The 3 levels of forecasting: Point forecasts, Interval forecasts, Probability forecasts
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.
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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
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.
In a recent post at SupplyChainBrain, Robert Bowman takes a look at excellence in demand planning. Focusing on admirable qualities and techniques, it should be an interesting read for any demand planner seeking to improve his or her craft.
The executive suites at most companies are populated by leaders who became corporate “heroes.” These exceptional performers led—and continue to lead—transformative initiatives that drive revenue growth, reduce costs and increase shareholder value.
Undershoot is Sabotaging your Service Level!
Service level is a key performance indicator for companies that put a premium on satisfying customer demand. Service level is defined as the probability of surviving a replenishment lead time without stocking out.
Inventory management best practice begins with setting service level targets, then calculates reorder points (also called Mins) to achieve those targets. These calculations should account for variability in both demand and replenishment lead time. There are many software systems available for doing these calculations. If everything works out, the achieved service level ends up very close to the target service level. Unfortunately, there is often a painful gap between the two.
One reason for the gap is unrealistic models of demand. In many cases, software for calculating reorder points uses textbook formulas based on mathematical assumptions that make analysis simple at the expense of realism. Many “Inventory 101” textbooks use formulas that assume demand has a Normal distribution (a.k.a. the “bell-shaped curve”) for finished goods and the Poisson distribution for spare parts. Fortunately, there are now inventory optimization and forecasting systems that process the actual demand histories of the inventory items using probabilistic forecasting. These solutions calculate an accurate estimate of the distribution – not some idealized version. To learn more check out this past blog on probabilistic forecasting:
But there is a second source of error in textbooks that operates invisibly in many inventory software package: “undershoot”.
Calculations of reorder points almost always assume that stockouts arise when the total demand during a replenishment interval exceeds the reorder point. For example, assume that demand averages 1 unit per day. If lead time is 5 days, then on average lead time demand is 5 units. Setting the reorder point at 5 units would yield a laughable service level somewhere in the vicinity of 50%. Adding safety stock to the calculation might result in a reorder point of, say, 11 units, which might correspond to a service level of 95%. Another way to say this is, starting at a reorder point of 11 units, there should be a 95% chance of surviving the 5 day lead time without experiencing cumulative demand of more than 11 units. Theoretically!
What’s missing from this analysis is the undershoot phenomenon. Undershoot means that the lead time begins not at the reorder point but below it. Undershoot happens every time the demand that breached the reorder point took the stock down below (not down to) the reorder point. The figure below shows replenishment cycles with and without undershoot. Undershoot picks your pocket before you even begin to roll the dice. It deludes the inventory professional into thinking his or her reorder points are sufficient to achieve their targets, whereas actual performance will not make the grade.
There is only one situation in which undershoot is not a worry: when demand is always either zero or one unit. In that case, undershoot is impossible. But in all other cases, undershoot is sure to happen to some extent, and it can seriously undercut the service level actually achieved by a given choice of reorder point. Our analyses show that the conditions most vulnerable to undershoot involve highly intermittent and skewed demand with very short lead times – the very conditions being made most common by market trends.
What can be done to protect yourself from the effect of undershoot on reorder point calculations? Use inventory optimization and forecasting software that isn’t tied to the old textbook assumptions and instead automatically accounts for undershoot when calculating the service level produced by any choice of reorder point.
To see Smart Software’s Inventory Optimization solution in action, register to see a recorded demo below:
Is safety stock regarded as emergency spares or as a day-to-day buffer against spikes in demand? Knowing the difference and configuring your ERP properly will greatly benefit your bottom line. It is critical to understand how your ERP configurations will impact treatment of safety stock and replenishment orders/production job suggestions. Doing so ensures that unintended mistakes that cause inventory bloat and shortages can be avoided.
Discover the key strategies to tackle inventory inflation caused by software in your supply chain. We often are asked, “Why is the software driving up the inventory?” The answer is that Software isn’t driving it in either direction – the inputs are driving it, and those inputs are controlled by the users (or admins). Here are four things you can do to get results you expect.
Smart Software is pleased to announce the award of US Patent 11,656,887. The patent directs “technical solutions for analyzing historical demand data of resources in a technology platform to facilitate management of an automated process in the platform.
Smart Software and ArcherPoint Team Up to Launch Smart IP&O for NAV
Collaboration Provides Smart Inventory Planning, Forecasting, & Optimization for Microsoft NAV
Boston MA., June 5, 2018 – Smart Software, Inc. is excited to announce the successful integration of its cloud-based Inventory Planning and Optimization software with Microsoft Dynamics NAV to create Smart IP&O for NAV. Smart Software partnered with ArcherPoint Inc., a Microsoft Dynamics ERP Gold Partner and full-service provider for Dynamics NAV and Dynamics 365 to build the connector.
