Forecasting

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• Forecasting

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Forecasting Survey

• How far into the future do you typically project
  when trying to forecast the health of your
  industry? ? less than 4 months 3 ? 4-6
  months 12 ? 7-12 months 28 ? gt 12
  months 57

Fortune Council survey, Nov 2005
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Indices to forecast health of industry

• Consumer price index 51
• Consumer Confidence index 44
• Durable goods orders 20
• Gross Domestic Product 35
• Manufacturing and trade inventories and
  sales 27
• Price of oil/barrel 34
• Strength of US 46
• Unemployment rate 53
• Interest rates/fed funds 59

Fortune Council survey, Nov 2005
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Forecasting Importance

• Improving customer demand forecasting and sharing
  the information downstream will allow more
  efficient scheduling and inventory management
• Boeing, 1987 2.6 billion write down due to raw
  material shortages, internal and supplier parts
  shortages Wall Street Journal, Oct 23, 1987

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Forecasting Importance

• Second Quarter sales at US Surgical Corporation
  decline 25, resulting in a 22 mil
  lossattributed to larger than anticipated
  inventories on shelves of hospitals. US Surgical
  Quarterly, Jul 1993
• IBM sells out new Aetna PC shortage may cost
  millions in potential revenue. Wall Street
  Journal, Oct 7, 1994

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Principles of Forecasting

• Forecasts are usually wrong
• every forecast should include an estimate of
  error
• Forecasts are more accurate for families or
  groups
• Forecasts are more accurate for nearer periods.

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Important Factors to Improve Forecasting

• Record Data in the same terms as needed in the
  forecast production data for production
  forecasts time periods
• Record circumstances related to the data
• Record the demand separately for different
  customer groups

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Forecast Techniques

• Extrinsic Techniques projections based on
  indicators that relate to products examples
• Intrinsic historical data used to forecast
  (most common)

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Forecasting

• Forecasting errors can increase the total cost of
  ownership for a product - inventory carrying
  costs
• - obsolete inventory - lack of sufficient
  inventory - quality of products due to
  accepting marginal products to prevent
  stockout

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Forecasting

• Essential for smooth operations of business
  organizations
• Estimates of the occurrence, timing, or magnitude
  of uncertain future events
• Costs of forecasting excess labor excess
  materials expediting costs lost revenues

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Forecasting

• Predicting future events
• Usually demand behavior over a time frame
• Qualitative methods
• Based on subjective methods
• Quantitative methods
• Based on mathematical formulas

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Strategic Role of Forecasting

• Focus on supply chain management
• Short term role of product demand
• Long term role of new products, processes, and
  technologies
• Focus on Total Quality Management
• Satisfy customer demand
• Uninterrupted product flow with no defective
  items
• Necessary for strategic planning

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Strategic Role of Forecasting

• Focus on supply chain management
• Short term role of product demand
• Long term role of new products, processes, and
  technologies
• Focus on Total Quality Management
• Satisfy customer demand
• Uninterrupted product flow with no defective
  items
• Necessary for strategic planning

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Components of Forecasting Demand

• Time Frame
• Short-range, medium-range, long-range
• Demand Behavior
• Trends, cycles, seasonal patterns, random

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Time Frame

• Short-range to medium-range
• Daily, weekly monthly forecasts of sales data
• Up to 2 years into the future
• Long-range
• Strategic planning of goals, products, markets
• Planning beyond 2 years into the future

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Demand Behavior

• Trend
• gradual, long-term up or down movement
• Cycle
• up down movement repeating over long time frame
• Seasonal pattern
• periodic oscillation in demand which repeats
• Random movements follow no pattern

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Forms of Forecast Movement
Figure 8.1
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Forecasting Methods

• Time series
• Regression or causal modeling
• Qualitative methods
• Management judgment, expertise, opinion
• Use management, marketing, purchasing,
  engineering
• Delphi method
• Solicit forecasts from experts

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Time Series Methods

• Statistical methods using historical data
• Moving average
• Exponential smoothing
• Linear trend line
• Assume patterns will repeat
• Naive forecasts
• Forecast data from last period

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Moving Average

• Average several periods of data
• Dampen, smooth out changes
• Use when demand is stable with no trend or
  seasonal pattern
• stock market analysis - trend analysis

