1. Basic principles and demand forecasting
Lecture 3
Basic principles and demand forecasting
Inventory Control
February, 15th Hessel Visser

2. Who is Hessel Visser? ‘s-Gravendeel Dordrecht ‘s-Gravendeel Noordhoff
CoLogic
Hogeschool Rotterdam
Enraf-Nonius
Fokker
Kluwer
Wie heeft er ooit van Hessel Visser gehoord voordat je aan dit college begon?
2 x HTS en TU
Basic education
1950
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2010

3. What did I do? 3

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5. Basic principles and demand forecasting
Logistics Tools for Management
DuPont chart
ABC-analysis
Relative Contribution
Forecasting
Qualitative forecasting
Quantitative Methods
Conclusions

6. 1 DuPont Chart Definition
DuPont Chart calculates the key components of any business for easy evaluation of performance.

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9. 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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11. 3 Relative Contribution
Definition
Average contribution margin that is weighted to reflect the relative contribution of each operating department of a multi-department firm to its ability to pay fixed costs and to generate income.

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14. 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, cross-sectional or longitudinal data.

15. Types of Forecasts Economic forecasts Technological 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
One can use an example based upon one’s college or university. Students can be asked why each of these forecast types is important to the college. Once they begin to appreciate the importance, one can then begin to discuss the problems. For example, is predicting “demand” merely as simple as predicting the number of students who will graduate from high school next year (i.e., a simple counting exercise)?

17. Demand Patterns Dependent versus independent
Only independent demand needs to be forecasted
Dependent demand should never be forecasted
Seat
Handlebars
Wheels

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

19. 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
A point to be made here is that one requires a forecasting “plan,” not merely the selection of a particular forecasting methodology.

20. Product Demand Charted over 4 Years with Trend and Seasonality1 2 3 4
Seasonal peaks
Trend component
Actual demand line
Average demand over four years
Demand for product or service
Random variation
This slide illustrates a typical demand curve. You might ask students why it is important to know more than simply the actual demand over time. Why, for example, would one wish to be able to break out a “seasonality” factor?

21. Actual Demand, Moving Average, Weighted Moving Average
Actual sales
Moving average
This slide illustrates one of the simplest forecasting techniques - the moving average. It may be useful to point out the lag introduced by exponential smoothing - and ask how one can actually make use of the forecast.

22. 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
This slide provides a framework for discussing some of the inherent difficulties in developing reliable forecasts. You may wish to include in this discussion the difficulties posed by attempting forecast in a continuously, and rapidly changing environment where product life-times are measured less often in years and more often in months than ever before.
One might wish to emphasize the inherent difficulties in developing reliable forecasts.

23. Forecasting Approaches
Qualitative Methods
Quantitative Methods
Used when situation is vague & little data exist
New products
New technology
Involves intuition, experience
e.g., forecasting sales on Internet
Used when situation is ‘stable’ & historical data exist
Existing products
Current technology
Involves mathematical techniques
e.g., forecasting sales of color televisions
This slide distinguishes between Quantitative and Qualitative forecasting. If you accept the argument that the future is one of perpetual, and perhaps significant change, you may wish to ask students to consider whether quantitative forecasting will ever be sufficient in the future - or will we always need to employ qualitative forecasting also. (Consider Tupperware’s ‘jury of executive opinion.’)

24. 5 Qualitative forecasting
Definition
Qualitative forecasting methods are based on educated opinions of appropriate persons

25. 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
This slide outlines several qualitative methods of forecasting. Ask students to give examples of occasions when each might be appropriate.
The next several slides elaborate on these qualitative methods.

26. 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
Ask your students to consider other potential disadvantages. (Politics?)

27. 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
You might ask your students to consider what problems might occur when trying to use this method to predict sales of a potential new product.

28. Delphi Method Iterative group process 3 types of people
Decision makers
Staff
Respondents
Reduces ‘group-think’
Decision Makers
(Sales?)
Staff
(Sales will be 50!)
(What will sales be? survey)
You might ask your students to consider whether there are special examples where this technique is required. ( Questions of technology transfer or assessment, for example; or other questions where information from many different disciplines is required.)
Respondents
(Sales will be 45, 50, 55)

30. Consumer Market Survey
Ask customers about purchasing plans
What consumers say, and what they actually do are often different
Sometimes difficult to answer
You might discuss some of the difficulties with this technique. Certainly there is the issue that what consumers say is often not what they do. There are other problems such as that consumers sometime wish to please the surveyor; and for unusual, future, products, consumers may have a very imperfect frame of reference within which to consider the question.

31. 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.

32. Quantitative Forecasting Methods (Non-Naive)
Time Series
Associative
Models
Models
A point you may wish to make here is that only in the case of linear regression are we assuming that we know “why” something happened. General time-series models are based exclusively on “what” happened in the past; not at all on “why.” Does operating in a time of drastic change imply limitations on our ability to use time series models?
Moving
Exponential
Trend
Linear
Average
Smoothing
Projection
Regression

33. 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:
This and subsequent slide frame a discussion on time series - and introduce the various components.

34. Time Series Components
Trend
Seasonal
Cyclical
Random

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36. Forecast errors

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39. 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

40. Conclusions about Logistic Tools for management.
Start with Simple Tools
Collect Data in an Early Stage
Integrate Tools as much as possible

41. Inventory Control It’s all about inventory
Inventory Definitions and Goals
Inventory Turnover
Inventory Management
Inventory Costs
Conclusions 41

42. 1 Inventory Goals 42

43. 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. 43

44. Why Inventory Control?
Stock is the insurance premium for the fear of getting non-sales. 44

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47. 2 Inventory Turnover 47

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53. 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. 53

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58. 4 Inventory Costs 58

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66. 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. 66

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69. 6 Safety Stock
Safety stock: Quantity of inventory used in inventory management systems to allow for deviations in demand or supply. 69

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73. Try to get rid of stock 73

74. 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. 74