THEORY OF INVENTORY MANAGEMENT BASED ON DEMAND FORECASTING - Polish Journal of Management Studies

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THEORY OF INVENTORY MANAGEMENT BASED ON DEMAND FORECASTING

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THEORY OF INVENTORY MANAGEMENT BASED ON DEMAND FORECASTING

Kot S., Grondys K., Szopa R. *


Abstract:

Efficient management of supply chains consists in particular in ensuring possibly highest quality of customer service and striving for minimization of the costs generated by flow between the links. Typical cause of constantly increasing costs is excessive  inventory levels throughout the chain. The reason for this situation is maladjustment of the level of supply to the level of demand in the market, which results in surplus stock. The starting point for reduction in inventory levels is forecasting of demand  in the market through market prognoses in cooperation with all the links in the supply chain. Therefore, in the aspect of demand forecasting, the character of data flow and the type of cooperation between the links is essential.

Keywords: dependent and independent inventory, demand forecasting

Introduction

Management of logistics chains plays a key role in the process of demand forecasting. The whole supply chain is subject to flow of both materials and information. Contemporary concept of supply chain management strives for cooperation in order to reduce  inventory throughout the chain, whereas planning is carried out using the principle of continuity, dividing all the information required in order to control the processes of flow [5,9,12]. Fig. 1 presents one of the models of inventory management where  the components of the chain work independently and information is transferred only at the level of adjacent links.

The arrows in Fig. 1 point clearly to communication between individual chain links, which causes that information about the demand expressed in order size is subject to verification  at the level of retailers. Then, the same level of demand is repeated, which is expressed in orders from other entities in the chain. Each link cares only for their own interests, being in close relationship with suppliers and customers. This behaviour  leads to maintaining a particular level of inventory in each link, which is kept in a ‘ready state’ in order to satisfy customer needs at any moment [14]. Thus, a task of safety stock is to maintain a suitable level of customer service,  whereas its independent building in each unit of the chain causes generation of surplus inventory throughout the logistics chain. Aiming at ensuring the highest standard of customer service, the companies must bear the costs of [17]:
‘physical flow,the stock,of the stock.costs.’
Accumulation of these costs causes considerable expenses to the company, particularly in the cases of ‘artificially’ high level of safety stock.
Each link in supply chain, starting from manufacturers, distributors, wholesalers or retailers strives for taking suitable measures at their levels towards forecasting of demand for their products. At the same time, each of the entities is guided by achievement  of main goals of their activity, aimed at ensuring possibly highest customer service. At this stage, the questions arise of the limits of demand and chances to analyse the demand. The answer to these questions would allow for adjustment of companies’ operation to actual demand.
Early demand forecasting allows for limitation of costs generated as a result of storage of excessive amount of unsold products [1]. It should be emphasized that the selected techniques of prediction are contained in the implemented advanced IT systems  used for warehouse management. The enterprises which do not use these systems or use them only for limited areas, incur considerably higher costs of building inventory.


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Summary

Poor communication between the links in supply chain and neglecting high errors of forecast is a frequent cause of growing costs throughout the chain, resulting from increasing inventory levels. In the environment of companies with global scope, collecting  and synchronization of information distributed between suppliers and customers is frequently disturbed by communicational noise. This leads to obtaining incomplete or inaccurate data about future demand without taking into account current economic situation  in the selected market.
In order to optimize operation of supply chain, it seems essential to forecast the demand at the level of each link in the logistics chain. There are a variety of techniques and methods of quantitative and qualitative forecasting today. However, due to  measurability and objective character of statistical methods, they are more frequently used in many companies which are natural participants of logistics chains. Subjective qualitative methods still bring up the rear of the methodologies of sales forecasting.
Apart from preparation of forecasts using a selected method, another problem is the quality of flow of information about the demand size. This information is transfer only between direct links in supply chain. This means that actual demand size for final  customer will be known only to retailers and the adjacent links, e.g. wholesalers. Other participants obtain information about the demand indirectly. These two factors impact on inaccurate demand forecasting and prospective rise in the costs of inventory.
The solution can be combination of several methods of forecasting at the same time, using both quantitative and qualitative methods prepared at the level of cooperation between the links. Based on assessment of the errors of forecasts, one can assess  possibly best forecasts in the studied logistics chain, whereas the effect of combination of the methods depends on the character of the chain.
Proper and cyclic assessment of consumer market and consumers’ expectations is a key factor in planning of production size in companies. This assessment is typically made based on forecasts for final products. The more accurate demand forecasting,  the more efficient decisions for the planned production, lower inventory levels and costs of maintaining inventory. Therefore, utilization of forecasting techniques in company’s operation is economically justified and rational.


References

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TEORIA ZARZĄDZANIA ZAPASAMI BAZUJĄCA NA PROGNOZOWANIU POPYTU

Streszczenie:

Efektywne zarządzanie łańcuchami dostaw polega przede wszystkim na zapewnieniu możliwie najwyższej jakości obsługi klienta oraz dążenie do minimalizacji kosztów generowanych przez przepływ  pomiędzy jego ogniwami. Typowymi przyczynami stale rosnących kosztów jest nadmierny poziom zapasów w całym łańcuchu. Powodem takiej sytuacji jest niedostosowanie poziomu dostaw do poziomu popytu na rynku, co prowadzi  do gromadzenia nadmiernych zapasów. Punktem wyjścia do obniżenia poziomu zapasów jest prognozowanie popytu na rynku poprzez prognozy rynku we współpracy z wszystkimi ogniwami łańcucha dostaw. Dlatego też w  aspekcie prognozowania popytu istotne są, charakter przepływu danych jak i rodzaj współpracy między poszczególnymi ogniwami.



 
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