Smart Software is a global provider of next generation 100% web-based demand planning, forecasting, and inventory optimization solutions. ArcherPoint created the connector to integrate Smart Software’s tools with Microsoft Dynamics NAV. The new integration brings the cloud-based Smart IP&O (Inventory Planning and Optimization) into the latest version of Microsoft’s ERP solution. By seamlessly integrating strategic planning in Smart IP&O with operational execution in Dynamics NAV, business users can continuously predict, respond, and plan more effectively in today’s uncertain business environment.
Jim Benson, sales executive from ArcherPoint says, “Smart Software helps our customers by delivering insightful business analytics for inventory modeling and forecasting that drive ordering and replenishment in the latest version of Microsoft NAV. With Smart IP&O, our customers gain a means to shape inventory strategy to align with the business objectives, while empowering their planning teams to reduce inventory and improve service. In today’s supply chain, it is no longer enough to simply manage inventory. It must be optimized.”
The Smart/NAV integration makes all transactional data in NAV, such as shipments, sales orders, receipts, inventory on hand, and more, available in Smart IP&O’s data model. Smart IP&O brings this data to life leveraging field-proven analytics and forecasting methods. This enables executives and their planning team to identify operational inefficiencies, accurately forecast demand, model the financial and customer impact of current and proposed inventory policies, and return optimal planning parameters and forecasts to drive replenishment.
Greg Hartunian, CEO of Smart Software stated, “Businesses that leverage inventory optimization and forecasting technology are able to better understand their operations, lower costs, improve customer service, and outperform the competition. We look forward to working closely with ArcherPoint to help our joint customers achieve these key benefits.”
To learn more about the Smart IP&O for NAV and how it can help your business, please join us for a free webinar, Wednesday, June 27 at 2pm ET. We will provide a demo on the software, uses, and benefits of the product. To register for the webinar please visit: https://www.archerpoint.com/events/lunch-and-learn-archerpoint-smart-inventory-planning-and-optimization
About Smart Software
Smart Software, a leading innovator in demand planning and inventory optimization software, offers Smart IP&O, an integrated suite of web-based demand planning, inventory optimization and supply chain analytics applications. Smart Software has collaborated with ArcherPoint to develop an automated integration with Microsoft Dynamics NAV, enabling the transparent flow of data and results to drive Sales, Inventory and Operations Planning. Founded in 1981, Smart serves a wide range of manufacturing, distribution, and transportation organizations including The Home Depot, FedEx, SCIEX, DisneyLand Resorts, MARS, BC Transit, Metro-North Railroad and many more. Learn more at www.smartcorp.com.
About ArcherPoint
ArcherPoint has built a business around adaptive innovation. Regardless of industry, companies look to ArcherPoint as a business solution provider and partner they can depend on to deliver results. Our history with Microsoft Dynamics NAV dates back to the product’s beginnings. Today, our team includes experts all over the world, not only in Dynamics NAV solution design, development, 24/7 support, and upgrades, but also in accounting, manufacturing, retail, distribution, and other key areas of business. With a commitment to quality service, ArcherPoint is dedicated to helping companies realize true business value by giving them access to world-class ERP solutions that will grow with them to meet their needs now and in their future.
For more information, please contact Smart Software, Inc., Four Hill Road, Belmont, MA 02478.
Phone: 1-800-SMART-99 (800-762-7899); FAX: 1-617-489-2748; E-mail: info@smartcorp.com
Smart Inventory Planning & Optimization to be Showcased at Epicor Insights
Belmont, Mass., May 14 – Smart Software, Inc., provider of industry-leading demand forecasting, planning, and inventory optimization solutions, today announced that Epicor Software will present Epicor Smart IP&O, a joint solution for inventory planning, forecasting, and optimization at Epicor’s annual customer conference in Nashville, TN from May 21 – 24 . Smart Software will also be on hand to profile the solution in booth # 5 in the Solutions Pavilion.
Smart Software and Epicor’s collaboration brings the cloud-based Smart IP&O (Inventory Planning and Optimization) into the latest version of the Epicor enterprise resource planning (ERP) solution. Smart Software’s Chief Technology Officer, Sree Menon states “it’s no longer enough to simply manage inventory. By seamlessly integrating strategic planning with operational execution, Smart IP&O enables Epicor ERP users to continuously predict, respond and plan inventory helping lower costs and improve service.”
The Epicor Sales Engineering team will demonstrate Epicor Smart IP&O in two sessions:
“Introducing Epicor Smart Demand Planning & Inventory Optimization”
Thursday, May 24 at 8:00 AM
Tennessee Ballrom B
“Moderniza las Operaciones de tu Cadena de Suministro con la Plataforma Epicor Smart Inventory Planning and Optimization”
Thursday, May 24 at 10:20 AM
Ryman Studio H/I
Epicor Insights 2018 will bring together more than 3,000 users of Epicor’s industry-specific ERP solutions for the manufacturing, distribution, and service industries. Customers who attend will have dedicated education tracks focused on their specific products and solutions, plus more opportunities to network across products and industries. To learn more, visit https://www.epicor.com/customers/insights/default.aspx
About Smart Software, Inc.
