Basic principles and demand forecasting

1. Lecture 3 Basic principles and demand forecasting Inventory Control February, 15th 2010 Hessel Visser www.hesselvisser.nl

2. Who is Hessel Visser? ‘s-Gravendeel Dordrecht ‘s-Gravendeel Noordhoff CoLogic Hogeschool Rotterdam Enraf-Nonius Fokker Kluwer 2 x HTS en TU Basic education 1950 1960 1970 1980 1990 2000 2010

3. What did I do?

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

6. Definition DuPont Chart calculates the key components of any business for easy evaluation of performance. www.businessplans.org/DuPontChart.html 1 DuPont Chart

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9. 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'. 2 ABC-analysis

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11. 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. 3 Relative Contribution

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14. 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. 4 Forecasting

15. 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 Types of Forecasts

17. Dependent versus independent Only independent demand needs to be forecasted Dependent demand should never be forecasted Demand Patterns 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. 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 Seven Steps in Forecasting

20. Seasonal peaks Trend component Actual demand line Demand for product or service Average demand over four years Random variation Year 2 Year 3 Year 4 Year 1 Product Demand Charted over 4 Years with Trend and Seasonality

21. Actual Demand, Moving Average, Weighted Moving Average Weighted moving average Actual sales Moving average

22. 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 Realities of Forecasting

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

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

25. 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 Overview of 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

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

28. Iterative group process 3 types of people Decision makers Staff Respondents Reduces ‘group-think’ Delphi Method Decision Makers (Sales?) (Sales will be 50!) Staff (What will sales be? survey) 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 http://blogs.zdnet.com/emergingtech/?m=200701&paged=1

31. 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. 6 Quantitative Methods

32. Quantitative Forecasting Methods(Non-Naive) Quantitative Forecasting Associative Time Series Models Models Linear Moving Exponential Trend Average Smoothing Regression Projection

33. 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?

34. Trend Cyclical Seasonal Random Time Series Components

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

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

42. 1 Inventory Goals

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.

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

47. 2 Inventory Turnover