Demand Forecasting, Inventory, and Lean Management

Posted on Dec 5, 2024 in Other subjects

Demand Forecasting

Demand Forecasting Defined

A demand forecast estimates future demand over a specified time. Forecasts are crucial inputs for various organizational decisions. In operations management, demand forecasting is vital for:

  • System design
  • Medium-term system planning
  • Short-term system scheduling

Characteristics of a Good Forecast

Effective forecasts are:

  • Timely
  • Accurate
  • Reliable
  • Meaningful
  • Easy to understand
  • Cost-effective

Forecasting Process

  1. Define the forecast’s purpose.
  2. Establish a forecasting horizon.
  3. Gather and analyze relevant historical data.
  4. Choose a forecasting technique.
  5. Prepare the forecast.
  6. Monitor the forecast.

Forecasting Approaches

Forecasting approaches include judgmental methods (like executive opinions) and quantitative methods.

Time Series Analysis

A time series is a chronologically ordered sequence of observations taken at regular intervals. Key time series components include:

  1. Level: The average or horizontal pattern.
  2. Trend: A consistent upward or downward movement.
  3. Seasonality: Regular, repeating variations often linked to calendar, weather, or events.
  4. Cycles: Wavelike patterns lasting over a year, often tied to economic or political factors.
  5. Irregular Variations: Data points caused by unusual, one-time explainable events (e.g., strikes).
  6. Random Variations: Unpredictable variations from numerous factors.

Naïve Forecasting

The naïve forecast is simple and inexpensive but often less accurate. For stable series, the last data point predicts the next period. With seasonal variations, the last season’s value predicts the next. For data with a trend, the naïve forecast adds or subtracts the difference between the last two data points to the last value.

Moving Average Methods

The moving average method averages recent actual data values to create a forecast. A weighted moving average assigns different weights to different periods.

Exponential Smoothing

Exponential smoothing is a sophisticated weighted averaging method where each period’s forecast is based on the previous period’s forecast plus a percentage of the forecast error.

Inventory Management

Inventory Defined

Inventory refers to goods held for future use or sale. Inventory management involves planning and controlling these stocks.

Effective Inventory Management

Effective inventory management requires:

  1. A system for tracking inventory on hand and on order.
  2. Reliable demand forecasts with error indications.
  3. Knowledge of lead times and their variability.
  4. Estimates of holding, ordering, and shortage costs.
  5. An inventory item classification system.

Inventory Systems

A periodic inventory system (fixed-time period) involves regular physical counts to determine order quantities. A perpetual inventory system (continuous review, fixed-order quantity) continuously tracks inventory levels.

Inventory Tracking Tools

Tracking tools include barcodes and Radio Frequency Identification (RFID) technology for identifying objects in supply chains. Other tools include Point of Sale (POS) systems for electronically recording sales.

Inventory Metrics

Poor inventory management leads to stockouts and overstocking. The fill rate measures fulfilled orders from available inventory. Unit fill rate is units delivered divided by units ordered. Order fill rate is complete orders divided by total orders. Inventory turnover measures inventory efficiency (unit sales/average inventory or COGS/inventory value).

Lean Management

Just-in-Time (JIT) Production

Just-in-time (JIT) production processes and moves parts only as needed, usually in small batches. Key principles include:

  • Identifying customer value
  • Focusing on value-creating processes
  • Eliminating waste to create flow
  • Producing according to customer demand
  • Striving for perfection

Lean Principles and Tools

Muda represents waste and inefficiency. Kanban is a manual system controlling parts and materials movement based on need signals. Heijunka addresses production volume variations. Kaizen promotes continuous improvement. Jidoka emphasizes quality at the source.

Lean Product Design and Production

Lean product design features standard parts, modular design, and highly capable production systems. Concurrent engineering and Single-Minute Exchange of Die (SMED) reduce changeover time. A cell is a specialized production center. Statistical Process Control (SPC) and Six Sigma reduce variability. Poka-yoke mechanisms prevent errors. Automation, particularly intelligent automation, stops production if abnormalities occur.

Jidoka and Andon

Jidoka (quality at the source) prevents defective products from moving to the next workstation. Andon systems use lights to signal problems or slowdowns.

Takt Time and Planning

Takt time is calculated by dividing net available time by daily demand. Planning and control methods include level loading (heijunka), pull systems (with kanban), close supplier relationships, preventive maintenance, and 5S housekeeping. A pull system moves work as needed, while a push system pushes completed output to the next station. The Kanban formula is: N = DT(1+x)/c

Example: Exponential Smoothing

A boutique owner forecasts October demand using exponential smoothing (α = 0.2) and August’s forecast of 145. Given September sales of 160, the October forecast is: 0.2 * 160 + (1 – 0.2) * 140 = 144

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