A fundamental aspect of supply chain management is accurate demand forecasting. Some product items have an intermittent demand pattern that makes them all but impossible to forecast with traditional, smoothing-based forecasting methods. We address the problem of forecasting intermittent demand (or irregular demand), i.e. random demand with a large proportion of zero values. This pattern is characteristic of demand for companies that manage large inventories of service and spare parts in industries such as aviation, aerospace, automotive, high tech, and electronics, as well as in MRO (Maintenance, Repair and Overhaul).
Accurate forecasting of demand is important in inventory control, but the intermittent nature of demand makes forecasting especially difficult for service parts planning. Similar problems arise when an organization manufactures slow-moving items and requires sales forecasts for planning purposes. Because forecasts of intermittent and lumpy demand have been so unreliable, most companies forecast inventory requirements relying primarily on subjective business knowledge, forecast only a fraction of their higher volume inventory, use simple “rule of thumb” estimates, or traditional statistical forecasting that incorrectly assumes a particular type demand distribution for inventory control.
Learn industry best practices on how to improve intermittent demand forecasting and create supply chain efficiencies in the articles below.
Maximize Machine Uptime with Probabilistic Modeling
If you both make and sell things, you own two inventory problems. Companies that sell things must focus relentlessly on having enough product inventory to meet customer demand. Manufacturers and asset intensive industries such as power generation, public transportation, mining, and refining, have an additional inventory concern: having enough spare parts to keep their machines running.
This technical brief reviews the basics of two probabilistic models of machine breakdown. It also relates machine uptime to the adequacy of spare parts inventory.
Engineering to Order at Kratos Space – Making Parts Availability a Strategic Advantage
The Kratos Space group within National Security technology innovator Kratos Defense & Security Solutions, Inc., produces COTS s software and component products for space communications – Making Parts Availability a Strategic Advantage
The Advantages of Probability Forecasting
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. Much more useful is a forecast of full probability distribution of demand at any future time. This is more commonly referred to as probability forecasting and is much more useful.
The Scourge of Skewness
Demand planners have to cope with multiple problems to get their job done. One is the Irritation of Intermittency. The “now you see it, now you don’t” character of intermittent demand, with its heavy mix of zero values, forces the use of advanced statistical methods, such as Smart Software’s patented Markov Bootstrap algorithm. But even within the dark realm of intermittent demand, there are degrees of difficulty: planners must further cope with the potentially costly Scourge of Skewness.
6 Essential Steps to Better Recovery Planning
As we approach the midpoint in 2013, there is still a lot of economic uncertainty complicating your supply chain planning processes. Some look at this shaky economy and postpone needed investments that can position their organizations for a strong future.
A CFO’s Perspective on Demand Planning – “More Strategic Than You Think”
NKK Switches, based in Scottsdale, Arizona, is a leading manufacturer and supplier of electromechanical switches. The business involves many different switch types—toggles, push-button, rotary, even some programmable switch types. We are known for our high quality, and for our ability to meet an exceptionally broad range of customer requirements on a turnkey (custom configuration) basis. NKK Switches produces customized solutions from component parts sourced exclusively from manufacturing facilities in Japan and China.
Recent Posts
Daily Demand ScenariosIn this Videoblog, we will explain how time series forecasting has emerged as a pivotal tool, particularly at the daily level, which Smart Software has been pioneering since its inception over forty years ago. The evolution of business practices from annual to more refined temporal increments like monthly and now daily data analysis illustrates a significant shift in operational strategies. […]
The Cost of Spreadsheet PlanningCompanies that depend on spreadsheets for demand planning, forecasting, and inventory management are often constrained by the spreadsheet’s inherent limitations. This post examines the drawbacks of traditional inventory management approaches caused by spreadsheets and their associated costs, contrasting these with the significant benefits gained from embracing state-of-the-art planning technologies. […]
Learning from Inventory ModelsIn this video blog, the spotlight is on a critical aspect of inventory management: the analysis and interpretation of inventory data. The focus is specifically on a dataset from a public transit agency detailing spare parts for buses. […]
The Methods of ForecastingDemand planning and statistical forecasting software play a pivotal role in effective business management by incorporating features that significantly enhance forecasting accuracy. One key aspect involves the utilization of smoothing-based or extrapolative models, enabling businesses to quickly make predictions based solely on historical data. This foundation rooted in past performance is crucial for understanding trends and patterns, especially in variables like sales or product demand. Forecasting software goes beyond mere data analysis by allowing the blending of professional judgment with statistical forecasts, recognizing that forecasting is not a one-size-fits-all process. This flexibility enables businesses to incorporate human insights and industry knowledge into the forecasting model, ensuring a more nuanced and accurate prediction. […]
