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Logistics Management LSM 730 Lecture 25 Dr. Khurrum S. Mughal 1-1 Actions When Forecasting is Not Appropriate · Seek information directly from customers · Collaborate with other channel members · Apply forecasting methods with caution (may work where forecast accuracy is not critical) · Delay supply response until demand becomes clear · Shift demand to other periods for better supply response · Develop quick response and flexible supply systems CR (2004) Prentice Hall, Inc. 8-2 Managing Highly Uncertain Demand · Delay forecasting as long as possible · Prioritize supply by product’s degree of uncertainty (supply to the more certain products first) · Apply the principle of postponement to the most uncertain products (delay committing to a final product form until an order is received) · Create flexible supply to changing demand (alter capacity and output rates through subcontracting, computer technology, multi-purpose processes, etc.) · Be able to respond quickly to uncertain demand levels CR (2004) Prentice Hall, Inc. 8-3 Reasons for Inventories • Improve customer service - Provides immediacy in product availability • Encourage production, purchase, and transportation • • • economies - Allows for long production runs (buffer against demand fluctuations) - Takes advantage of price-quantity discounts - Allows for transport economies from larger shipment sizes Act as a hedge against price changes - Allows purchasing to take place under most favorable price terms Protect against uncertainties in demand - Provides a measure of safety to keep operations running when demand levels and lead times cannot be known for sure Act as a hedge against contingencies - Buffers against such events as strikes, fires, and disruptions in supply 9-4 Reasons Against Inventories • They consume capital resources that might be put to better use elsewhere in the firm • They too often mask quality problems that would more immediately be solved without their presence • They divert management’s attention away from careful planning and control of the supply and distribution channels by promoting an insular attitude about channel management CR (2004) Prentice Hall, Inc. 9-5 Types of Inventories • Pipeline - Inventories in transit • Speculative - Goods purchased in anticipation of price increases • Regular/Cyclical/Seasonal - Inventories held to meet normal operating needs • Safety - Extra stocks held in anticipation of demand and lead time uncertainties • Obsolete/Dead Stock - Inventories that are of little or no value due to being out of date, spoiled, damaged, etc. 9-6 Nature of Demand • Perpetual demand - Continues well into the foreseeable future • Seasonal demand - Varies with regular peaks and valleys throughout the year Accurately forecasting demand is singly the • Lumpy demand most important factor - Highly variable (3  Mean) in good inventory • Regular demand management - Not highly variable (3 < Mean) • Terminating demand - Demand goes to 0 in foreseeable future • Derived demand - Demand is determined from the demand of another item of which it is a part 9-7 Inventory Management Philosophies • Pull - Draws inventory into the stocking location - Each stocking location is considered independent - Maximizes local control of inventories • Push - Allocates production to stocking locations based on overall demand - Encourages economies of scale in production • Just-in-time - Attempts to synchronize stock flows so as to just meet demand as it occurs - Minimizes the need for inventory CR (2004) Prentice Hall, Inc. 9-8 Pull vs. Push Inventory Philosophies PUSH - Allocate supply to each warehouse based on the forecast for each warehouse PULL - Replenish inventory with order sizes based on specific needs of each warehouse Demand forecast Q1 Warehouse #1 A1 A2 Plant Q2 Warehouse #2 A3 Demand forecast Q3 A = Allocation quantity to each warehouse Q = Requested replenishment quantity by each warehouse CR (2004) Prentice Hall, Inc. Warehouse #3 Demand forecast 9-11 Inventory Management Philosophies (Cont’d) • Supply-Driven - Extensive Forecasting needed - All supply must be accepted and processed - Inventories are controlled through demand • Aggregate Control - Classification of items: › Groups items according to their sales level based on the 80-20 principle › Allows different control policies for 3 or more broad product groups CR (2004) Prentice Hall, Inc. 9-10