USING FORECASTING TOOLS
IFS Inventory Planning and Replenishment
KARIN RAINESALO
BUSINESS SOLUTIONS CONSULTANT
AGENDA
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What is IPR and why use IPR?
New Parameters on Inventory Parts
Classification—ABC/Frequency/Lifecycle Planning policies
Planning hierarchy Planning parameters
Example—planning hierarchy changes planning parameter IFS Demand Planning
Change forecast data
Example—forecast changes planning paramters Calculation Explanations and Simulation
WHAT IS IPR AND WHY USE IPR?
IFS Customer Summit 2011, Chicago
What is IPR?
IPR = Inventory Planning and Replenishment Functionality to manage part replenishment. Works with Order Policy Code B parts:
Safety Stock Reorder Point Lot Size
Next Order Date Why IPR?
You’ve always had the ability to enter values for safety stock, reorder point, and lot size.
IFS Applications has had functionality to help you calculate those values… …using historical data.
MAIN FEATURES
OVERVIEW
Definition:
A solution for inventory replenishment using reorder levels
IPR calculate values for:
Safety Stock – needed to absorb variation in demand or lead-time.
Reorder Point – the inventory level at which you need to create a
replenishment order
Lot Size – the quantity to order when the reorder point is reached
Next Order Date – given the current stock level and forecast
IPR adds forecast info as an input to
Stock Time Safety Stock Reorder point Lot Size Expected Lead Time
TARGET GROUPS
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RECOMMENDATION
IPR is a reorder point-based planning system. Planning of a part is independent of other parts.
If the demand for a part depends almost entirely on other parts, MRP-based solutions work better. If a part has many sources of demand (>10), reorder point works fine even though all demand is dependent.
The result of an “inspection” is just replenish/don’t replenish – the forecast is not distributed upstream as in an MRP system.
Under which circumstances should IPR be deployed?
Spare part logistics Distribution and trade
Common components used in many bills of materials
Replenish Fulfill
Delivery Lead Time Supply Lead Time
CLASSIFICATION
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ABC ANALYSIS
Classification by turnover value—ABC analysis
Distinguish the vital few from the trivial many.
A small number of parts will correspond to a large portion of total value.
The classification defines the operative and strategic focus.
Cumulative Value Cum. No of parts A B C 75 200 1000 80% 95% 100%
CLASSIFICATION
FREQUENCY ANALYSIS
Classification based on history—frequency
The frequency will determine how difficult is to plan the parts
Fast movers—predictable demand and easy to forecast
Slow movers—unpredictable demand and low forecast accuracy
The frequency class will help to decide the best forecasting and inventory planning method.
It also supports strategic decisions about product range, supply model, etc.
Demand
Average Demand SLOW (NO) MOVER
Average Demand FAST MOVER Average Demand MEDIUM MOVER
CLASSIFICATION
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ABC/FREQUENCY/LIFECYCLE STAGE
This classification is grouped by lifecycle stages.
The classification is done by site or asset class.
Example: Spare parts at site 90
Introduction Stage Duration
Decline Inactivity Days
Expired Inactivity Days
Expired Decline Mature Introduction
CS BS AS CM BM AM CF BF AF CS BS AS CM BM AM CF BF AF CS BS AS CM BM AM CF BF AF CS Development CS BS AS CM BM AM CF BF AF Today
CLASSIFICATION
PURPOSE
The classification ABC/Frequency/Lifecycle is the foundation for the planning policies to be applied.
Frequency
Fast movers have high forecast accuracy and low
variation
Slow movers are impossible to forecast and
intermittent ABC Class
A-parts are important and need/justify a lot of
attention
C-parts are not important and should not require a
lot of attention Lifecycle stage
Mature parts have a reliable forecast
New parts (Introduction) require a manual estimate
AM AS BM BS CM CS AF BF CF Frequency Volume Value
CLASSIFICATION
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PROCESS
Determines ABC Class
Determines Frequency Class based on number of issues per year (or number of periods) and classification boundaries by site.
