Industrial Management
Chapter 13: Demand Forecasting and Planning
Group members:
Lý Chấn Minh
Đồng Việt Dũng
Cao Tấn Phát
Phạm Đức Huy
CONTENT:
1. Introduction (research problem question)
Research problem question: Why does demand forecasting matter?
2 points frequently on this topic:
+Going out of stock
+Too much storage in inventory
To: enhance inventory by predict future sales through analyzing past sales data
reduce risks and make efficient financial decisions (warehouse planning)
2. Literature review (Characteristics,
Terminologies, Theories)
Accurate demand forecasts are essential for all companies in a supply chain since several
decisions have to be made before the actual values of important variables are known. In
addition to forecasts of resource and energy demands
+Survey or Qualitative methods
+Statistical or Quantitative methods
3. Mathematical model
(When to order new inventory, and how much safety stock to keep on hand. One example of an
inventory policy is the Economic Order Quantity (EOQ) model, which calculates the optimal
order quantity that minimizes total inventory costs, including ordering costs and holding costs.)
The EOQ model considers several factors, such as the demand rate, ordering costs, holding
costs, and lead time, to determine the optimal order quantity. The formula for EOQ is:
EOQ = sqrt((2 x D x S) / H)
Parameters:
D = annual demand
S = ordering cost per order
H = holding cost per unit per year
Variables:
Q= number of each order
Once the optimal order quantity is determined, the next step is to determine the reorder point.
This is the inventory level at which a new order should be placed. It is calculated by multiplying
the lead time by the average daily demand and adding safety stock, which is the extra inventory
kept on hand to account for unexpected demand or lead time fluctuations.
By choosing an appropriate inventory policy, businesses can ensure that they have enough
inventory to meet customer demand without tying up excess capital in excess inventory, while
also minimizing the costs associated with inventory management.
Optimization question: How to optimal order quantity that minimizes its total costs related to
ordering, receiving, and holding inventory
4. Problem model (Example)
For the Demand, you can take the quantity planned over the desired period (usually 12
months). In this example, we will take 12,000 thousand pairs of Nike shoes size 43. We assume
the demand is constant over the year.
Constrain: every value need to be >= 0
Holding Cost:
In the example above, we use a percentage of the Item Purchase Price, we have to get the
values from Finance Department
The total Holding Costs for our Nike shoes are $2.85, which represents 9.5% of the purchase
price.
Transaction costs
The cost of placing an order or Transaction Costs (TC) is a little more complex because
it includes the fixed costs of many processes involved in each order.
The method we used is to try to estimate the number of hours spent on each process. Here are
the most common processes listed below:
In this example, we have a total of 1.7 hours to handle one order, which represents $42.5. It is a
fixed cost per order.
Application of the EOQ Formula
D = Demand = 12000$
TC = Transaction Costs = 42$
HC = Holding Costs = 2.85$
As it is simpler to use round values for order management
The annual number of orders N is given by the annual demand D divided by the Quantity Q of
one order:
the frequency of orders over the year is
5. Additional problem
1. Unstable demand
you will be overstocked at a time of low demand and under-stocked at a time of high demand.
You would need to adjust the frequency of ordering
2. The purchase price
Suppliers offer discounts depending on the quantities ordered. If so, it is advisable to record the
purchase prices according to different order levels, as shown in the table below.
3. Inconsistent costs
The formula considers that all costs are constant, including transportation and storage. This is
not always the case: for example, you have fixed costs in a warehouse (rent, depreciation of
machines) but also have variable costs like workforce or even electricity.
Focus on the costs that have the most impact on your business, and find an easy way to
quantify them (such as a percentage of the purchase price). This will give you a good direction.
4. Inconsistent or unpredictable lead time
The formula considers supply lead time as constant. But in reality, lead time may vary over the
year, and you have uncertainty about the supply delays.
If you can anticipate and see 2 clear patterns during the year (big lead time during summer and
shorter ones the rest of the year) then you can easily recalculate the EOQ formula
5. No safety stock
Today’s markets are more and more volatile and uncertain. Therefore, it is essential to
hold safety stocks to face this uncertainty, which can strongly impact your profits and your
customer service rate.
6. Summary (Conclusion of research outcomes)
The Economic Order Quantity is a good tool to minimize total
costs, as it is the theoretical optimal quantity to order in
Inventory Management. We saw how to use the EOQ formula in
Excel through the example above. The formula itself has
limitations we have listed
Reference
Department of Industrial Engineering & Management, National Chiao Tung University, 1001
University Rd., Hsinchu 30013, Taiwan
University of Bremen, Faculty of Production Engineering, Badgasteiner Straße 1, 28359 Bremen,
Germany
BIBA – Bremer Institut für Produktion und Logistik, 28359 Bremen, Germany
Tsan-Ming Choi (Editor), Handbook of EOQ Inventory Problems; Stochastic and Deterministic
Models and Applications (2014)
EOQ formula models, Edouard ThieuleuxFounder, AbcSupplyChain, April 13, 2023
