Lecture 3
Basic principles and demand forecasting
Inventory Control
February, 15th 2010
Hessel Visser
www.hesselvisser.nl
Logistics: Principles and Practice
hesselvisser@chello.nl
Who is Hessel Visser?
‘s-Gravendeel
‘s-Gravendeel
Dordrecht
Noordhoff
CoLogic
Hogeschool Rotterdam
Enraf-Nonius
Fokker
Kluwer
2 x HTS en TU
Basic education
1950
1960
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1970
1980
1990
2000
2010
hesselvisser@chello.nl
What did I do?
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Basic principles and demand forecasting
Logistics Tools for Management
1. DuPont chart
2. ABC-analysis
3. Relative Contribution
4. Forecasting
5. Qualitative forecasting
6. Quantitative Methods
Conclusions
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1 DuPont Chart
Definition
• DuPont Chart calculates the key
components of any business for easy
evaluation of performance.
www.businessplans.org/DuPontChart.html
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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'.
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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.
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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.
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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
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Demand Patterns
Dependent versus independent
– Only independent demand needs to be
forecasted
– Dependent demand should never be
forecasted
Seat
Handlebars
Wheels
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What Should Be Forecasted?
Level
Business plan
Sales and operations
planning
Master production
schedule
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Forecast
Market direction
Product lines and
families
End items and
options
Time Frame
2 to 10 years
1 to 3 years
6 to 18
Months
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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
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Product Demand Charted over 4
Years with Trend and Seasonality
Demand for product or service
Seasonal peaks
Trend component
Actual
demand line
Random
variation
Year
1
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Year
2
Average demand
over four years
Year
3
Year
4
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Actual Demand, Moving Average,
Weighted Moving Average
35
Sales Demand
30
Actual sales
Weighted moving average
25
20
15
Moving average
10
5
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month
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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
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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
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• Involves
mathematical
techniques
– e.g., forecasting sales
of color televisions
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5 Qualitative forecasting
Definition
• Qualitative forecasting methods are
based on educated opinions of appropriate
persons
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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
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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
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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
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Delphi Method
• Iterative group
process
• 3 types of people
– Decision makers
– Staff
– Respondents
• Reduces ‘groupthink’
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Decision Makers
Staff
(What will
(Sales?)
(Sales will be 50!)
sales be?
survey)
Respondents
(Sales will be 45, 50, 55)
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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
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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.
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Quantitative Forecasting Methods
(Non-Naive)
Quantitative
Forecasting
Associative
Models
Time Series
Models
Moving
Average
Exponential
Smoothing
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Trend
Projection
Linear
Regression
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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:
Sales:
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2003
78.7
2004
63.5
2005
89.7
2006
93.2
2007
92.1
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Time Series Components
Trend
Cyclical
Seasonal
Random
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Forecast errors
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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
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Conclusions about Logistic
Tools for management.
• Start with Simple Tools
• Collect Data in an Early Stage
• Integrate Tools as much as possible
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Inventory Control
It’s all about inventory
1. Inventory Definitions and Goals
2. Inventory Turnover
3. Inventory Management
4. Inventory Costs
Conclusions
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1 Inventory Goals
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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.
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Why Inventory Control?
• Stock is the insurance premium for the
fear of getting non-sales.
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2 Inventory Turnover
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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.
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4 Inventory Costs
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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.
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6 Safety Stock
• Safety stock:
Quantity of
inventory used in
inventory
management
systems to allow
for deviations in
demand or
supply.
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Try to get rid of stock
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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.
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