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Classification For Forecasting and Stock Control: A Case Study
Classification For Forecasting and Stock Control: A Case Study
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The next sections explain the empirical findings, from fore- category is defined according to demand volume. This allows
casting and stock-control perspectives. Unresolved issues are the ‘slow’ category to be the ‘C’ class in an A–B–C classi-
discussed as part of a ‘research agenda’ for demand categ- fication by volume. However, in the remainder of the paper,
orization. Conclusions are summarized at the end of the paper. the company’s usage is followed, where the ‘slow’ category
is restricted to intermittent demand patterns.
Categorization framework In summary, according to this framework:
Infrequent demand occurrences or irregular demand sizes, • An intermittent demand item is an item with infrequent
when demand occurs, do not allow lead time demand to be demand occurrences.
represented by the normal distribution. In these cases, demand • A slow moving item is an item whose average demand
will be called non-normal. By using this nomenclature, it is per period is low. This may be due to infrequent demand
not meant that all regular, non-sporadic, non-lumpy demands occurrences, low average demand sizes or both.
are necessarily normally distributed. A different distribution • An erratic demand item is an item whose demand size is
may be more appropriate, although the normality assumption highly variable.
should reasonably represent many real-world cases (see eg, • A lumpy demand item is an intermittent item for which
Silver et al, 1998). demand, when it occurs, is highly variable.
A rather modest part of the operational research literature • A clumped demand item is an intermittent item for which
has been devoted to exploring non-normal demand patterns. demand, when it occurs, is constant (or almost constant).
Nevertheless, there are inconsistencies in definitions of non- The framework is conceptual, rather than operational, since
normal demand patterns. For example, Williams (1984) argues ‘high’ and ‘low’ are not quantified. The conceptual frame-
that the variances of the number of orders, order sizes and work was used to guide discussions with the company and
lead-times should be taken into account, whereas Gelders and experimentation with their software.
Van Looy (1978) define non-normal patterns by the magnitude
of demand over a calendar year.
Case study: old method of classification
A categorization framework has been developed (see
Figure 1), to link definitions of non-normal demand patterns The empirical investigation presented here is based on the
with factors that have been proposed in the literature. The categorization scheme employed by the forecasting and
first column contains three of these factors. Of course, the stock control software manufacturer, as shown pictorially in
framework can be extended to take other factors into account, Figure 2. (The nomenclature differs slightly from Figure 1
such as the variance of lead-time. The second column defines since an item must be non-intermittent to be ‘erratic’, and
‘intermittent’ and ‘erratic’ demand, according to the factors intermittent to be ‘slow’.) The criteria used in this catego-
proposed in the forecasting-categorization of Syntetos et rization scheme reflect, according to the manufacturer, an
al (2005). In the final column, ‘lumpy’ demand is defined approach that is not untypical within this specialized software
according to Syntetos et al (2005), while the ‘clumped’ sector.
category contains more regular demand patterns, including In the old system, the number of zero demand time
fixed clump-sizes (Ritchie and Kingsman, 1985). The ‘slow’ periods (r ), during the last n time periods (n = 13), is
High
Intermittent
Mean inter -
demand interval
Non-intermittent
Low
High
Erratic Lumpy
Coefficient of variation AND
of demand sizes
Non-erratic Clumped
Low AND
Low
Slow Lumpy
Intermittent
Order frequency
Non-intermittent
Fast Erratic
High
Low High
Variability of demand
compared against a corresponding break-point to determine Nevertheless, the break-points were chosen arbitrarily, so
intermittence. (A break-point of 7 has been used traditionally. that they make sense only for the particular situation that was
If r 7, then demand is classified as intermittent; if r < 7, then analysed in the 1984 paper. This raises some doubts about the
demand is non-intermittent.) In this paper, the term ‘break- potential applicability of the proposed categorization scheme
point’ will be used to denote a critical value of any parameter in other contexts. Eaves and Kingsman (2004) analysed
that determines the category of an SKU. demand data from the Royal Air Force and concluded that
The average demand per unit time period (over the last Williams’ classification scheme did not adequately describe
13 periods) is used as a criterion for further distinguishing the observed demand structure. Consequently, a revised clas-
between lumpy and slow-moving SKUs in the intermittent sification scheme was proposed (for more details, see Eaves,
demand category. (The average demand break-point is set to 2002). The break-point values assigned to the categorization
0.5.) If demand has been classified as non-intermittent, the parameters were chosen subjectively, based on manage-
variability of the demand per period is compared against a ment decisions, thereby restricting the generalization of their
specified break-point to further distinguish between fast and results. Of course, the production of universally applicable
erratic SKUs. rules was not the objective of either academic paper. In both
Intermittent demand requirements are estimated using a papers, a case-study-based solution was developed.
