Improve Forecast Accuracy, Eliminate Excess Inventory, & Maximize Service Levels
In this Video Dr. Thomas Willemain, co–Founder and SVP Research, talks about forecast-based inventory management policy, also known as MRP logic. This is the fourth in our series on major approaches to managing inventory. We begin by looking at some very simple and then more robust models of inventory dynamics that help us determine how much to order or manufacture and when. We then consider how to calculate lead time and account for lead time variability. Tom concludes by describing the importance of safety stock, it’s role in properly buffering against demand and supply uncertainty, and how best to calculate it.
RECENT POSTS
Leveraging ERP Planning BOMs with Smart IP&O to Forecast the Unforecastable
In a highly configurable manufacturing environment, forecasting finished goods can become a complex and daunting task. The number of possible finished products will skyrocket when many components are interchangeable. A traditional MRP would force us to forecast every single finished product which can be unrealistic or even impossible. Several leading ERP solutions introduce the concept of the “Planning BOM”, which allows the use of forecasts at a higher level in the manufacturing process. In this article, we will discuss this functionality in ERP, and how you can take advantage of it with Smart Inventory Planning and Optimization (Smart IP&O) to get ahead of your demand in the face of this complexity.
Why Inventory Planning Shouldn’t Rely Exclusively on Simple Rules of Thumb
For too many companies, a critical piece of data fact-finding ― the measurement of demand uncertainty ― is handled by simple but inaccurate rules of thumb. For example, demand planners will often compute safety stock by a user-defined multiple of the forecast or historical average. Or they may configure their ERP to order more when on hand inventory gets to 2 x the average demand over the lead time for important items and 1.5 x for less important ones. This is a huge mistake with costly consequences.
Why MRO Businesses Should Care About Excess Inventory
Do 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.
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. […]
