Improve Demand Forecasts by Leveraging the Retailer’s Forecasting and Replenishment System

James Ratliff Consultant Observed Demand (former Inventory Manager, Kmart)
http://www.linkedin.com/in/jamesratliffprofile

Abstract
Retailers are demanding that vendors help streamline inventory at both the distribution center and store level. Usually, the retailer’s forecasting and replenishment system generates orders based on the observed demand which is current deseasonalized demand plus trend plus predictable seasonal fluctuations. For several years now, INFOREM (Inventory Forecasting and Replenishment Module) has been the replenishment application of choice by many retailers, such as Walmart, Target, Kmart, Safeway, etc. Understanding key INFOREM forecasting concepts will lead to the development of more accurate vendor demand forecasts. During this presentation learn the important concepts that drive INFOREM’s forecasting process.

Introduction
• Why even discuss INFOREM specifically?
– Some of the largest retailers use INFOREM to replenish hundreds of stores. Below is a short list of retailers including 2008 Sales and number of stores*
• • • • • • Wal-mart Target Safeway Macy’s Kmart Kohl’s $405.607 billion $64.948 billion $44.104 billion $24.892 billion $18.0 billion (Est.) $16.389 billion 7,262 stores 1,591 stores 1,743 stores 853 stores 1,360 stores (Est.) 929 stores

– Total Combined 2008 Sales = $573.94 billion – Total Combined Stores = 13,738 stores
*Note: Number of stores is from Store Magazine Top 100 Retail List 2008 published in its July 2008 issue at http://www.stores.org/pdf/08TOP100.pdf.

Agenda • • • • Background Forecasting Concepts Ordering Concepts How can the retail vendor apply these concepts? – Demand Planning Simulation – Working with the retailer’s replenishment team .

GM.Background Merchandise Planning & Allocation – Long Term Demand & Supply Planning • Sales. and Inventory Turns Goal Driven – Medium Term Demand & Supply Planning • Review Monthly (Enter New Orders Monthly) • Production and/or Import Lead Time Driven – Short Term Demand & Supply Planning • Review Weekly (Enter New Orders Weekly) • Ship Lead Time Driven • ATS commitments and STA Dates .

AMR Benchmark Analytix data in “The Handbook for Becoming Demand Driven.Background • Goal is to improve Forecast Accuracy Forecast Error (MAPE) with One-Month Lag Industry Bulk Chemicals Consumer Goods High Tech Range 24% to 10% 40% to 14% 45% to 4% Median 11% 26% 28% Source: Lora Cecere. Debra Hoffman. .” July 2005. Roddy Martin. and Laura Preslan. AMR Research.

JDA owns rights to INFOREM . 2010.Background INFOREM – Acronym for “Inventory Forecasting and Replenishment Module” – Created by IBM in the 1970s – Probable offspring of IBM’s 1966 IMPACT “Inventory Program & Control Techniques” – INFOREM Purchased by i2 Technology in 2000 – Update: JDA Acquires i2 Technologies – January.

The INFOREM Policy system DDU FEX RDR Policy File Retailer Item Records AUX Build Transfer Record INFOREM Calculations Retailer Data Orders Outputs Recycle Aux Batch Processing Steps .

Agenda • • • • Background Forecasting Concepts Ordering Concepts How can the retail vendor apply these concepts? – Demand Planning Simulation – Working with the retailer’s replenishment team .

The INFOREM Forecast Formula DD X BI = Sales Forecast DD is Deseasonalized Demand BI is the Base Index .

The INFOREM Forecast Formula • Deseasonalized Demand (DD) is INFOREM’s technical name for an item’s average rate of sales per week • The DD is dynamic in that it adjusts to meet retail trends experienced at the store level • The Base Index is a number that represents the level of sales expected in a given week compared to the average • The Base Index is not dynamic and has to be manually changed periodically .

5 0.0 0.5 Base Index 1.5 2.The INFOREM Forecast Formula An Item’s Store Graphical Profile Item Profile 2.0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 Fiscal Week .0 1.

The INFOREM Forecast Formula DD X BI = Sales Forecast DD is Deseasonalized Demand BI is the Base Index .

Calculating a New DD Output Old DD Input CPS Step 1 Bypass Codes No Update No Update / Update ? Step 2 Update Demand Filter Limits No Update No Update / Update ? Update Final New DD Output DD Change Restrictions Step 4 New DD Input / Output DD Update Step 3 VRS .

Calculating a New DD Output Old DD Input CPS Step 1 Bypass Codes No Update No Update / Update ? Step 2 Update Demand Filter Limits No Update No Update / Update ? Update Final New DD Output DD Change Restrictions Step 4 New DD Input / Output DD Update Step 3 VRS .

Calculating a New DD Output Old DD Input CPS Step 1 Bypass Codes No Update No Update / Update ? Step 2 Update Demand Filter Limits No Update No Update / Update ? Update Final New DD Output DD Change Restrictions Step 4 New DD Input / Output DD Update Step 3 VRS .

Calculating a New DD Output Old DD Input CPS Step 1 Bypass Codes No Update No Update / Update ? Step 2 Update Demand Filter Limits No Update No Update / Update ? Update Final New DD Output DD Change Restrictions Step 4 New DD Input / Output DD Update Step 3 VRS .

Calculates forecast error 3.Step 3 DD Update Calculation • Deseasonalized Demand Update (DDU) process performs three primary functions in creating a new DD: 1. Calculates a new DD . Deseasonalizes current period sales (CPS) 2.

Dividing CPS by the Base Index (BI) for that week to establish a current DD (CDD) • CDD = CPS BI .Step 3 DD Update Calculation 1. Deseasonalizes current period sales (CPS) • DD Update process begins by deseasonalizing the current period sales (CPS).

Step 3 DD Update Calculation 2. Calculates forecast error • Apply a weighting  (Alpha) to both the old DD and CDD to calculate the new DD • •  is a product of forecast error DD Update uses a Tracking Signal to determine when  needs to be increased or decreased .

Calculates forecast error Tracking Signal = TSt = MSDTSt MADTSt where .9 and | | denotes absolute value – – MSDTSt = Mean Signed Deviation for Tracking Signal (mean forecast error) MADTSt = Mean Average Deviation for Tracking Signal (mean absolute forecast error) .Step 3 DD Update Calculation 2.1 < TS < .

) * MADTSt-1  = Beta. “Monitoring a Forecasting System.” Operational Research Quarterly15. smoothing constant often 0. Calculates forecast error MSDTSt =  * (CDDt – old DDt) + (1 . 1964. 271-74. pp. D.) * MSDTSt-1 MADTSt =  * |CDDt – old DDt| + (1 .1 or 0.2 Trigg. .Step 3 DD Update Calculation 2.W.

value from .Step 3 DD Update Calculation 2.1 to . Exponential smoothing with an adaptive response rate. . Calculates forecast error – Damping factor (DAMP) is an assigned value from . Operational Research Quarterly 18: 53-59.1 to . Leach AG.9 – t = TSt x DAMP Trigg DW.9 that modifies the Tracking Signal (TSt) used in producing the smoothing rate t t is set to equal the TSt times DAMP for each update. 1967.

Step 3 DD Update Calculation 3. Calculates a New DD – Variable Response Smoothing (VRS) or Adaptive Response Rate Exponential Smoothing (ADRES) or (ADRRES) is used to calculate the New DDt+1 New DDt + 1 = t * CDDt + (1 – t) * old DDt .

Calculating a New DD Output Old DD Input CPS Step 1 Bypass Codes No Update No Update / Update ? Step 2 Update Demand Filter Limits No Update No Update / Update ? Update Final New DD Output DD Change Restrictions Step 4 New DD Input / Output DD Update Step 3 VRS .

Calculating a New DD Output Old DD Input CPS Step 1 Bypass Codes No Update No Update / Update ? Step 2 Update Demand Filter Limits No Update No Update / Update ? Update Final New DD Output DD Change Restrictions Step 4 New DD Input / Output DD Update Step 3 VRS .

Summary of Steps to Calculating a New DD • Step 1: Bypass codes are used to qualify the incoming sales data • Step 2: Demand Filters are used to audit the sales data for reasonableness • Step 3: Deseasonalized Demand Update (DDU) calculates a new DD • Step 4: DD Change Restriction puts in place limits to regulate the up and down movement of the DD .

Agenda • • • • Background Forecasting Concepts Ordering Concepts How can the retail vendor apply these concepts? – Demand Planning Simulation – Working with the retailer’s replenishment team .

The INFOREM Policy system DDU FEX RDR Policy File Retailer Item Records AUX Build Transfer Record INFOREM Calculations Retailer Data Orders Outputs Moment of Truth Recycle Aux Batch Processing Steps .

Order Forecasting Topics • • • • Order Paths Order Generation Rules Calculating Order Quantities Safety Stock .

Order Paths Independent SKU Non-Flow Flow JIT Group of SKUs Vendor Direct NonAggregate DC Orders Aggregate Aggregate DC Orders DC Orders Store Orders Store Orders .

Order Paths Group of SKUs Independent SKU Vendor Direct Non-Flow Flow JIT NonAggregate DC Orders Aggregate Aggregate DC Orders DC Orders Store Orders Store Orders .

Order Paths Independent SKU Non-Flow Flow JIT Group of SKUs Vendor Direct NonAggregate DC Orders Aggregate Aggregate DC Orders DC Orders Store Orders Store Orders .

3–Tier Distribution System Tier 1 Tier 2 Retail Vendor Tier 3 Stores Legend National DC Regional DCs Tier 2 Regional DCs Tier 3 .

Order Forecasting Topics • • • • Order Paths Order Generation Rules Calculating Order Quantities Safety Stock .

Order Generation Rules • INFOREM provides six order generation rules • An order generation rule is a set of rules used to determine when to order and how much to order • The rules are called Forecast Types and are: – – – – – – Minimum / Maximum – FT U Order Point / Order Up To Level – FT O Presentation Stock / Slow Seller – FT J Time Supply – FT T Fixed Order Quantity – FT F End of Season – FT E .

Order Generation Rules • INFOREM provides six order generation rules • An order generation rule is a set of rules used to determine when and how much to order • The rules are called Forecast Types and are: – – – – – – Minimum / Maximum – FT U Order Point / Order Up To Level – FT O Presentation Stock / Slow Seller – FT J Time Supply – FT T Fixed Order Quantity – FT F End of Season – FT E .

Calculating Order Quantities The Forecast Type chosen will determine: • The Order Point – When to order? • The Order Quantity – How much to order? .

Order Forecasting Topics • • • • Order Paths Order Generation Rules Calculating Order Quantities Safety Stock .

Waiting for Demand Loop 1 Loop 2 No Has review time arrived? Demand occurs .Unit withdrawn from inventory Yes Compute Inventory Status Avail = OH + OO .CMSTK No End Is Avail < OP? Yes Compute OUTL Compute OQ End Compute Order Point (OP) .Calculating Order Quantities Fixed Time Period Reordering Idle State .

CMSTK No End Is Avail < OP? Yes Compute OUTL Compute OQ End Compute Order Point (OP) .Unit withdrawn from inventory Yes Compute Inventory Status Avail = OH + OO .Waiting for Demand Loop 1 Loop 2 No Has review time arrived? Demand occurs .Calculating Order Quantities Fixed Time Period Reordering Idle State .

Waiting for Demand Loop 1 Loop 2 No Has review time arrived? Demand occurs .Unit withdrawn from inventory Yes Compute Inventory Status Avail = OH + OO .CMSTK No End Is Avail < OP? Yes Compute OUTL Compute OQ End Compute Order Point (OP) .Calculating Order Quantities Fixed Time Period Reordering Idle State .

CMSTK No End Is Avail < OP? Yes Compute OUTL Compute OQ End Compute Order Point (OP) .Waiting for Demand Loop 1 Loop 2 No Has review time arrived? Demand occurs .Calculating Order Quantities Fixed Time Period Reordering Idle State .Unit withdrawn from inventory Yes Compute Inventory Status Avail = OH + OO .

Waiting for Demand Loop 1 Loop 2 No Has review time arrived? Demand occurs .CMSTK No End Is Avail < OP? Yes Compute OUTL Compute OQ End Compute Order Point (OP) .Unit withdrawn from inventory Yes Compute Inventory Status Avail = OH + OO .Calculating Order Quantities Fixed Time Period Reordering Idle State .

Unit withdrawn from inventory Yes Compute Inventory Status Avail = OH + OO .Calculating Order Quantities Fixed Time Period Reordering Idle State .CMSTK No End Is Avail < OP? Yes Compute OUTL Compute OQ End Compute Order Point (OP) .Waiting for Demand Loop 1 Loop 2 No Has review time arrived? Demand occurs .

Calculating Order Quantities Fixed Time Period Reordering Idle State .Waiting for Demand Loop 1 Loop 2 No Has review time arrived? Demand occurs .CMSTK No End Is Avail < OP? Yes Compute OUTL Compute OQ End Compute Order Point (OP) .Unit withdrawn from inventory Yes Compute Inventory Status Avail = OH + OO .

Calculating Order Quantities OP/OUTL – Forecast Type O • Order Point Definition OP = FCST(RTF*RT + LT) + SSTOCK or CSTOCK (which every is greater) • When to order? If AVAIL < OP • • • • • • • AVAIL (Available Inventory) = OH (On Hand) + OO (On Order) .5 is usually used RT (Review Time) . Promotional Allocation RTF (Review Time Factor) .The minimum amount of product you want to have on hand when the next order arrives (presentation) .COMSTK (Committed Stock) COMSTK refers to store orders that are committed for various reasons i.Number of days between order review and goods being available for sale ( store level) or distribution (DC level) SSTOCK (Safety Stock) .A default value of .Number of days between INFOREM reviews LT (Lead Time) .Amount of merchandise kept to protect against out of stock condition CSTOCK (Counter Stock) .e.

Calculating Order Quantities
OP/OUTL – Forecast Type O
• Order Up To Level Definition OUTL = FCST(LT + OSTRAT) + SSTOCK or CSTOCK
(which ever is greater)

• How much to order? OQ = OUTL – AVAIL (rounded to pack)

• • • • •

LT (Lead Time) - Number of days between order review and goods being available for sale ( store level) or distribution (DC level) OSTRAT (Order Strategy) - Number of days an order quantity should last upon
receipt

SSTOCK (Safety Stock) - Amount of merchandise kept to protect against out of stock condition CSTOCK (Counter Stock) - The minimum amount of product you want to have on hand when the next order arrives (presentation) OQ (Order Quantity) AVAIL (Available Inventory) = OH (On Hand) + OO (On Order) - COMSTK (Committed Stock)

Order Forecasting Topics
• • • • Order Paths Order Generation Rules Calculating Order Quantities Safety Stock

Safety Stock
• Safety Stock is an additional layer of inventory added to a store order point to cover forecast variance to actual sales in order to prevent store out of stocks

• The Mean Absolute Deviation for Safety Stock (MADSS) is the average difference between forecasted demand and actual sales • Safety Stock is controlled by forecast errors, service level objectives, and lead time variations

Agenda • • • • Background Forecasting Concepts Ordering Concepts How can the retail vendor apply these concepts? – Demand Planning Simulation – Working with the retailer’s replenishment team .

Demand Planning Simulation Order Paths Independent SKU Group of SKUs Non-Flow Flow JIT Vendor Direct NonAggregate DC Orders Aggregate Aggregate DC Orders DC Orders Store Orders Store Orders .

Demand Planning Simulation 3-Tier Distribution System Tier 1 Tier 2 Retail Vendor Tier 3 Stores Legend National DC Regional DCs Tier 2 Regional DCs Tier 3 .

Demand Planning Simulation 3-Tier Distribution System Tier 1 Tier 2 Retail Vendor Tier 3 Stores Legend National DC Regional DCs Tier 2 Regional DCs Tier 3 .

Service Level (DSER) .Order Up to Level (OUTL) .Available Inventory (AVAIL) .Base Index (BI) .Counter Stock (CSTOCK) .Demand Planning Simulation • Spreadsheet Simulation • Key assigned values and weekly calculated values in the Aux File and Policy File at the store level and/or DC level that some retailers provide through its internet portal .Order Point (OP) .Safety Stock (SSTOCK) .Deseasonalized Demand (DD) .Committed Stock (COMSTK) .Order Strategy (OSTRAT) .Lead Time (LT) .Review Time (RT) .

Demand Planning Simulation Using the system’s forecast. inventory and orders are calculated as shown in the spreadsheet below and . .. and order settings. replenishment. week one DD is calculated and a 13 week forecast for sales..

.Demand Planning Simulation … the spreadsheet chart below.

the replenishment settings begin to destabilize due to out of stocks. . Clearly.Demand Planning Simulation After 13 weeks of calculating a stabilized new DD every week. this store did not have enough weeks of supply.

How much safety stock or counter stock do you add to the store? .Demand Planning Simulation Adding safety stock or counter stock would probably stabilize the system.

Agenda • • • • Background Forecasting Concepts Ordering Concepts How can the retail vendor apply these concepts? – Demand Planning Simulation – Working with the retailer’s replenishment team .

Communicating with the Retailer’s Replenishment Team Causes of Forecast Error There are many internal and external factors that have an impact on forecast error.     Bad Profile Improper INFOREM settings Lead Time Variance Unit Integrity     Poor Sister Item Product Availability External Market Conditions Merchandise Display .

Agenda • • • • Background INFOREM Forecasting Concepts INFOREM Ordering Concepts How can the retail vendor apply these INFOREM concepts? – Demand Planning Simulation – Working with the retailer’s replenishment team .

observeddemand.End Email me at james.com Or Visit my website at www.com • http://www.com Or call me at 312-330-2889 Check out my profile at LinkedIn.ratliff@observeddemand.linkedin.com/in/jamesratliffprofile .

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