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Moving Average

• Average several periods of data
• Dampen, smooth out changes
• Use when demand is stable with no trend or
  seasonal pattern

Sum of Demand In n Periods n
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Simple Moving Average
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Simple Moving Average
DaugDsepDoct
MAnov
110 orders for Nov
Example 8.1
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Simple Moving Average
Example 8.1
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Simple Moving Average
91 orders for Nov
Example 8.1
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Simple Moving Average
Example 8.1
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Weighted Moving Average

• Adjusts moving average method to more closely
  reflect data fluctuations

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Weighted Moving Average

• Adjusts moving average method to more closely
  reflect data fluctuations

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Weighted Moving Average Example
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Weighted Moving Average Example
3 Month 110 5 month 91
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Exponential Smoothing

• Averaging method
• Weights most recent data more strongly
• Reacts more to recent changes
• Widely used, accurate method

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Exponential Smoothing
Ft 1 ??Dt (1 - ?)Ft where Ft 1 forecast
for next period Dt actual demand for present
period Ft previously determined forecast for
present period ?? weighting factor, smoothing
constant

• Averaging method
• Weights most recent data more strongly
• Reacts more to recent changes
• Widely used, accurate method

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Forecast for Next Period

• Forecast (weighting factor)x(actual demand for
  period)(1-weighting factor)x(previously
  determined forecast for present period)

0 gt ? lt 1
Lesser reaction to recent demand
Greater reaction to recent demand
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Seasonal Adjustments

• Repetitive increase/ decrease in demand
• Use seasonal factor to adjust forecast

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Seasonal Adjustments

• Repetitive increase/ decrease in demand
• Use seasonal factor to adjust forecast

demand for period/sum of demand
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Seasonal Adjustment
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Seasonal Adjustment
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Seasonal Adjustment
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Seasonal Adjustment
Forecast for 1st qtr 2011
Forecast for 2011 using simple 3 year moving ave
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Forecast Accuracy

• Find a method which minimizes error
• Error Actual - Forecast

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Forecast Control

• Reasons for out-of-control forecasts
• Change in trend
• Appearance of cycle
• Weather changes
• Promotions
• Competition
• Politics

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Reverse Logistics Important or Irritant?
Estimated 100 billion industry in 2006 Survey
shows considerable spending on Returns
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In an ideal world, reverse logistics would not
exist.
Jim Whalen, In Through the Out
Door, Warehousing Management, March 2001
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Now, more than ever, reverse logistics is seen
as being important.
Dale Rogers, Going Backwards, 1999
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Reverse Logistics - What is it?The Armys
Definition

• The return of serviceable supplies that are
  surplus to the needs of the unit or are
  unserviceable and in need of rebuild or
  remanufacturing to return the item to a
  serviceable status

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Reverse Logistics - What is it?The Commercial
Perspective

• Reverse Logistics is the process of moving
  products from their typical final destination to
  another point, for the purpose of capturing value
  otherwise unavailable, or for the proper disposal
  of the products.
• Any activity that takes money from the company
  after the sale of the product

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Typical Reverse Logistics Activities

• Processing returned merchandise - damaged,
  seasonal, restock, salvage, recall, or excess
  inventory
• Recycling packaging materials/containers
• Reconditioning, refurbishing, remanufacturing
• Disposition of obsolete stuff
• Hazmat recovery

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Why Reverse Logistics?

• Competitive advantage
• Customer service
• - Very Important 57
• - Important 18
• - Somewhat/unimportant23
• Bottom line profits

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Reverse Logistics - New Problem?

• Sherman
• Montgomery Wards - 1894
• Recycling/remanufacturing in 1940s
• World War II - 77,000,000 square feet of storage
  across Europe with over 6.3 billion in excess
  stuff
• Salvage and reuse of clothing and shoes in the
  Pacific Theater World War II

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Key Dates in Reverse Logistics

• World War II the advent of refurbished
  automobile parts due to shortages
• 1984 - Tylenol Scare - Johnson and Johnson
• 1991 - German ordinance that put teeth in
  environmental reverse pipeline
• Summer 1996 UK Packaging and Packaging Waste
  Legislation
• 1998 - first real study of reverse logistics in
  the US - University of Nevada, Reno
• 2001 EU goal of 50-65 recovering or recycling
  of packaging waste

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Reverse Logistics

• A US Army Perspective

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Operation Iraqi Freedom

• The US Army moved the equivalent of 150
  Wal-Mart Supercenters to Kuwait in a matter of a
  few months

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Military Operations and Excess

• In battle, troops get temperamental and ask
  for things which they really do not need.
  However, where humanly possible, their requests,
  no matter how unreasonable, should be answered.
  George S. Patton, Jr.

