Inventory Management Workshop
How to leverage forecast errors to optimize inventory policy?

- presented by Mark Chockalingam, Ph. D.,

August 5 2009 10AM - 1PM EST

The objective of this workshop is to review the close link between forecast accuracy and inventory management and discuss the implications of forecast error for inventory strategies – Lead time uncertainty, safety stock, and planning to forecast. The workshop will also briefly review forecast error metrics and their calculation methodology.

You will learn...

The mechanics of various demand metrics used in a manufacturing organization
The pros and cons of the demand metrics and how forecast bias can be controlled
The limitations and dangers of using Weeks Forward Coverage as an Inventory Policy Parameter
How carefully designed demand metrics can be leveraged in inventory management and planning

Detailed Outline of the Workshop:

In this workshop, we will discuss how demand metrics can be leveraged in designing scientific inventory planning parameters. Inaccurate demand forecasts can result in supply imbalances which cause inferior customer service and/or bloated inventories. We will briefly discuss the effects of forecast quality on inventory setting and process to calculate and use demand forecast errors in inventory strategies.

Typically, Organizations set safety stock in a set number of weeks or months to cover unexpected demand. Such methods of safety stock calculation as measure of weeks-forward coverage, also called WFC, can often be unscientific and extremely dependent on the judgment of the planner. Conceived in the slide-rule era, the WFC magnifies the effect of an inaccurate forecast.

Here, we review some scientific methods of setting safety stock strategies that are dependent on the history of demand error by sku. We also show how forecast bias will qualitatively affect safety stock policy:

Importance of Forecast Error in Inventory management
- Link between Forecast Error and Inventories
- Calculation methods for Different Error Measures and their pros and cons
- MAPE versus RMSE: Which to use?
- Value vs. Volume weighting your inventory policy
Inventory Policy and Quality of Forecasts
- Traditional inventory Management policies
- Potential Process Flaws in lack of a holistic Service-Cost Strategy
- Weeks Forward Coverage
- Effect of Demand Volatility and Seasonality
- Definition of the Classic Safety Stock
- Determinants of Safety Stock: Service Levels and Lead Time
- Incorporating the correct Net Lead time in your calculations
- Average Forecast Error versus Standard Deviation to determine Safety stock
- Safety Stock Calculation Examples

Challenges in the Process
- Inventory components in the planning Horizon
- When not to use the Forecast in the planning process?
- Forecast Bias and its impact
- Can you make an adjustment for Forecast Bias
Special Cases
- Setting Safety stock for Seasonal products
- How to accommodate for supply volatility or Schedule Variance?
- Made to Order versus Made to Stock products
- Brief review of other special cases without calculations: Lot sizing, Dynamic Lot sizing and Demand Back orders and applications to VMI.