13-period simple moving average (SMA (13)). Non- In both categorization schemes discussed above, fore-
intermittent demand is estimated using various forms of casting methods and stock control models are selected once
exponential smoothing, depending on the trend and seasonal the demand patterns have been categorized. This is also true
characteristics of the demand series. In the next stage, stock for the software solution summarized in the previous section.
control applications are selected based on a sub-categorization Johnston and Boylan (1996) re-conceptualized the term
scheme. For slow demand, the Poisson distribution is used ‘intermittence’ by considering the mean inter-demand inter-
to calculate the order quantity. For lumpy demand, a propri- vals for which Croston’s (1972) method, specifically designed
etary empirical method is used instead. For non-intermittent for intermittence, outperformed single exponential smoothing
demand, continuous order level or periodic order-up-to-level (SES). The authors recommended a rule that if the mean inter-
methods are used depending on the client’s requirements (with demand interval ( p) is greater than 1.25 forecast revision
demand standard deviation adjustments for the erratic SKUs). periods, then Croston’s method should be used, rather than
SES (based on the simulated mean squared error (MSE)). This
form of rule is based on the premise that it is preferable to
Literature review
identify conditions for superior forecasting performance, and
Williams (1984) analysed the demand data of a public utility then to categorize demand based on these results, rather than
and proposed a method of demand pattern categorization the other way round. The essence of the re-conceptualization
based on an idea called variance partition. According to lies in this approach and the identification of the mean inter-
this method, the variance of the demand during lead time is demand interval as a categorization parameter, rather than the
split into its constituent parts: variance of the order sizes, specification of an exact break-point value. Indeed, it seems
transaction variability and variance of the lead times. The more logical to work in the following way: (i) compare
categorization scheme meets various theoretical and practical alternative estimation procedures, (ii) identify the regions of
requirements that were proposed in Williams’ work. superior performance for each one of them and (iii) define
476 Journal of the Operational Research Society Vol. 59, No. 4
quite flat for break-points from r = 2 to r = 6 showing that The software features the continuous re-order point, order
forecast accuracy is insensitive to the choice of break-point in quantity (s, Q) system, the periodic order-up-to-level (T, S)
this region. In the region from r = 7 (the old company break- system and the periodic order point order-up-to-level (T, s, S)
point) to r = 13, forecast accuracy is highly sensitive to the system. (For a discussion of these systems, see Silver et al,
break-point value. This conclusion is confirmed by analysis 1998.) In this research, detailed results were obtained only for
of mean MAE, where similar results are obtained. an (s, Q) system, in which orders of quantity Q are placed
This analysis strengthened the company’s resolve to change when the stock falls below the re-order point (s). The simu-
this parameter from being hard-coded to being menu-driven lations were not replicated on the other control systems since
and to recommend r = 3 as an initial setting. This break- preliminary results indicated no significant differences. This
point consistently yielded accuracy that was close to the best, conclusion is also supported by the findings of the empir-
for ‘issue points’, even when the optimal break-point was ical study conducted by Sani and Kingsman (1997) on the
somewhat higher. For ‘all points in time’, the setting of r = 3 combined performance of statistical estimators and periodic
performed well for Data set 1, but less so for Data sets 2 and stock control models.
3. The need to customize this setting, based on client data, The order-quantity, Q, was determined by the cumulative
remained for ‘all points in time’. forecast over the lead-time, and s by using an appropriate
distribution. For slow items, a Poisson distribution is assumed.
Empirical investigation: stock control This is a natural choice for slow movers and reflected the
company’s existing practice. For lumpy items, the propri-
In the next stage of this investigation, stock control related etary method developed by the company was investigated, in
issues were considered. A demand forecasting system, such addition to calculations based on the negative binomial
as the one discussed in the previous section, may perform distribution (NBD). The NBD is included since it satisfies
well in terms of a given accuracy measure, but this does not both theoretical and empirical criteria (Syntetos and Boylan,
necessarily translate into excellent stock-control performance. 2006b). The forecasting methods considered, for both slow
and lumpy items, were: SBA and SMA(13). SMA(13) has
Simulation design and performance criteria
been included as it is the estimator currently employed in
At this stage, the results were based mainly on one data the system. Croston’s method and SES were excluded on the
set (Data set 1, motor spare parts). The chemical data set basis of a further forecasting analysis, the details of which
(Data set 3) was not used at all for stock simulations because are beyond the scope of this paper.
inventory-related data could not be made available. Moreover, The following measures were recorded: (i) individual
the aerospace spare parts data set (Data set 2) was of limited SKU time average stock-holding (in units and in value); (ii)
use because, for many SKUs, the demand status switched very average of (i) over all SKUs; (iii) Customer service level
frequently across different categories over time, leaving only (CSL) achieved. The ‘CSL’ is defined as the ratio of the
a small number (fewer than 30) that were consistently defined fulfilled demand (total demand minus backorders) to the total
as slow or lumpy. This also affected Data set 1, although to a demand, calculated in terms of units. Default options for the
much lesser degree. Overall, many SKUs had to be discarded simulation experiment included: backorders carried forward
in order to examine the characteristics of slow and lumpy (ie no lost sales); time series are treated as demand rather
data. However, this enabled a more systematic investigation than sales; optimization of forecasting parameters over lead
on the remaining series. time is based on the MSE.
A positive trend of about 6% over 26 months was detected To conduct this analysis, ‘intermittent demand’ was defined
at the aggregate level for the first data set. This trend was not as those SKUs with three or more zero demand periods over
detectable at SKU level, but it is possible that it may have the last 13 periods, following the outcome of the forecasting
affected the results. investigation reported earlier. To distinguish between slow and
For the purposes of this research, only the intermittent lumpy demand, the squared coefficient of variation of demand
demand category was evaluated, as improvements in that area size (CV2 ) was used. The evaluation of break-points, which
constituted the main objective of the software manufacturer. clients would use in practice, was problematic. Clients operate
JE Boylan et al—Classification for forecasting and stock control 479
94.0
differential service-level targets for slow and lumpy items,
and so the choice of break-point would largely depend on
92.0
service-mix requirements. In Data set 1, though, almost 50%
of the SKUs would be classified as slow, regardless of client
preferences, since these items had zero variance of demand 90.0
size. Classification of this subset of SKUs as slow, and the
remainder as lumpy, would provide a useful benchmark for 88.0
future analyses, taking client service-mix requirements into 93.0 94.0 95.0 96.0 97.0
account.
Target Customer Service Level %
Stock control implications of forecasting for slow items SMA(13) SBA Target Service Level
Ritchie E and Kingsman BG (1985). Setting stock levels for Syntetos AA and Boylan JE (2006a). Comments on the attribution of
wholesaling: Performance measures and conflict of objectives an intermittent demand estimator. Int J Forecasting 22: p. 201.
between supplier and stockist. Eur J Opl Res 20: 17–24. Syntetos AA and Boylan JE (2006b). On the stock-control
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control and demand forecasting methods for low demand items. Econ 103: 36–47.
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and Production Planning and Scheduling, 3rd ed. John Wiley & Watson RB (1987). The effects of demand–forecast fluctuations on
Sons: New York. customer service and inventory cost when demand is lumpy. J Opl
Strijbosch LWG, Heuts RMJ and van der Schoot EHM (2000). A Res Soc 38: 75–82.
combined forecast-inventory control procedure for spare parts. Williams TM (1984). Stock control with sporadic and slow-moving
J Opl Res Soc 51: 1184–1192. demand. J Opl Res Soc 35: 939–948.
Syntetos AA and Boylan JE (2001). On the bias of intermittent demand
estimates. Int J Production Econ 71: 457–466.
Syntetos AA and Boylan JE (2005). The accuracy of intermittent Received October 2005;
demand estimates. Int J Forecasting 21: 303–314. accepted July 2006 after one revision