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Unit 2- Forecasting and inventory
management


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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

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Demand Forecasting within the supply
chain

Forecasting demand level is important to the firm as a
whole as it provides basic inputs for the planning and
control of all functional areas.
Understanding demand patterns:
Spatial vs temporal demand: space and time
dimensions of demand- logistics problem is to know
where demand volume will take place and when it will
take place.- needed to plan warehouse locations,
balance inventor levels across the logistics network,
allocate transportation resources.
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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-
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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, the
higher the forecast error( read bull whip effect)
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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 due
to information distortion along the chain leading
to supply demand mismatch.
When all stages of a supply chain produce a
collaborative forecast, it tends to be more
accurate.

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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 scs ability to match supply with
demand.
Areas which can be enhanced through collaborative
forecasting are:
Production: scheduling, inventory control, aggregate
planning, purchasing



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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




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Inputs to collaborative forecasting
Inputs can be from functional areas with in a firm, from
the various members in the supply chain like vendors,
carriers and buyers.
Buyers and marketing , who are close to the final
consumer can have the best feel of end demand.
Vendors or purchasing personnel are tuned to supply
shortages and capacity limitations affecting product
price and demand levels
Transportation personnel or carriers may be able to
predict delivery times that affect customer service
and sales.

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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 the
manufacturing process
Cost of ordering is more than cost of carrying inventory
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Types of inventory in SC
In transit inventory- in transit between different stages of
the supply chain
Cycle inventory- inventory necessary to meet the
average demand during the time between successive
replenishments. Amount of cycle stock depends on lot
sizes, economical shipment quantities, storage space
limitations, lead times, prices-quantity discount
schedules, and inventory carrying costs
Safety inventory- as a hedge against the variability in
demand
Shrinkage, dead or obsolete stock



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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 the
inventory at hand. It is a measure of the ability of a company
to 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 a
reference period without delay from stock on hand.

Cycle inventory reasons
A supply chain is coordinated if the decisions made
by 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 buying
by the retailer without a significant increase in the
customer demand.

Lot & Volume based quantity discounts
In Commodity based products, price is set by the market
and 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 cycle
inventory 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.
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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 ordering
and 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 individual
products 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
synchronized to keep cycle inventory low. i.e the
replenishment order of retailers to the distributor and
distributor to the manufacturer can be synchronized by
cross docking

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Inventory planning and controlling in
SC Safety inventory
2 questions to consider when planning safety
inventory:
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

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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 also
increases.
Both fill rate and cycle service level increases as
the safety inventory is increased.
Safety inventory increases with an increase in the
lead time and the standard deviation of periodic
demand.

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Strategies to reduce safety inventory
1) A change to continuous monitoring of
inventory from periodic monitoring can help reduce
inventories.
2) Physical aggregation and virtual aggregation
using information centralization helps reduce cycle
inventories
3) BY segregating inventories into fast moving and
slow moving items. Slow moving items can be
stocked at a centralized location. Fast moving items
can be decentralized.

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Strategies to reduce safety inventory
contd.,
4) Product substitution: substitution refers tot eh use
of one product or satisfy demand for a different product.
2 instances where substitution may occur:
Manufacturer-driven substitution manufacturers or
supplier makes the decision to substitute.
Customer-driven substitutions- customers make the
decision to substitute.
5)Component commonality : Significant amount of
inventory in the supply chain is held in the form of
components. Use of common components in a variety of
products helps in aggregation strategy leading to
inventory reduction.
6)Product postponement strategy