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KNOWLEDGE LIBRARY

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27Jun

Warehouse Occupancy Percentage

Optimal storage utilization helps enforce healthy inventory management. In our early work with Honda their...

02Jun

Efficient Procurement Inventory

Efficient procurement inventory (EPI) is often required to realize steep discounts when a special opportunity...

02Jun

Inventory Carrying Rate

The inventory carrying rate (ICR) is the percent of the unit inventory value used to...

26Jun

Inventory Activity Profiling & Data Mining

Suppose you were sick and went to the doctor for a diagnosis and prescription.  When...

27Jun

Inventory Performance Measures

Inventory performance measures include financial, productivity , quality, and response time indicators for evaluating the efficiency and...

Forecasting

A few years ago we assisted a major sporting goods company with their inventory strategy. Based on my observations of their inventory and supply chain I made a strong recommendation to them to implement forecasting. The CIO interrupted my presentation and strongly disagreed. He said, “We are not going to do forecasting!” I was taken aback by the interruption and forcefulness of his rebuke. I asked him, “Why are you not going to forecast?” He said, “Because the forecast will be wrong.” I wanted to say “Duhhhh.” But I restrained myself and said. “You are right. There is only One Source of perfect forecasting Who I know, but He does not work for most supply chains. However, wouldn’t you like to know how far off your forecast is, in what direction, and if it is getting better or worse?”

The CIO’s strong reaction to my recommendation that they implement forecasting may sound unusual. Unfortunately, I don’t find it that far from the norm. The vast majority of organizations either don’t forecast at all, forecast at such a high level that it is practically irrelevant for inventory planning purposes, and/or don’t hold anybody accountable for it; which is tantamount to not forecasting at all.

Forecasting plays a pivotal and vital role in determining required inventory levels. Forecasting also influences nearly every supply chain decision. As a result, the degree to which forecasting is in error foreshadows the error in all supply chain decision making.

Even a small improvement  in forecast accuracy can yield big inventory savings. In a recent project with a major engine manufacturer we found that every 10% improvement in forecast accuracy yielded a 5% reduction in inventory (Figure 1). In that particular case the reduction was worth more than $5,000,000 in safety stock inventory.

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