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Most demand forecasts are partial or incomplete: They provide only one single number: This is called a point forecast.

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Usually, the point forecast estimates the average value of future demand. Much more useful is a forecast of full probability distribution of demand at any future time.

This is more commonly referred to as probability forecasting and is much more useful.

The one advantage of a point forecast is its simplicity. If your ERP system is also simple, the point forecast fills in the one number needed by the ERP system to do workforce scheduling or raw material purchases.

The disadvantage of a point forecast is that it is too simple. While the point forecast provides limited information, e.

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This information lets you do risk assessment and contingency planning. Contingency planning is Kailua1 with the possibility of benefits because the point forecast usually has only a small chance of actually being correct.

This kind of error is not a mistake in the forecasting calculations: An operations manager can use the extra information in a probability forecast in both informal and formal ways.

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Informally, even if an ERP system requires a single-number forecast as input, a wise manager will want to have some clue about the risks associated with that point forecast, i. The lowest forecast of about poossibility, units occurs in June, but the actual demand might be as much as units higher or lower.

Inventory management requires that you balance item availability against the inventory cost. It turns out that knowing the full probability distribution of Kalua1 over a replenishment lead time is essential for setting reorder points also called mins on a rational, scientific basis.

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Figure 2 shows a probability forecast of total demand during the 33 week replenishment lead time for a certain spare part. Once again, the average is not the possibiliity.

Knowing more is always better than knowing less and the probability forecast provides that extra bit of crucial information. Software has been able to supply a point forecast for over 40 years, but modern software can do better and possibiltiy the whole picture.

Figure 1: The red line shows the demand history of a finished good. The green line shows the point forecasts for the next 12 months. The blue lines possibi,ity the margins of error in the 12 point forecasts.

Figure 2: A probabilistic forecast of demand for a spare part over a 33 week replenishment lead time. An inventory professional who is responsible for 10, items has 10, things to stress over every day. Double that for someone responsible for 20, items.

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In the crush of business, routine decisions often take second place to fire-fighting: These terms imply certain standard functionality for collaboration, statistical analysis, and reporting to support a professional demand planning process.

Modern supply benefit software lets you exploit all three helping you to reduce inventory costs, improve on time delivery and service levels, while running a more efficient supply Kailua1 with the possibility of benefits.

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Pursuing best practices in demand planning, forecasting and inventory optimization. Going Beyond the Average: Leave a Comment.

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Related Posts. Stop Leaking Money with Manual Inventory Controls An inventory professional who is responsible for 10, items has 10, things to stress over every day.

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More from my site The 3 levels of forecasting: