The Smart Forecaster
Pursuing best practices in demand planning, forecasting and inventory optimization
Do you know which items have too much or too little inventory? What if you knew? How would you go about cutting overstocks while still ensuring a competitive service level? Would you be able to reduce stockouts without incurring a prohibitively expensive inventory increase? How would these changes impact service levels, costs and turns—for individual items, groups of items and overall?
Most companies know they have too much or too little inventory but lack a key ingredient for optimizing inventory: Service Level-Driven Demand Planning. To take action, you must know how much inventory is needed to satisfy the service level you require. More fundamentally, you need to know the specific service level that will result from your current inventory policies, the gap to be addressed and its financial implications.
Many organizations, especially those with intermittent demand, find this to be an exceptionally challenging trial and error process.
Moving to a service level-driven approach will overcome this challenge and ensure that rebalancing inventory improves service level performance at a lower cost. Start with the most accurate demand forecast possible, calibrate for forecast risk and then determine your optimal inventory position. In a recent webinar, I demonstrated Service Level-Driven Demand Planning and how SmartForecasts can be used to drive this process:
1. Measure the service levels that will be achieved at current inventory levels and with your current inventory policy.
2. Identify items that will achieve high service levels (98%+) but at prohibitively high cost.
3. Identify items that are at high risk of stockout (service levels < 75%).
4. Run multiple what-if scenarios based on a different prioritization of service levels by item or item groups. Choose the scenario that optimizes financial constraints with service objectives.
5. Quantify cash savings from reducing overstocks and the costs to increase inventory when service levels are unacceptably low.
6. Take action to establish new service level-driven reorder points, order quantities and inventory levels to meet your service targets and budget.
To view the webinar replay, please click here and complete the registration request.
Gregory Hartunian serves as President of Smart Software and as a member of the Board of Directors. A graduate of The F.W. Olin School for Business at Babson College, he formerly served as Vice President, Sales and Operations.
When setting a target service level, make sure to take into account factors like current service levels, replenishment lead times, cost constraints, the pain inflicted by shortages on you and your customers, and your competitive position.
Those who produce forecasts owe it to those who consume forecasts, and to themselves, to be aware of the uncertainty in their forecasts. This note is about how to estimate forecast uncertainty and use the estimates in your demand planning process. We focus on forecasts made in support of demand planning as well as forecasts inherent in optimizing inventory policies involving reorder points, safety stocks, and min/max levels.
Many companies adopt a “customer first, better to have the inventory and not need it” approach to inventory planning. While well intentioned, this approach often ignores the role that diminishing returns and opportunity costs play in inventory management impacting the organizations ability to quickly respond to demand.