The Nuts’n’Bolts hardware store stocks some high-value items and a large number

Question

The Nuts’n’Bolts hardware store stocks some high-value items and a large number of relatively low-value components. Inventory is reviewed weekly, and orders are placed with suppliers when inventory levels indicate that current levels are “too low.” Most suppliers deliver the low-value items within two weeks; some of the high-value items may take four weeks for delivery.

How would you develop a forecasting system to predict the sales of such items at the individual (SKU stock-keeping unit) level? How would you use such forecasts to plan future purchases?

Use PHIVE to go through the necessary steps. For purposes of the discussion, assume that that any historical data you might need can be made available.

Explanation / Answer

Lead time for low value components = 2 weeks

Lead time for high value components = 4 weeks

In order to develop a forecasting method to predict the sales of the individual items, we would basically refer to 3 aspects from the company’s perspective:

·         Past Sales data with Seasonal variations

·         Comparison on an industry-wide scale

·         Economic trends and changes

Based on the past sales data, we would arrive at a monthly run-rate first to identify any seasonal changes in demand on a month-on-month basis. Basically, we need to identify the months of high demand to add a multiplier to the average monthly demand. Once we have identified the monthly sales in the past year or so, we take into account an industry growth rate and any economic trends that would have a positive or negative impact on the sales numbers.

The entire sales projections can be laid down based on this entire past data.

Since we are confident of the sales projections in the days to come, we need to sort out the supply and ensure the availability of SKUs throughout and not have a ‘Stock Out’ situation.

From the operations perspective, we need to set the ‘Reorder Point’. This point would be the level of inventory at which action needs to be taken to replenish that particular SKUs inventory stock. Whenever, the inventory level reaches this point, the SKUs must be reordered.

Mathematically, Reorder Point (Stock Level) = Lead time Demand + Safety stock for exigencies.

For the Lead time Demand, we need to multiply the average daily sales obtained from the past data by the Lead time required by the supplier to deliver the products (this would be 2 weeks for the low value components and 4 weeks for high value components). The Safety stock, for such hardware items which have consistent demand, we can multiply the maximum daily consumption with the maximum lead time in days. This would in most probabilities cover all worst case scenarios and ensure there is no ‘Stock Out’ situation.

This would ensure low inventory carrying costs and lean inventory to cater to all demand.

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