Founded in 1981, Smart Software, Inc. is a leader in providing businesses with enterprise-wide demand forecasting, planning and inventory optimization solutions. Smart Software’s demand forecasting and inventory optimization solutions have helped thousands of users worldwide, including customers at mid-market enterprises and Fortune 500 companies, such as Mitsubishi, Siemens, Disney, FedEx, MARS, and The Home Depot. Smart Inventory Planning & Optimization gives demand planners the tools to handle sales seasonality, promotions, new and aging products, multi-dimensional hierarchies, and intermittently demanded service parts and capital goods items. It also provides inventory managers with accurate estimates of the optimal inventory and safety stock required to meet future orders and achieve desired service levels. Smart Software is headquartered in Belmont, Massachusetts and can be found on the World Wide Web at www.smartcorp.com.
For more information, please contact Smart Software, Inc., Four Hill Road, Belmont, MA 02478.
Phone: 1-800-SMART-99 (800-762-7899); FAX: 1-617-489-2748; E-mail: info@smartcorp.com
Smart Software VP of Research to Present at ISF 2018
Dr. Tom Willemain to lead ISF session on Time Series Dissaggregation
Belmont, Mass., May 14, 2018 – Smart Software, Inc., provider of industry-leading demand forecasting, planning, and inventory optimization solutions, today announced that Tom Willemain, vice president for research, will present at the International Symposium of Forecasting from June 17 – 20 in Boulder, CO.
Dr. Willemain, will present a tutorial on Time Series Dissaggregation and how the approaches he’ll outline can improve the quality of demand forecasts. Imagine that you must provide daily forecast results but can only obtain historical demand at monthly or weekly levels. Often times, granular demand data is not available. How do you proceed? Converting aggregate quarterly, monthly, or weekly data to daily data is example of the time series dissaggregation problem. Dr. Willemain will discuss current solutions to this problem and press an improved solution.
As the premier, international forecasting conference, the ISF provides the opportunity to interact with the world’s leading forecasting researchers and practitioners. The attendance is large enough so that the best in the field are attracted, yet small enough that you are able to meet and discuss one-on-one. The ISF offers a variety of networking opportunities, through keynote speaker presentations, academic sessions, workshops, meals, and social programs. In addition, representatives of leading publishing, software, and other related companies are on hand to discuss their most recent offerings.
About Dr. Thomas Willemain
Dr. Thomas Reed Willemain served as an Expert Statistical Consultant to the National Security Agency (NSA) at Ft. Meade, MD and as a member of the Adjunct Research Staff at an affiliated think-tank, the Institute for Defense Analyses Center for Computing Sciences (IDA/CCS). He is Professor Emeritus of Industrial and Systems Engineering at Rensselaer Polytechnic Institute, having previously held faculty positions at Harvard’s Kennedy School of Government and Massachusetts Institute of Technology. He is also co-founder and Senior Vice President/Research at Smart Software, Inc. He is a member of the Association of Former Intelligence Officers, the Military Operations Research Society, the American Statistical Association, and several other professional organizations. Willemain received the BSE degree (summa cum laude, Phi Beta Kappa) from Princeton University and the MS and PhD degrees from Massachusetts Institute of Technology. His other books include: Statistical Methods for Planners, Emergency Medical Systems Analysis (with R. C. Larson), and 80 articles in peer-reviewed journals on topics in statistics, operations research, health care and other topics. For more information, email: TomW@SmartCorp.com or visit www.TomWillemain.com.
About Smart Software, Inc.
Founded in 1981, Smart Software, Inc. is a leader in providing businesses with enterprise-wide demand forecasting, planning and inventory optimization solutions. Smart Software’s demand forecasting and inventory optimization solutions have helped thousands of users worldwide, including customers at mid-market enterprises and Fortune 500 companies, such as Mitsubishi, Siemens, Disney, FedEx, MARS, and The Home Depot. Smart Inventory Planning & Optimization gives demand planners the tools to handle sales seasonality, promotions, new and aging products, multi-dimensional hierarchies, and intermittently demanded service parts and capital goods items. It also provides inventory managers with accurate estimates of the optimal inventory and safety stock required to meet future orders and achieve desired service levels. Smart Software is headquartered in Belmont, Massachusetts and can be found at www.smartcorp.com
SmartForecasts is a registered trademark of Smart Software, Inc. All other trademarks are the property of their respective owners.
For more information, please contact Smart Software, Inc., Four Hill Road, Belmont, MA 02478.
Phone: 1-800-SMART-99 (800-762-7899); FAX: 1-617-489-2748; E-mail: info@smartcorp.com
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