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Category Archives: Tools

Inventory Drivers – Forecast Accuracy

Inventory driverWelcome back to the ongoing series about Inventory Drivers.  Since the last two blogs talked about accuracy I thought I would continue the trend and talk about Forecast Accuracy.  I realize most people think this is an oxymoron since the guiding principle in most forecast programs is that the forecast is always wrong.  Fortunately we really don’t care that it is wrong.  What we really care about is “how wrong is it?”  This is a question that most forecasters get really passionate about because even though we know perfection is not possible, deep down we are convinced that if we can just get enough information and a fast enough program we can get it right.  We KNOW we can’t but we still want to.  Actually, from a company point of view, accuracy should be a matter of Return on Investment.  If we spend more money on increasing accuracy than we get back in cost saving from that increased accuracy then we are wasting the company’s money.  The important thing to keep in mind here is that an accurate forecast is not required for proper inventory control.  That is why we have things like safety stock.  Admittedly, the less accurate the forecast is, the more safety stock that is required but that is all just a matter of applying the right formula and having a clear definition of just how much risk the organization is willing to accept.  That does not mean that a forecast is not important.  It is critically important for a number of reasons from inventory planning, to financial planning, to production planning…  Notice a trend there?  Forecasts are important to the PLANNING process not the input / output control.  Plans, just like forecasts, are inherently unstable.  To misquote a little bit – No plan survives contact with reality.  Once you have a plan it is necessary to monitor how close reality is to the plan and adjust accordingly.  How often and quickly you do this will dramatically influence how successful you are at controlling your inventory.  Both planning and forecasting are about RISK CONTROL and it is the need for lower risk that leads to the higher inventory levels.  Increased forecast accuracy (to a point) leads to better plans, higher customer service, lower risk and eventually to lower inventory levels.forecast accuracy

One other quick thought before we leave this – WHO in your organization is responsible for generating the forecast.  I would suggest this is the responsibility of the sales department.  They do not need to do all the calculations and details of the forecast process but they are the people in your organization that are dealing with your customers decision makers and therefore have the best chance of finding about about potential changes before they happen.  A forecast built solely on historical data will never catch potential game changing issues until after the fact which always leaves you reacting to everyone else.  It is like driving using only the rear view mirror.  You are OK so long as the road is straight but as soon as there is a curve in the road you end up in the ditch.  Those curves represent changes from historical norms such as changes to customer orders.  Your sales force is in the best position to identify the “curves” before they put your processes “in the ditch”.  The problem of course, is that most sales people are not “fond” of forecasting as that is not their primary job (which is to sell product).  To counteract that I have always given them three instructions about forecasting:

–   Sort the customer or product by forecast accuracy and then start with the worst one and move down the list.  The more accurate ones are already good and working on them will not help as much as working on the worst one

–   Do not spend more than three hours per month doing the forecast.  They may not get through every forecast but hopefully the ones they do will be further down the list next month so rotation will eventually bring each customer to the set that get touched. This is sort of like continuous improvement.  Over the long run you can get amazing results.

–   If you must guess, then guess high.  It is generally less expensive to have a little extra stock than to run out and short a customer.  While saving money is always a good point the sales force will be more in favour with the point of not shorting a customer.

Enjoy thinking and talking to your friends and co-workers about this, especially what it means for your organization.   I would love to hear back on your (and their) thoughts on this topic

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Inventory Drivers – Production Accuracy

Inventory driverWelcome back to the ongoing series about Inventory Drivers.  In this posting I would like to touch on production accuracy.  One would think this is a given.  You take this many units of raw material and you finish with that many units of finished goods.  As talked about in an earlier posting, that is one plus one thinking and has a couple of assumptions built in that just may not be absolutely correct.

The first assumption is that the quantity completed is recorded accurately.  I’m not saying that people would deliberately misreport a number but mistakes can happen.  Depending on the product being made, it could just be a simple miscount but in other cases the process itself lends itself to less accurate counts.  Take for instance a company making something as simple as a washer.  This is not usually counted by unit but rather by weight with a particular weight assumed to represent a specific number of units.  This is arrived at by dividing the total weight by the average weight of one washer.  While this is a relatively accurate method with a lower volume, when you get to really large volumes it becomes inaccurate due to rounding error.  Specifically an average weight with 2 digits after the decimal is far less accurate than one with several digits.  Actually, anything that requires a conversion is open to severe consequences if done wrong.  If you want an example of this please go look up the “Gimli Glider”. Another possibility is that the average weight may have changed due to a process or raw material change but nobody updated the average weight used in the calculation.

production accuracy

The second assumption is that the raw materials not used will be put away properly and accurately recorded.  Far too often people seem to think that once the finished goods are made that the job is done or leftovers are just pushed to the side until the next job where they might need them.  I even know of one case where parts were stripped off old machines for repairs to other machines without recording the increased inventory of the recovered parts.  Of course this led to the system showing a negative inventory because they were recording the use of parts that were never received into the system.

 

The important point to all this is that people must have the discipline to actually consider how their processes affect the inventory accuracy and what is needed to keep it accurate.  They also need to have the discipline to record ALL transaction and to do so in a timely fashion.  As always, real time entry being the desired time frame (RF and RFID systems are your friend).  If inventory is not being recorded correctly and in a timely fashion then inventory levels will be pushed higher as everyone tries to compensate for the inherent errors that develop.

Enjoy thinking and talking to your friends and co-workers about this, especially what it means for your organization.   I would love to hear back on your (and their) thoughts on this topic

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