INTERNATIONAL SUPPLY CHAIN MANAGEMENT
Guide to Supply Chain Management
CHAPTER 2: GUIDE TO PLAN
Inventory = the quantity of goods that is available on hand or in stock.
Three main formats:
1. Raw materials
2. Work in progress
3. Finished goods
Why hold inventory?
- Protect against uncertainty
- Cost reduction through inventory is achieved when
stock is held close to the customer.
- Protect against quality defects.
- Stabilize manufacturing
- Anticipation stock
- Balancing supply and demand.
DIFFERENT TYPES OF INVENTORY
• Cycle or replenishment stock: This stock keeps the supply chain moving. Cycle stock is the inventory
necessary to meet the normal daily demand.
• Safety stock: This stock buffers against forecast error and the supplier’s unreliability.
• In-transit stock: This stock is in the process of being transported to a stocking or delivery point.
• Seasonal stock: This stock is built up in advance to meet increased sales volumes during a particular
time of the year.
• Promotional stock: This stock feeds into marketing campaigns and advertising.
• Speculative stock: This stock is held to protect against price increases or periods of limited availability.
Dead or obsolete stock: This stock is no longer usable or saleable in the market
CYCLE STOCK
AS x costs of products = average cycle stock investment
,SAFETY STOCK
There are two parts of the equation to account for in the safety stock calculation:
a) Safety stock supply that covers unplanned production and delivery delays
b) Safety stock demand that covers unplanned changes in demand
Average demand can be calculated by summing up
demands from a number of time periods and dividing the sum
by the number of time periods.
Supplier uncertainty arises from orders taking different
lengths of time to arrive from suppliers. It thus describes how
reliable your supplier is. (in for instance days to late)
Reducing Inventory
There are four ways in which you can positively influence
your safety stock position:
1. Reduce lead-time less safety stock is needed
2. Reduce supplier uncertainty as suppler become more reliable, less safety stock is needed
3. Reduce forecast error demand uncertainty can be reduced and thus less safety stock will be needed
4. Reduce service level will positively impact your safety stock position. This decision of reducing service
levels to improve the overall safety stock position should be discussed and agreed together with your
customer
DEMAND AND SUPPLY PLANNING
DESCRIBING THE DEMAND
Demand can be segregated into various categories.
• Level of demand (High or Low)
• Frequency of demand (Fast of Slow)
• Patterns of demand (stable, trend or seasonal)
• Product life cycle positioning (launch, emerging, established, decline, withdrawal)
• Product classification product segmentation - Pareto’s law provides an approach to identify which
categories a product belongs to depending on their parentage turnover. (fast movers, medium movers,
slow movers)
, FORECASTING THE DEMAND
There are two distinct classes of forecasting methods:
1. Qualitative forecasting - includes the simple process of guessing future demand, making hunches
based on intuition and using your experience. This includes judgment and common sense reasoning
when establishing future demand.
2. Quantitative or statistical forecasting - comprises statistical models that can have a causal nature
(for example, more ice cream sales with hot weather) or that can be based on a time series of historical
data. The time series method is the most common form of statistical forecasting.
Time series method = a statistical forecasting method based on the assumption that historical patterns of
demand are a good indicator for future demand assumption of continuity (basic value, trend, seasonality)
PLANNING THE DEMAND AND SUPPLY
It is ideally to hold safety stock for each item to meet this customer service objective. However, excess inventory
can result in high costs because of holding extra stock. As a consequence, stock that cannot be sold will have to
be written off. In order to balance the cost-service trade-off, demand planning aims at improving forecast
accuracy and reducing forecast error. Demand planning aims at improving forecast accuracy and reducing
errors. The three main areas to measure and improve in demand planning:
1. Bias = When a forecast is consistently either over or under the actual demand. Measured by calculating
the difference between the forecast and actual demand over a cumulative period of time. The aim is to
keep the bias as close to neutral as possible to maintain the normal property.
2. Accuracy = (1- error%)
3. Error = the absolute deviation of the actual realized demand quantity from the forecasted quantity
Supply planning
In a continuous review system with a fixed order quantity,
inventory is reviewed daily and a fixed quantity (Q) is ordered whenever the stock drops below a certain point.
This point is called the re-order point. The inventory levels continue to fall even after the order point, as
demand is placed upon the item.
In a periodic review system with an order-up-to-level, inventory is reviewed at regular intervals and every time a
sufficient quantity is ordered to raise the inventory level up to a certain level. This order quantity depends on the
relative stock position at each moment of review, i.e. at each review point
This model is also called min-max policy because the stock planner tries to keep inventory between a minimum
and a maximum stock level.
SALES AND OPERATIONS PLANNING
Sales & Operations Planning (S&OP) can be defined as the process of constantly realigning decisions in
sales, marketing, demand and supply planning areas with the aim to synchronize with the strategic
financial plans. S&OP aims at improving the business, by optimizing profits and reducing costs & risks.
