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3 Relative Contribution Definition • Average contribution margin that is weighted to reflect the relative contribution of each operating department of a multidepartment firm to its ability to pay fixed costs and to generate income. Logistics: Principles and Practice hesselvisser@chello. nl

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4 Forecasting 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, crosssectional or longitudinal data. Logistics: Principles and Practice hesselvisser@chello. nl

Types of Forecasts • 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 Logistics: Principles and Practice hesselvisser@chello. nl

Logistics: Principles and Practice hesselvisser@chello. nl

Demand Patterns Dependent versus independent – Only independent demand needs to be forecasted – Dependent demand should never be forecasted Seat Handlebars Wheels Logistics: Principles and Practice hesselvisser@chello. nl

What Should Be Forecasted? Level Business plan Forecast Time Frame Market direction 2 to 10 years Sales and operations. Product lines and 1 to 3 years planning families Master production schedule Logistics: Principles and Practice End items and options 6 to 18 Months hesselvisser@chello. nl

Seven Steps in Forecasting • 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 Logistics: Principles and Practice hesselvisser@chello. nl

Demand for product or service Product Demand Charted over 4 Years with Trend and Seasonality Seasonal peaks Trend component Actual demand line Year 1 Logistics: Principles and Practice Rando m variatio Year n 2 Average demand over four years Year 3 Year 4 hesselvisser@chello. nl

Actual Demand, Moving Average, Weighted Moving Average Actual sales Weighted moving average Moving average Logistics: Principles and Practice hesselvisser@chello. nl

Realities of Forecasting • 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 Logistics: Principles and Practice hesselvisser@chello. nl

Forecasting Approaches Qualitative Methods Quantitative Methods • Used when situation is vague & little data exist • Used when situation is ‘stable’ & historical data exist – New products – New technology – Existing products – Current technology • Involves intuition, experience – e. g. , forecasting sales on Internet Logistics: Principles and Practice • Involves mathematical techniques – e. g. , forecasting sales of color televisions hesselvisser@chello. nl

5 Qualitative forecasting Definition • Qualitative forecasting methods are based on educated opinions of appropriate persons Logistics: Principles and Practice hesselvisser@chello. nl

Overview of Qualitative Methods • 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 Logistics: Principles and Practice hesselvisser@chello. nl

Jury of Executive Opinion • Involves small group of high-level managers – Group estimates demand by working together • Combines managerial experience with statistical models • Relatively quick • ‘Group-think’ disadvantage Logistics: Principles and Practice hesselvisser@chello. nl

Sales Force Composite • Each salesperson projects his or her sales • Combined at district & national levels • Sales reps know customers’ wants • Tends to be overly optimistic Logistics: Principles and Practice hesselvisser@chello. nl

Delphi Method • Iterative group process • 3 types of people – Decision makers – Staff – Respondents • Reduces ‘groupthink’ Logistics: Principles and Practice Decision Makers Staff (What will sales be? survey) (Sales? ) (Sales will be 50!) Respondents (Sales will be 45, 50, 55) hesselvisser@chello. nl

Logistics: Principles and Practice hesselvisser@chello. nl

Consumer Market Survey • 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 Logistics: Principles and Practice hesselvisser@chello. nl

6 Quantitative Methods 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. Logistics: Principles and Practice hesselvisser@chello. nl

Quantitative Forecasting Methods (Non-Naive) Quantitative Forecasting Associative Models Time Series Models Moving Average Exponential Smoothing Logistics: Principles and Practice Trend Projection Linear Regression hesselvisser@chello. nl

What is a Time Series? • 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: 2003 2004 2005 2006 2007 Sales: 78. 7 63. 5 89. 7 93. 2 92. 1 Logistics: Principles and Practice hesselvisser@chello. nl

Time Series Components Trend Cyclical Seasonal Random Logistics: Principles and Practice hesselvisser@chello. nl

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Forecast errors Logistics: Principles and Practice hesselvisser@chello. nl

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Tracking the 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 Logistics: Principles and Practice hesselvisser@chello. nl

Conclusions about Logistic Tools for management. • Start with Simple Tools • Collect Data in an Early Stage • Integrate Tools as much as possible Logistics: Principles and Practice hesselvisser@chello. nl

Inventory Control It’s all about inventory 1. Inventory Definitions and Goals 2. Inventory Turnover 3. Inventory Management 4. Inventory Costs Conclusions Logistics: Principles and Practice hesselvisser@chello. nl

1 Inventory Goals Logistics: Principles and Practice hesselvisser@chello. nl

What is Inventory? • 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. Logistics: Principles and Practice hesselvisser@chello. nl

Why Inventory Control? • Stock is the insurance premium for the fear of getting non-sales. Logistics: Principles and Practice hesselvisser@chello. nl

Logistics: Principles and Practice hesselvisser@chello. nl

2 Inventory Turnover Logistics: Principles and Practice hesselvisser@chello. nl

Logistics: Principles and Practice hesselvisser@chello. nl

3 Inventory Management • 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. Logistics: Principles and Practice hesselvisser@chello. nl

Logistics: Principles and Practice hesselvisser@chello. nl

4 Inventory Costs Logistics: Principles and Practice hesselvisser@chello. nl

Logistics: Principles and Practice hesselvisser@chello. nl

5 Order points 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. Logistics: Principles and Practice hesselvisser@chello. nl

Logistics: Principles and Practice hesselvisser@chello. nl

6 Safety Stock • Safety stock: Quantity of inventory used in inventory management systems to allow for deviations in demand or supply. Logistics: Principles and Practice hesselvisser@chello. nl

Logistics: Principles and Practice hesselvisser@chello. nl

Try to get rid of stock Logistics: Principles and Practice hesselvisser@chello. nl

Inventory Management • 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. Logistics: Principles and Practice hesselvisser@chello. nl