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Relationship Between Inventory Positioning Levels And Forecast Accuracy Economics Essay

1. Explain the interactions which exist between customer service levels, inventory holding levels and forecasting/forecast correctness and clarify how this may be managed. Make sure you include discourse of the issues arising if these connections are poorly supervised. A detailed justification of each (customer support levels, inventory holding levels and forecasting/forecast accuracy and reliability) is not required.

The activities associated with the inventory and materials management are extremely important for the company not only at functional level but also in terms of cost; it will probably be worth mentioning that the aforementioned activities absorb around 26% of the logistics cost for the business. If products demand was known with high degree of certainty and these products could be pressed directly on the market then it would not be necessary to have stocks and therefore warehouse management operations. However, these hypothetical case isn't only not economically successful but also in the majority of the cases in the true business environment extremely hard. Therefore, there can be an urgent dependence on a proper, cost-effective, and functional effective management of the inventory which might well lead to the balance of the storage area costs by reducing transfer costs and the cost related to the non-availability of the product preventing the negative outcomes of the high fluctuations popular.

A company is compelled to utilize warehouses for the following reasons: i) to lessen transport and production costs, ii) to web page link resource and demand, iii) to support the production businesses, and iv) to aid the marketing activities of the company. So far as transport cost lowering is concerned, but the warehouse management activities and the amount of inventory are increasing the logistics costs, these can better be balanced by the lower costs incurred through increased efficiency in move and production functions.

Companies that are able to produce their products only a certain time period are forced to carry inventory in order to meet customers demand. This is also the situation for companies which whilst having the ability to produce every time they want within the year, they are compelled to sell their products at certain period(s) of the entire year. In addition, in case that the raw materials of any company present high price fluctuations within the year then it is appealing buying these raw materials when prices are extremely low in order to ensure self-sufficiency for the future increase in demand of these products and economical efficiency from buying these materials at low prices that can cover the inventory possessing costs.

There are often that the stock can support creation functions from the view that many products require time to be able to mature. Also during the maturation period, the company is not appreciated to pay fees on completed products, which are still "happening" (work-in-progress inventory). Finally, the inventory management operations add value to the merchandise, since storing a product near to customers reduces the delivery time and the product is designed for the customer which also escalates the level of service wanted to the customer and it is also possible to increase sales.

It is a common business practice that the logistics administrator produces his/her own forecasts based on the customer demand, carry and delivery times, and the relative logistics costs, which are being used in tactical and operational planning and control of the business. In many cases the aforementioned required long-term forecasts are either provided by other departments of the company (not the logistics office) or it is partial responsibility of the logistics section of the business.

The most wide-spread medium-term forecasting methods which are really helpful for the decision-maker are the pursuing: i) the exponential normalization method, ii) enough time series evaluation, and iii) the multiple regression analysis. The exponential smoothing method could very well be the hottest short-term forecast method, since it needs minimal data used for repeated applications providing sufficient results in adaptive changes.

Most of the problems in the forecast operations arise in: i) the beginning of the process usually because of the lack of prior information, ii) the abnormal patterns of your time series, and iii) in the geographic section of the data, and iv) in the trial mixtures found in order to lessen the prediction problem. Nevertheless, the logistics management should be aware that we now have alternatives to the issues happening from the forecasting businesses and these are related to planning the resource chain such that it is adaptable and responds quickly in changes so supplying matches demand when the latter occurs.

Inventory is the most important cost factor within the source chain, that ought to be within the minimum amount possible levels, controlling immediate and indirect costs to the desired levels while maintaining the option of products to the customers. The reasons related to the holding of inventory are either related to the level of service offered to the clients or related to the reduced amount of the incurred costs.

Firstly, inventory can result in better and increased response to the customer requirements for products or services as it'll enable the company to act in response quickly to demand. This can not only keep up with the sales levels but also to increase them. Second of all, an organization by possessing inventory can encourage the development of economies of level in order to create more in bigger and longest production cycles. The inventory can provide as intermediate areas that may lead to the discharge of the production output from versions in demand.

Thirdly, the business by buying and keeping a cost-effective level of inventory (higher that its immediate needs) is important since it can purchase in higher quantities thus reducing transport costs. Fourthly, the business by retaining inventory which is bought in order to pay future needs of the business, gives this inventory in today prices and not by future prices, which are generally higher, thus lowering substantially the purchasing costs.

Fifthly, inventory helps the normalization of the unwanted effects brought on by the variation in the time of development and transport of products. Finally, inventory may be used to overcome disaster problems such as hits, natural disasters, etc.