Guide to Supply Chain Management
CHAPTER 2: GUIDE TO PLAN
Inventory = the quantity of goods that is available on hand or in stock.
Three main formats:
1. Raw materials
2. Work in progress
3. Finished goods
Why hold inventory?
- Protect against uncertainty
- Cost reduction through inventory is achieved when
stock is held close to the customer.
- Protect against quality defects.
- Stabilize manufacturing
- Anticipation stock
- Balancing supply and demand.
DIFFERENT TYPES OF INVENTORY
• Cycle or replenishment stock: This stock keeps the supply chain moving. Cycle stock is the inventory
necessary to meet the normal daily demand.
• Safety stock: This stock buffers against forecast error and the supplier’s unreliability.
• In-transit stock: This stock is in the process of being transported to a stocking or delivery point.
• Seasonal stock: This stock is built up in advance to meet increased sales volumes during a particular
time of the year.
• Promotional stock: This stock feeds into marketing campaigns and advertising.
• Speculative stock: This stock is held to protect against price increases or periods of limited availability.
Dead or obsolete stock: This stock is no longer usable or saleable in the market
CYCLE STOCK
AS x costs of products = average cycle stock investment
,SAFETY STOCK
There are two parts of the equation to account for in the safety stock calculation:
a) Safety stock supply that covers unplanned production and delivery delays
b) Safety stock demand that covers unplanned changes in demand
Average demand can be calculated by summing up
demands from a number of time periods and dividing the sum
by the number of time periods.
Supplier uncertainty arises from orders taking different
lengths of time to arrive from suppliers. It thus describes how
reliable your supplier is. (in for instance days to late)
Reducing Inventory
There are four ways in which you can positively influence
your safety stock position:
1. Reduce lead-time less safety stock is needed
2. Reduce supplier uncertainty as suppler become more reliable, less safety stock is needed
3. Reduce forecast error demand uncertainty can be reduced and thus less safety stock will be needed
4. Reduce service level will positively impact your safety stock position. This decision of reducing service
levels to improve the overall safety stock position should be discussed and agreed together with your
customer
DEMAND AND SUPPLY PLANNING
DESCRIBING THE DEMAND
Demand can be segregated into various categories.
• Level of demand (High or Low)
• Frequency of demand (Fast of Slow)
• Patterns of demand (stable, trend or seasonal)
• Product life cycle positioning (launch, emerging, established, decline, withdrawal)
• Product classification product segmentation - Pareto’s law provides an approach to identify which
categories a product belongs to depending on their parentage turnover. (fast movers, medium movers,
slow movers)
, FORECASTING THE DEMAND
There are two distinct classes of forecasting methods:
1. Qualitative forecasting - includes the simple process of guessing future demand, making hunches
based on intuition and using your experience. This includes judgment and common sense reasoning
when establishing future demand.
2. Quantitative or statistical forecasting - comprises statistical models that can have a causal nature
(for example, more ice cream sales with hot weather) or that can be based on a time series of historical
data. The time series method is the most common form of statistical forecasting.
Time series method = a statistical forecasting method based on the assumption that historical patterns of
demand are a good indicator for future demand assumption of continuity (basic value, trend, seasonality)
PLANNING THE DEMAND AND SUPPLY
It is ideally to hold safety stock for each item to meet this customer service objective. However, excess inventory
can result in high costs because of holding extra stock. As a consequence, stock that cannot be sold will have to
be written off. In order to balance the cost-service trade-off, demand planning aims at improving forecast
accuracy and reducing forecast error. Demand planning aims at improving forecast accuracy and reducing
errors. The three main areas to measure and improve in demand planning:
1. Bias = When a forecast is consistently either over or under the actual demand. Measured by calculating
the difference between the forecast and actual demand over a cumulative period of time. The aim is to
keep the bias as close to neutral as possible to maintain the normal property.
2. Accuracy = (1- error%)
3. Error = the absolute deviation of the actual realized demand quantity from the forecasted quantity
Supply planning
In a continuous review system with a fixed order quantity,
inventory is reviewed daily and a fixed quantity (Q) is ordered whenever the stock drops below a certain point.
This point is called the re-order point. The inventory levels continue to fall even after the order point, as
demand is placed upon the item.
In a periodic review system with an order-up-to-level, inventory is reviewed at regular intervals and every time a
sufficient quantity is ordered to raise the inventory level up to a certain level. This order quantity depends on the
relative stock position at each moment of review, i.e. at each review point
This model is also called min-max policy because the stock planner tries to keep inventory between a minimum
and a maximum stock level.
SALES AND OPERATIONS PLANNING
Sales & Operations Planning (S&OP) can be defined as the process of constantly realigning decisions in
sales, marketing, demand and supply planning areas with the aim to synchronize with the strategic
financial plans. S&OP aims at improving the business, by optimizing profits and reducing costs & risks.