Determines Lifecycle Stage based on days between issues and classification boundaries by company.
A background job that can be scheduled.
CLASSIFICATION
DETERMINE PLANNING POLICIES
PLANNING PARAMETERS
The IPR calculates 4 planning parameters which are used to create replenishment proposals:
Lot size
Safety Stock Reorder Point Next Order Date
IPR offers a number of different methods to calculate these parameters
Stock Time Safety Stock Reorder point Lot Size Expected Lead Time
PLANNING PARAMETERS
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SET THE DEMAND MODEL
In order to calculate the planning parameters it is necessary to have an estimate of future:
Demand (Forecast)
Expected demand variation (Demand forecast error) The Demand Model defined on Inventory Part will dictate what data to use to estimate the future.
Forecast—from IFS/Demand Planning
Yearly prediction—Manual entry
History—inventory transactions are used
ADVICE:
Use Forecast for:
Mature Fast and Medium movers
Important parts where a reliable forecast can be created manually
Parts with trends, campaigns, seasonality etc. Use History for Mature Slow Movers
PLANNING PARAMETERS
HOW TO DETERMINE LOT SIZE
Manual—manual entry of the lot sizeTime Coverage—the lot size is calculated to cover a number of days demand
Economic Order Quantity (EOQ)
A trade-off between inventory holding cost and ordering cost
The result is dependent on Demand, Part Cost, Inventory Interest Rate, Ordering Cost
Stock
Time
Max Order Cover Time Lot
Size
By using IFS/Demand Planning, the lot sizes will change dynamically with seasonality,
trends, campaigns, etc.
ADVICE:
Time coverage is a commonly used model – it is easy to understand and communicate
EOQ gives good results, but requires significant analysis to determine the right input parameters
PLANNING PARAMETERS
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HOW TO DETERMINE LOT SIZE
Additional parameters that control the lot size: Max Order Cover Time can be defined to limit the lot size when EOQ is used
Durability
Min, Max and Multiple Lot Size
Stock
Time
Max Order Cover Time Lot
Size
By using IFS/Demand Planning, the lot sizes will change dynamically with seasonality,
PLANNING PARAMETERS
HOW TO DETERMINE SAFETY STOCK
The purpose of a safety stock is to cover for
uncertainty in demand quantity or supply lead time
Manual —manual entry of the safety stock
Time Coverage—the safety stock is calculated to cover a number of days’ demand
Historical Uncertainty—the safety stock is calculated using Standard deviation, Lead time, Service Rate [%], Lot Size
Mean Absolute Error—rather than using historical standard deviation, the historical
forecast error is used Period
Demand Forecast Demand Average Demand Stock Time Safety Stock Reorder point Lot Size Expected Lead Time Next Order Date Receipt
By using IFS/Demand Planning, the safety stock levels can be kept
lower, as historical variation that originates from seasonality, trends,
ADVICE:
Mean Absolute Error will show good results for
mature Fast and Medium Movers.
PLANNING PARAMETERS
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HOW TO DETERMINE REORDER POINT
The Reorder point is defined as either of:
Manual—manual entry of reorder point
Lead-time driven—calculated as the demand during the lead time plus safety stock
In addition to this, a number of models are added to handle slow-moving parts (< 10 transactions per period):
Slow Movers—Lifecycle Slow Movers—Lead time Croston—Lifecycle Croston—Lead time Stock Time Safety Stock DemandLT Expected Lead Time
Next Order Date Receipt
INVENTORY PART—MODELS
Demand Model Safety Stock Model Lot Size Model
INVENTORY PART—COVER TIMES
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INVENTORY PART—EOQ PARAMETERS
Inventory Interest, Ordering Cost, Service Rate
PLANNING PARAMETERS
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PLANNING HIERARCHY
A number of parameters are needed in order to calculate the planning data
Demand Model Safety Stock Model Lot Size Model
Order Point Model
Inventory Interest Rate Service Rate
Ordering Cost
Instead of defining these parameters for each part, they can be maintained in a planning
PLANNING HIERARCHY
Hierarchy is in place to define:
Inventory interest Ordering cost Service rate Models Cover times
Lower level hierarchical value overrides higher level value:
Company Site ABC/Frequency/Lifecycle stage Asset Class Commodity Group Supplier Inventory Part
PLANNING HIERARCHY—EXAMPLE
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Set parameters at different levels and they’ll pass to the inventory parts.