Smart Software to Present at Epicor Insights 2024Smart Software will present at this year's Epicor Insights event in Nashville. If you plan to attend this year, please join us at booth #13 or #501, and learn more about Epicor Smart Inventory Planning and Optimization. . […]
Inventory Optimization for Manufacturers, Distributors, and MRO
Why MRO Businesses Need Add-on Service Parts Planning & Inventory SoftwareMRO organizations exist in a wide range of industries, including public transit, electrical utilities, wastewater, hydro power, aviation, and mining. To get their work done, MRO professionals use Enterprise Asset Management (EAM) and Enterprise Resource Planning (ERP) systems. These systems are designed to do a lot of jobs. Given their features, cost, and extensive implementation requirements, there is an assumption that EAM and ERP systems can do it all. In this post, we summarize the need for add-on software that addresses specialized analytics for inventory optimization, forecasting, and service parts planning. […]
The Forecast Matters, but Maybe Not the Way You ThinkTrue or false: The forecast doesn't matter to spare parts inventory management. At first glance, this statement seems obviously false. After all, forecasts are crucial for planning stock levels, right? It depends on what you mean by a “forecast”. If you mean an old-school single-number forecast (“demand for item CX218b will be 3 units next week and 6 units the week after”), then no. If you broaden the meaning of forecast to include a probability distribution taking account of uncertainties in both demand and supply, then yes. […]
Why MRO Businesses Should Care About Excess InventoryDo MRO companies genuinely prioritize reducing excess spare parts inventory? From an organizational standpoint, our experience suggests not necessarily. Boardroom discussions typically revolve around expanding fleets, acquiring new customers, meeting service level agreements (SLAs), modernizing infrastructure, and maximizing uptime. In industries where assets supported by spare parts cost hundreds of millions or generate significant revenue (e.g., mining or oil & gas), the value of the inventory just doesn’t raise any eyebrows, and organizations tend to overlook massive amounts of excessive inventory. […]
Top Differences Between Inventory Planning for Finished Goods and for MRO and Spare PartsIn 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. […]
The Problem
Some product items have an intermittent demand pattern that makes them all but impossible to forecast with traditional, smoothing-based forecasting methods. Items with intermittent demand – also known as lumpy, volatile, variable or unpredictable demand – have many zero or low volume values interspersed with random spikes of demand that are often many times larger than the average. This problem is especially prevalent in companies that manage large inventories of service and spare parts in industries such as aviation, aerospace, automotive, high tech, and electronics, as well as in MRO (Maintenance, Repair and Overhaul).
Intermittent demand
In these businesses, as much as 80% of the parts and product items may have intermittent or lumpy demand. Intermittent demand makes it difficult to accurately estimate the safety stock and service level inventory requirements needed for successful supply chain planning. Because forecasts of intermittent and lumpy demand have been so unreliable, most companies forecast inventory requirements relying primarily on subjective business knowledge, forecast only a fraction of their higher volume inventory, use simple “rule of thumb” estimates, or traditional statistical forecasting that incorrectly assumes a particular type demand distribution for inventory control. The result is that billions of dollars are wasted every year because of either excess inventory costs or poor customer service due to stock-outs.
Intermittent demand – also known as lumpy, volatile, variable or unpredictable demand.
The Smart Solution
SmartForecasts and Smart Inventory Optimization use a unique empirical probabilistic forecasting approach that results in accurate forecasts of inventory requirements where demand is intermittent. The solution works particularly well whenever demand does not conform to a simple normal distribution. Our patented, APICS award-winning “bootstrapping” technology rapidly generates tens of thousands of possible scenarios of future demand sequences and cumulative demand values over an item’s lead time. These scenarios are statistically similar to the item’s observed data, and they capture the relevant details of intermittent demand without relying on the assumptions commonly made about the nature of demand distributions by traditional forecasting methods. The result is a highly accurate forecast of the entire distribution of cumulative demand over an item’s full lead time. With the information these demand distributions provide, you can easily plan your company’s safety stock and service level inventory requirements for thousands of intermittently demanded items with nearly 100% accuracy.
The Benefits
Companies using our powerful intermittent demand forecasting and planning solution typically reduce standing inventory by 20% in the first year, increase parts availability 10-20%, and reduce the need for and associated costs of emergency transshipment to close gaps in their supply chain. Repair and service parts inventories are truly optimized, leading to more efficient operations, improvements in customer service, and significantly less cash tied up in inventory.
White Paper: Smart Software Gen2
In this white paper, we introduce “Gen2”, our next generation of probabilistic modeling technology that powers the Smart IP&O Platform. We recount the evolution of Smart Software’s forecasting methods and we detail how Gen2 substantially expands the capabilities that have made Gen1 so useful to so many companies. Finally, we will also give a high-level view of the probability math behind Gen2 . Fill in this form and we'll email you the paper.