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Janes Defence Weekly
Recent report (Aug 2003) There is a 40 hectare
(100 acres) area in Kuwait with items waiting
to be retrograded back to the US.
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Does this create a problem?
From GAO Audit Report
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From GAO Audit Report
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Reverse Logistics

• The Commercial Perspective

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(No Transcript)
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Reverse Logistics

• Rate of returns?
• Cost to process a return?
• Time to get the item back on the shelf if
  resaleable?

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Costs - above the cost of the item

• Merchandise credits to the customers.
• The transportation costs of moving the items from
  the retail stores to the central returns
  distribution center.
• The repackaging of the serviceable items for
  resale.
• The cost of warehousing the items awaiting
  disposition.
• The cost of disposing of items that are
  unserviceable, damaged, or obsolete.

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Costs

• Process inbound shipment at a major distribution
  center 1.1 days
• Process inbound return shipment 8.5 days
• Cost of lost sales
• Wal-Mart Christmas 2003 - returns 4 Days of
  Supply for all of Wal-Mart 2000 Containers
• PalmOne - 25 return rate on PDAs

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More Costs

• Hoover - 40 Million per year
• Cost of processing 85 per item
• Unnamed Distribution Company - 700K items on
  reverse auction
• 2001 - over 60 billion in returns 52 billion
  excess to systems 40 billion to process
• 2010 majority of cell phones -

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Is it a problem?

• Estimate of 2004 holiday returns 13.2 billion
• of estimated 2004/2005 holiday returns 25
• Wal-Mart 6 Billion in annual returns 17,000
  truck loads (gt46 trucks a day)
• Electronics 10 Billion annually in returns
• Personal Computers 1.5 Billion annually
  approximately 95 per PC sold
• 79 of returned PCs have no defects
• Home Depot 10 million in returns in the stores
  alone
• Local Wal-Mart 1 million a month in returns

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Is it a Problem?

• European influence spread to US - Green Laws
• Estee Lauder - 60 million a year into land fills
• FORTUNE 500 Company - 200 million over their
  300 million budget for returns
• Same Provider - 40,000 products returned per
  month 55 no faults noted
• K-Mart - 980 million in returns 1999
• Warranty vice paid repairs
• Recent survey of FORTUNE 500 Companies 12 of
  companies

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More consequences

• Increased Customer Wait Times
• Loss of Confidence in the Supply System
• Multiple orders for the same items
• Excess supplies in the forward pipeline
• Increase in stuff in the reverse pipeline
• Constipated supply chain

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Impact?

• Every resaleable item that is in the reverse
  supply chain results in a potential stock out or
  zero balance at the next level of supply.
• Creates a stockout do-loop

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Results?

• This potential for a stock out results in
  additional parts on the shelves at each location
  to prevent a stock out from occurring.
• More stocks larger logistics footprint the
  need for larger distribution centers and returns
  centers.

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Reverse Logistics

• According to the Reverse Logistics Executive
  Council, the percent increase in costs for
  processing a return, as compared to a forward
  sale, is an astounding 200-300.
• Typically, as many as 8-12 more steps per item in
  the reverse pipeline than items in the forward
  pipeline

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The truth is, for one reason or another,
materials do come back and it is up to those
involved in the warehouse to effectively recover
as much of the cost for these items as possible.
- Whalen, In Through the Out Door
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RFID and Returns

• Visibility Tracking
• Component tracking
• Data Warehouse on what, why, when
• Altered products
• Not for every product

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Impacts of Reverse Logistics

• Forecasting
• Carrying costs
• Processing costs
• Warehousing
• Distribution
• Transportation
• Personnel
• Marketing

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Next Week

• Next Week Resource Planning, Supply Chain
  Security, The Beer Game