🚚Logistics Management Unit 4 – Demand Forecasting & Inventory Control

Key Concepts & Definitions

• Demand forecasting predicts future customer demand for a product or service based on historical data, market trends, and other relevant factors
• Inventory control manages and regulates the flow of goods, parts, and finished products into and out of an organization's inventory
  • Ensures optimal inventory levels are maintained to meet customer demand while minimizing holding costs
• Lead time the amount of time between when an order is placed and when the goods are received
• Safety stock extra inventory held to protect against stockouts due to unexpected demand or supply chain disruptions
• Economic Order Quantity (EOQ) model determines the optimal order quantity that minimizes total inventory holding costs and ordering costs
• ABC analysis categorizes inventory items based on their value and importance (A: high value, B: moderate value, C: low value)
• Just-in-Time (JIT) inventory management system where goods are received from suppliers just as they are needed in the production process, reducing inventory holding costs

Importance in Logistics

• Effective demand forecasting inventory control are critical components of logistics management
  • Directly impact a company's ability to meet customer demand, maintain optimal inventory levels, and control costs
• Accurate demand forecasts enable better planning for production, procurement, and distribution activities
• Inventory control ensures the right products are available in the right quantities at the right time
  • Minimizes stockouts lost sales due to unavailable products
  • Reduces excess inventory carrying costs (storage, insurance, obsolescence)
• Efficient inventory management improves cash flow by reducing working capital tied up in inventory
• Streamlined inventory control processes enhance supply chain visibility and responsiveness
  • Enables quicker reaction to changes in demand or supply disruptions
• Optimized inventory levels lead to better customer service and satisfaction
  • Faster order fulfillment
  • Fewer backorders and stockouts

Demand Forecasting Techniques

• Time-series methods analyze historical demand data to identify patterns and trends
  • Moving average calculates the average demand over a specified number of past periods
  • Exponential smoothing assigns greater weight to more recent demand data
• Causal methods examine the relationship between demand and external factors (economic indicators, promotions, weather)
  • Regression analysis models the relationship between demand and one or more independent variables
• Qualitative methods rely on expert opinions, market research, and customer surveys
  • Delphi method involves a panel of experts providing forecasts and iteratively refining them based on group feedback
• Hybrid methods combine quantitative and qualitative techniques for more accurate forecasts
• Collaborative forecasting involves sharing information and insights among supply chain partners to improve forecast accuracy
• Machine learning algorithms (neural networks, decision trees) can analyze complex data sets to generate sophisticated demand forecasts

Inventory Management Basics

• Inventory types include raw materials, work-in-progress (WIP), finished goods, and maintenance, repair, and operating (MRO) supplies
• Inventory costs consist of ordering costs, holding costs, and stockout costs
  • Ordering costs include placing and processing orders, transportation, and receiving
  • Holding costs include storage, insurance, taxes, and opportunity cost of capital
• Inventory turnover measures how quickly inventory is sold and replaced
  • Calculated as Cost of Goods Sold (COGS) divided by average inventory value
• Inventory accuracy ensures that recorded inventory levels match actual physical stock
  • Cycle counting involves regularly counting a subset of inventory items to maintain accuracy
• First-In, First-Out (FIFO) inventory valuation assumes oldest inventory is sold first
• Last-In, First-Out (LIFO) inventory valuation assumes newest inventory is sold first

Inventory Control Models

• Economic Order Quantity (EOQ) model determines the optimal order quantity that minimizes total inventory costs
  • Assumes constant demand, lead time, and costs
  • Formula: $EOQ = \sqrt{\frac{2DS}{H}}$ where D = annual demand, S = ordering cost per order, H = holding cost per unit per year
• Reorder Point (ROP) model determines when to place an order based on lead time and safety stock
  • Formula: $ROP = (Average Daily Usage \times Lead Time) + Safety Stock$
• Periodic review model orders a variable quantity at fixed time intervals to bring inventory up to a target level
• Material Requirements Planning (MRP) system schedules production and orders based on sales forecasts, bill of materials, and inventory levels
• Vendor-Managed Inventory (VMI) system where suppliers manage and replenish inventory at the customer's site based on agreed-upon levels

Technology in Forecasting & Control

• Enterprise Resource Planning (ERP) systems integrate inventory data with other business functions (finance, production, sales)
  • Provides real-time visibility into inventory levels, demand, and supply chain activities
• Inventory management software automates processes such as order placement, tracking, and replenishment
  • Barcode scanners and RFID tags enable accurate, real-time inventory tracking
• Demand forecasting software uses advanced algorithms and machine learning to generate accurate, granular forecasts
  • Incorporates multiple data sources (sales history, market trends, external factors)
• Cloud-based solutions offer scalability, accessibility, and real-time collaboration among supply chain partners
• Internet of Things (IoT) devices monitor inventory levels, storage conditions, and asset location in real-time
• Artificial Intelligence (AI) and predictive analytics optimize inventory decisions based on complex data analysis

Real-World Applications

• Retail industry uses demand forecasting to plan inventory levels, allocate products to stores, and optimize pricing and promotions
  • Fast fashion retailers (Zara, H&M) rely on accurate forecasts to quickly respond to changing trends
• Manufacturing companies use MRP systems to plan production schedules and ensure the availability of raw materials and components
  • Toyota's Just-in-Time (JIT) system minimizes inventory holding costs and improves efficiency
• E-commerce businesses use inventory management software to track stock levels across multiple warehouses and fulfill orders quickly
  • Amazon's dynamic inventory allocation system optimizes placement of products based on demand patterns and shipping costs
• Pharmaceutical companies use specialized cold chain logistics to manage temperature-sensitive inventory (vaccines, biologics)
• Food and beverage industry uses forecasting and inventory control to manage perishable goods and seasonal demand fluctuations
  • Coca-Cola's demand forecasting system incorporates weather data to predict sales of cold drinks

Challenges & Future Trends

• Increasing supply chain complexity due to globalization, product proliferation, and shorter product life cycles
  • Requires more sophisticated forecasting and inventory control methods to manage uncertainty
• Omnichannel retailing blurs the lines between online and offline channels
  • Necessitates integrated inventory management across multiple channels and fulfillment options (ship-from-store, click-and-collect)
• Sustainability concerns drive the adoption of circular economy practices
  • Reverse logistics and inventory management for product returns, repairs, and recycling
• Big data and advanced analytics enable more accurate, granular, and real-time forecasting and inventory optimization
  • Machine learning algorithms can identify complex patterns and adapt to changing conditions
• Blockchain technology offers potential for improved supply chain transparency, traceability, and inventory verification
• Additive manufacturing (3D printing) may reduce the need for inventory holding by enabling on-demand production of spare parts and customized products