The Smart Forecaster
Pursuing best practices in demand planning, forecasting and inventory optimization
Most demand forecasts are partial or incomplete: They provide only one single number: the most likely value of future demand. This is called a point forecast. Usually, the point forecast estimates the average value of future demand. Interval forecasts provide an estimate of the possible future range of demand (i.e. demand has a 90% chance of being between 50 – 100 units). Probabilistic forecasts take it a step further and provide additional information. Knowing more is always better than knowing less and the probabilistic forecast provides that extra information so crucial for inventory management. This video blog by Dr. Thomas Willemain explains each type of forecast and the advantages of probabilistic forecasting.
Point forecast (green) shows what is most likely to happen. The Interval Forecast shows the range (blue) of possibilities.
Probability Forecast shows the probability of each value occurring
Once a customer is ready to implement software for demand planning and/or inventory optimization, they need to connect the analytics software to their corporate data stream.This provides information on item demand and supplier lead times, among other things. We extract the rest of the data from the ERP system itself, which provides metadata such as each item’s location, unit cost, and product group.
In this blog, we review 10 specific questions you can ask to uncover what’s really happening with the inventory planning and demand forecasting policy at your company. We detail the typical answers provided when a forecasting/inventory planning policy doesn’t really exist, explain how to interpret these answers, and offer some clear advice on what to do about it.
In the supply chain planning world, the most fundamental decision is how to balance item availability against the cost of maintaining that availability (service levels and fill rates). At one extreme, you can grossly overstock and never run out until you go broke and have to close up shop from sinking all your cash into inventory that doesn’t sell.