Dia 1 hesselvisser@chello.nl Logistics: Principles and Practice Basic principles and demand forecasting February, 15th 2010 Hessel Vi

hesselvisser@chello.nl 

Logistics: Principles and Practice  
 

Basic principles and demand forecasting 
 
 

February, 15th 2010                 Hessel Visser

www.hesselvisser.nl 

Lecture 3 
 

Inventory Control

 

hesselvisser@chello.nl 

Logistics: Principles and Practice  

Basic education 

1950 

1960 

1970 

1980 

1990 

2010 

2000 

2 x HTS en TU 

Kluwer 

Fokker 

Enraf-Nonius 

Hogeschool Rotterdam 

Noordhoff 

Who is Hessel Visser? 

CoLogic 

‘s-Gravendeel 

‘s-Gravendeel 

Dordrecht

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Logistics: Principles and Practice  

What did I do?

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Logistics: Principles and Practice

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Logistics: Principles and Practice  

Logistics Tools for Management

1. DuPont chart
2. ABC-analysis
3. Relative Contribution
4. Forecasting
5. Qualitative forecasting
6. Quantitative Methods

Conclusions 
 


Basic principles and demand forecasting

 




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Logistics: Principles and Practice  


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 multi-department firm to its ability to pay fixed costs and to generate income.

 




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Logistics: Principles and Practice  


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.

 




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Logistics: Principles and Practice  


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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Logistics: Principles and Practice




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Demand Patterns 


Dependent versus independent

• Only independent demand needs to be forecasted
• Dependent demand should never be forecasted
 


Seat 


Wheels 


Handlebars




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What Should Be Forecasted? 


Business plan 


Market direction 


2 to 10 years 


Sales and operations

planning 


Product lines and

families 


1 to 3 years 


Master production 


schedule 


End items and

options 


6 to 18

Months 


  


Forecast 


Time Frame 


Level




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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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Logistics: Principles and Practice  


Product Demand Charted over 4 Years with Trend and Seasonality 


Year

1 


Year

2 


Year

3 


Year

4 


Seasonal peaks 


Trend component 


Actual demand line 


Average demand over four years 


Demand for product or service 


Random variation




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Actual Demand, Moving Average, Weighted Moving Average 


Actual sales 


Moving average 


Weighted moving average




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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 


• Used when situation is ‘stable’ & historical data exist
• Existing products
• Current technology
• Involves mathematical techniques
• e.g., forecasting sales of color televisions
 


Quantitative Methods 


• Used when situation is vague & little data exist
• New products
• New technology
• Involves intuition, experience
• e.g., forecasting sales on Internet
 


Qualitative Methods




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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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• Involves small group of high-level managers
• Group estimates demand by working together
• Combines managerial experience with statistical models
• Relatively quick
• ‘Group-think’ 
  disadvantage
 


Jury of Executive Opinion




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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 ‘group-think’
 


Respondents  


Staff  
 


Decision Makers 
 


(Sales?) 


(What will sales be? survey) 


(Sales will be 45, 50, 55) 


(Sales will be 50!)




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Logistics: Principles and Practice




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Logistics: Principles and Practice  


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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Logistics: Principles and Practice  


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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Logistics: Principles and Practice  


Quantitative Forecasting Methods 
(Non-Naive) 


Quantitative 


Forecasting 


Linear 


Regression 


Associative 


Models 


Exponential 


Smoothing 


Moving 


Average 


Time Series 


Models 


Trend 


Projection




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• 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  


What is a Time Series?




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Trend 


Seasonal 


Cyclical 


Random 


Time Series Components




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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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Logistics: Principles and Practice  


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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Logistics: Principles and Practice  


It’s all about inventory

1. Inventory Definitions and Goals
2. Inventory Turnover
3. Inventory Management
4. Inventory Costs

Conclusions 
 


Inventory Control

 




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Logistics: Principles and Practice  


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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Logistics: Principles and Practice  


Why Inventory Control? 


• Stock is the insurance premium for the fear of getting non-sales.

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Logistics: Principles and Practice




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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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Logistics: Principles and Practice




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Logistics: Principles and Practice




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Logistics: Principles and Practice




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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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Logistics: Principles and Practice




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Logistics: Principles and Practice




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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.