New England Supply Chain Conference & Exhibition

APICS - The Association for Operations Management North Shore Chapter 20 and Boston Chapter 10    --   The Council of Supply Chain Management Professionals (CSCMP) New England Roundtable    --    The Northeast Supply Management Group, A Special Interest Group of ISM®

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Optimizing Inventory Management Using Demand Metrics

by Mark Chockalingham, MBA, Ph.D., Managing Principal, DemandPlanning.net

The objective of this workshop is to review the close link between forecast accuracy and inventory optimization and discuss the implications of forecast error for inventory strategies - Lead time uncertainty, safety stock, and planning to forecast. The workshop will also look at the mechanics behind the various demand metrics.

Accurate and timely demand plans are a vital component of an effective supply chain. Forecast accuracy at the SKU and DC level is critical for proper allocation of resources, both working capital as well as strategic assets. Inaccurate demand forecasts often can result in supply imbalances which could ultimately cause inferior customer service and bloated inventories. In this session, we will discuss the process of evaluating demand plans, the pros and cons of different demand accuracy metrics, and the time-lag with which accuracy should be measured. We will also consider metrics that identify and track forecast bias.

With the above background, we will discuss how demand metrics can be leveraged in designing scientific inventory planning parameters. Typically, Organizations set safety stock in a set number of weeks or months to cover unexpected demand. This measure of weeks-forward coverage, also called WFC, can often be unscientific and extremely dependent on the judgment of the planner. Conceived in the slide-rule era, the WFC magnifies the effect of an inaccurate forecast.

Here, we review some scientific methods of setting safety stock strategies that are dependent on the history of demand error by sku. We also show how forecast bias will qualitatively affect safety stock policy.

Workshop participants will learn:

  • The mechanics of various demand metrics used in a manufacturing organization
  • The pros and cons of the demand metrics and how forecast bias can be controlled
  • The limitations and dangers of using Weeks Forward Coverage as an Inventory Policy Parameter
  • How carefully designed demand metrics can be leveraged in inventory management and planning

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