The maintenance of inventory hasn't only positive but also negative effects. First of all, the inventory will not add immediate value to the merchandise but even binds capital that may be better invested increasing the company productivity and competitiveness. Subsequently, the inventory can hide the problems of quality raised since it is utilized in order to provide as a direct compensation for the product of low quality, thus fixing quality problems slower. Finally, inventory brings about the isolation of the business's departments from the other person and will not promote their particular design and cooperation, which would happen if inventories did not exist.

The goal of inventory management is twofold. On the main one hand you have the strive for increasing the customer service which is conducted by the increased availability of the merchandise and on the other hand the aim is to reduce the price tag on providing this supply.

The availability of the product at a particular time and at a certain volume is estimated by the probability of satisfying an order by the existing stock. The likelihood is known as the service level and the amount of service of a product is defined as:

Level of Service = 1 - (expected amount of lost sales anticipated to non-availability of the merchandise / gross annual total demand)

It appears that the level of service is indicated with a value between 0 and 1, which is usually pre-defined as a target for the business. The main aim is to control the expected amount of lost sales anticipated to non-availability of the merchandise. When the products offered by a company is more than one, the problem raises in difficulty.

The cost of providing the required service level can be split into three wide-ranging categories, each one is in conflict or balance to the other. These costs are: i) the procurement costs, ii) the inventory costs, and iii) the price of non-availability of the merchandise.

The procurement costs associated with the acquisition of products for replenishment of inventory and are often an important monetary force which frequently determines the quantity of the requests. It usually provides the making cost of the product, the cost related to the planning of the production process, the price of processing and transmitting of orders and the materials management cost. Some of these costs are fixed and not dependent on the size of the order while some such as vehicles costs or development costs are fully reliant on the order size.

The cost of maintaining the related inventory includes the cost related to the use of the comparative space essential for the safe-keeping of products, the administrative centre binding costs, the price tag on the services related to possessing the inventory such as insurance and taxes, and the cost related to the risk of keeping the inventory, including the cost associated with deterioration, destruction, obsolescence or theft of goods.

The cost of non-availability of a product occurs when the get can not be met from the prevailing stock. This cost can be divided into cost of lost sales, which occurs when the order is withdrawn due to insufficient the product in stock and the expense of delay in gratifying the order which creates particular bureaucratic costs. Of course addititionally there is the defamation cost credited to product lack, which is the essential cost of future lost sales but which cannot be measured.

In bottom line, the logistician frequently locates it essential to provide his/her own forecasts of demand, lead times, prices and charges for use in strategic and functional planning. However, the correctness of these forecasts highly influences the inventory levels hold by the company. If the forecasts are of low exactness then either the inventory levels are high and the administrative centre binded to inventory is high, which brings about low competitiveness and lost trading opportunities for the company, or the inventory levels are low and the company encounters all the negative outcomes mentioned at the prior paragraphs (e. g. , lost sales scheduled to unavailability of the products) and the amount of service offered to its customers is low. Therefore, an effective and cost-efficient balance is required between your logistician's forecasts for customers demand, the mandatory inventory levels and the desired by the company level of service wanted to its customers.

2. Select a different kind of environment from processing and discuss the way the key points of Logistics still apply in satisfying the customer demand.


It is easiest to think of logistics / supply chain in conditions of moving and storing a physical product in a developing setting. However, the logistics / resource chain guidelines and principles can be employed to such areas as service industries, and environment management.

Many companies chosen as service organizations in fact create a product. For example: Starbucks (coffee-shops), Springer (Publisher), and the European Central Bank. These companies carry out all the typical supply chain activities of any developing firm. However, for service companies like the Hilton Organization, and Alcester Hospital, supply string activities, especially those associated with physical syndication are not apparent.

For example, a medical center may choose to extend the crisis medical care throughout the community and must make decisions as to the locations of the centres. Another example may be the next: DHL can locate terminals and route pick up and delivery trucks. The Southern California Gas company inventories gas in underground wells through the off-season in the region where demand will happen. The Alpha Bank in Greece must locate and have cash inventory readily available because of its ATMs. The Government Reserve Standard bank in U. S. must select the methods of travel to move terminated checks among member banks. The Orthodox Cathedral must decide the quantity, location, and size of the churches had a need to meet shifts in proportions and location of congregations, as well as to plan the inventory of its priest's personnel. Epson's repair service for copying equipment is also a good example of the logistics decisions experienced in a service operation.

Therefore, even though many service focused companies may be distributing an intangible, non-physical product, they do engage in many physical syndication activities and decisions. The techniques, ideas, and ways of supply string management and logistics are as relevant to the service sector because they are to the production sector. The key according to Theodore Levitt, may maintain transforming an intangible service into a tangible product. Problems will remain in carefully discovering the costs from the distribution of intangible product. Perhaps because of this, few service businesses or organizations have a physical circulation manager on the staff, although they often times do have materials director to handle source matters. However, controlling logistics operating industries does signify a new way for the future development of logistics practice.

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