PLANNING HIERARCHY—EXAMPLE
However, if a part belongs to Asset Class 20 or 40, the inventory interest rate is 12%.
PLANNING HIERARCHY
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Models and lot size cover times set for different combinations of ABC Class, Frequency, and Lifecycle Stage.
Each setting shows its source: company, site, ABC/Frequency/Lifecycle, Asset Class,
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Each setting shows its source: company, site, ABC/Frequency/Lifecycle, Asset Class,
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IPR
EXAMPLE
A mature, fast-moving part with a forecast. Economic order quantity has been used to determine values for lot size.
Initial order cost determined by Company value
Change suppliers to one that results in a higher ordering cost. New value is calculated for lot size.
COCA-COLA PLANNING POLICIES
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COCA-COLA
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COCA-COLA PLANNING PARAMETERS
PLANNING PARAMETERS
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DEPENDENCIES
Parameter Value Required Input
Demand Model Forecast Forecast from IFS/Demand Planning
Yearly Prediction Inventory Part / Planning / Pred Year Cons Qty
History Inventory transactions
Safety Stock Model Manual Inventory Part / Planning / Safety Stock
Time Coverage Safety Stock Cover Time
Historical Uncertainty Inventory transactions + Service Rate(%), Inventory Part / Aquisition / Expected Lead Time
Mean Absolute Error Forecast from IFS/Demand Planning + Service Rate(%), Inventory Part / Aquisition / Expected Lead Time Lot Size Model Manual Inventory Part / Planning / Lot Size
Time Coverage Lot Size Cover Time
Economic Order Quantity Inv Interest (%), Ordering Cost, Part Cost
Order Point Model Manual Inventory Part / Planning / Lot Size
Lead Time Driven Inventory Part / Aquisition / Expected Lead Time
Slow Movers - Lead Time Inventory Transactions + Service Rate(%), Inventory Part / Aquisition / Expected Lead Time Slow Movers - Lifecycle Inventory Transactions + Service Rate(%), Inventory Part / Aquisition / Expected Lead Time
Croston - Lead Time Forecast from IFS/Demand Planning + Service Rate(%), Inventory Part / Aquisition / Expected Lead Time Croston - Lifecycle Forecast from IFS/Demand Planning + Service Rate(%), Inventory Part / Aquisition / Expected Lead Time
PLANNING PARAMETERS
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SET THE DEMAND MODEL
In order to calculate the planning parameters it is necessary to have an estimate of future:
Demand (Forecast)
Expected demand variation (Demand forecast error) The Demand Model defined on Inventory Part will dictate what data to use to estimate the future.
Forecast—from IFS/Demand Planning Yearly prediction—Manual entry
History—inventory transactions are used
ADVICE:
Use Forecast for:
Mature Fast and Medium movers
Important parts where a reliable forecast can be created manually
IFS DEMAND PLANNING
IFS DEMAND PLANNING
FORECASTING
IFS DEMAND PLANNING
A statistical forecasting tool with graphical and tabular displays. Use historical data to make predictions about the future.
A variety of forecasting models and metrics Naïve
Moving average
Exponentially Weighted Moving Average (EWMA)
Single (Level) Adaptive Single
Double (Level and Trend) with Dampening
Least Square Regression with Trend Dampening Croston’s Brown’s Model Multiple Regression Best fit Bayesian
IFS DEMAND PLANNING
FORECASTING
Seasonality
System-defined or user-defined
A variety of error measurement methods. Campaigns, Inheritance, Cannibalism
Uses a combination of statistical methods and judgmental adjustments Collaboration
Collaborators use a web-based client to view or input forecasts on a subset of items, customers
IFS DEMAND PLANNING AND IPR
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When the Demand Model is Forecast, IFS Demand Planning is the source of estimates of future demand.
Mature, fast-moving parts
Other parts that can be manually forecast reliably. Parts with seasonality, campaigns, trends.
Lot size and safety stock levels can be varied from period to period, based on changing demand: seasonality, campaigns, trends, events.
IFS DEMAND PLANNING AND IPR
EXAMPLE
A mature, fast-moving part with a forecast. Demand model for the part is Forecast; forecast has been used to determine values for safety stock, reorder point, lot size.
Change the forecast to add an event or campaign.
ABSOLUT BEFORE CHANGE
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ABSOLUT BEFORE CHANGE
ABSOLUTE AFTER CHANGE IN FORECAST
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ABSOLUT
An analysis tool is available so you can see how IPR does its calculations.
You can also simulate changes without having to update the database.
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The first tab shows the parameters used in the calculations and the policies selected.
The second tab shows the values calculated for all the planning parameters.
Column C can be used to perform simulations.
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Change the order cost from 10,000 to 20,000.
Since the Lot Size model is EOQ, there should be a change in the Lot Size.
Change the safety stock time coverage from 5 to 10.
Since the Safety Stock model is Time
Coverage, there should be a change in the Safety Stock.
Safety stock changes from 8,459 to 16.919.
CREATE GRAPHS FROM DATA
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PERFORM REPLENISHMENT
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TWO OPTIONS
Next Order Date
Next Order Date is the date when a part will reach its reorder point
Considering supply and the largest of forecast and actual demand
Displayed on overview Supplier for Purchase Part, from where requisitions can be created
Days To Next Order Date indicates priority
Order Proposal
A background job that will compare the available stock with the reorder point and create requisitions
Stock Time Safety Stock Reorder point Expected Lead Time
EXECUTE REPLENISHMENT
INVENTORY PLANNING AND REPLENISHMENT
BENEFITS
Powerful, efficient and impartial management of large numbers of parts
Classification of parts and inventory management policies defined by groups
Integrated with IFS/Demand Planning for improved response to changes in demand and forecast accuracy
Calculation of next order date for prioritization of proposals
Decision support for the planner to schedule orders
Special support for slow movers (Poisson-distributed demand) Rapid ROI and substantial improvement potential:
Lower inventories, improved customer service, less scrap and obsolescence Less administration, cost reduction opportunities
A powerful, yet proven, solution for distribution and spare parts management High performance because all heavy calculations are performed in the
CUSTOMER EXAMPLES
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IPR is live at 2 pilot customers: John Deere (Sweden, Finland) PMC Servi Group (Norway)
IPR is based on a Scandinavian extension called APO that has been implemented at approximately 20 customers already
Some examples of customers using the Scandinavian extension APO are: Systembolaget, Retail, >400 sites with 1500 parts each, Sweden AK-Maskin, spare parts retailer (agriculture), Norway
SKM Fellesköpet, automotive spare parts (agriculture), Norway BOS – Bertel O. Steen, automotive spare parts, Norway
THANK YOU FOR ATTENDING.
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THIS DOCUMENT MAY CONTAIN STATEMENTS OF POSSIBLE FUTURE FUNCTIONALITY FOR IFS’S SOFTWARE PRODUCTS AND TECHNOLOGY. SUCH STATEMENTS OF FUTURE FUNCTIONALITY ARE FOR INFORMATION PURPOSES ONLY AND SHOULD NOT BE
