The Smart Forecaster

 Pursuing best practices in demand planning,

forecasting and inventory optimization

Improve Forecast Accuracy, Eliminate Excess Inventory, & Maximize Service Levels

In this video, Dr. Thomas Willemain, co-Founder and SVP Research, talks about improving Forecast Accuracy by Managing Error. This video is the first in our series on effective methods to Improve Forecast Accuracy.  We begin by looking at how forecast error causes pain and the consequential cost related to it. Then we will explain the three most common mistakes to avoid that can help us increase revenue and prevent excess inventory. Tom concludes by reviewing the methods to improve Forecast Accuracy, the importance of measuring forecast error, and the technological opportunities to improve it.

 

Forecast error can be consequential

Consider one item of many

  • Product X costs $100 to make and nets $50 profit per unit.
  • Sales of Product X will turn out to be 1,000/month over the next 12 months.
  • Consider one item of many

What is the cost of forecast error?

  • If the forecast is 10% high, end the year with $120,000 of excess inventory.
  • 100 extra/month x 12 months x $100/unit
  • If the forecast is 10% low, miss out on $60,000 of profit.
  • 100 too few/month x 12 months x $50/unit

 

Three mistakes to avoid

1. Ignoring error.

  • Unprofessional, dereliction of duty.
  • Wishing will not make it so.
  • Treat accuracy assessment as data science, not a blame game.

2. Tolerating more error than necessary.

  • Statistical forecasting methods can improve accuracy at scale.
  • Improving data inputs can help.
  • Collecting and analyzing forecast error metrics can identify weak spots.

3. Wasting time and money going too far trying to eliminate error.

  • Some product/market combinations are inherently more difficult to forecast. After a point, let them be (but be alert for new specialized forecasting methods).
  • Sometimes steps meant to reduce error can backfire (e.g., adjustment).
Leave a Comment

RECENT POSTS

Confused about AI and Machine Learning?

Confused about AI and Machine Learning?

Are you confused about what is AI and what is machine learning? Are you unsure why knowing more will help you with your job in inventory planning? Don’t despair. You’ll be ok, and we’ll show you how some of whatever-it-is can be useful.

Centering Act: Spare Parts Timing, Pricing, and Reliability

Centering Act: Spare Parts Timing, Pricing, and Reliability

In this article, we’ll walk you through the process of crafting a spare parts inventory plan that prioritizes availability metrics such as service levels and fill rates while ensuring cost efficiency. We’ll focus on an approach to inventory planning called Service Level-Driven Inventory Optimization. Next, we’ll discuss how to determine what parts you should include in your inventory and those that might not be necessary. Lastly, we’ll explore ways to enhance your service-level-driven inventory plan consistently.

Recent Posts

  • What is Inventory Control Planning Management Optimization DictionaryWhat is Inventory Planning? A Brief Dictionary of Inventory-Related Terms
    People involved in the supply chain are likely to have questions about various inventory terms and methods used in their jobs. This note may help by explaining these terms and showing how they relate. […]
  • artificial intelligence ai and machine learning inventory managementConfused about AI and Machine Learning?
    Are you confused about what is AI and what is machine learning? Are you unsure why knowing more will help you with your job in inventory planning? Don’t despair. You’ll be ok, and we’ll show you how some of whatever-it-is can be useful. […]
  • Centering Act Spare Parts Timing Pricing and ReliabilityCentering Act: Spare Parts Timing, Pricing, and Reliability
    In this article, we'll walk you through the process of crafting a spare parts inventory plan that prioritizes availability metrics such as service levels and fill rates while ensuring cost efficiency. We'll focus on an approach to inventory planning called Service Level-Driven Inventory Optimization. Next, we'll discuss how to determine what parts you should include in your inventory and those that might not be necessary. Lastly, we'll explore ways to enhance your service-level-driven inventory plan consistently. […]
  • Balance,Concept,With,Chrome,Balls,inventory optimization softwareHow to Forecast Inventory Requirements
    Forecasting inventory requirements is a specialized variant of forecasting that focuses on the high end of the range of possible future demand. Traditional methods often rely on bell-shaped demand curves, but this isn't always accurate. In this article, we delve into the complexities of this practice, especially when dealing with intermittent demand. […]
  • Demand Planning twin brothers holding forecasting toolsSix Demand Planning Best Practices You Should Think Twice About
    Every field, including forecasting, accumulates folk wisdom that eventually starts masquerading as “best practices.” These best practices are often wise, at least in part, but they often lack context and may not be appropriate for certain customers, industries, or business situations. There is often a catch, a “Yes, but”. This note is about six usually true forecasting precepts that nevertheless do have their caveats. […]

    Inventory Optimization for Manufacturers, Distributors, and MRO

    • Centering Act Spare Parts Timing Pricing and ReliabilityCentering Act: Spare Parts Timing, Pricing, and Reliability
      In this article, we'll walk you through the process of crafting a spare parts inventory plan that prioritizes availability metrics such as service levels and fill rates while ensuring cost efficiency. We'll focus on an approach to inventory planning called Service Level-Driven Inventory Optimization. Next, we'll discuss how to determine what parts you should include in your inventory and those that might not be necessary. Lastly, we'll explore ways to enhance your service-level-driven inventory plan consistently. […]
    • 5 Steps to Improve the Financial Impact of Spare Parts Planning5 Steps to Improve the Financial Impact of Spare Parts Planning
      In today’s competitive business landscape, companies are constantly seeking ways to improve their operational efficiency and drive increased revenue. Optimizing service parts management is an often-overlooked aspect that can have a significant financial impact. Companies can improve overall efficiency and generate significant financial returns by effectively managing spare parts inventory. This article will explore the economic implications of optimized service parts management and how investing in Inventory Optimization and Demand Planning Software can provide a competitive advantage. […]
    • Bottom Line strategies for Spare Parts Planning SoftwareBottom Line Strategies for Spare Parts Planning
      Managing spare parts presents numerous challenges, such as unexpected breakdowns, changing schedules, and inconsistent demand patterns. Traditional forecasting methods and manual approaches are ineffective in dealing with these complexities. To overcome these challenges, this blog outlines key strategies that prioritize service levels, utilize probabilistic methods to calculate reorder points, regularly adjust stocking policies, and implement a dedicated planning process to avoid excessive inventory. Explore these strategies to optimize spare parts inventory and improve operational efficiency. […]
    • professional technician engineer planning spare parts in industrial manufacturing factory,Prepare your spare parts planning for unexpected shocks
      In today's unpredictable business climate, we do have to worry about supply chain disruptions, long lead times, rising interest rates, and volatile demand. With all these challenges, it's never been more vital for organizations to accurately forecast parts usage, stocking levels, and to optimize replenishment policies such as reorder points, safety stocks, and order quantities. In this blog, we'll explore how companies can leverage innovative solutions like inventory optimization and parts forecasting software that utilize machine learning algorithms, probabilistic forecasting, and analytics to stay ahead of the curve and protect their supply chains from unexpected shocks. […]