Relationship Between Inventory Holding Levels And Forecast Accuracy Economics Essay

1. Explain the relationships that exist between client service degrees, stock list retention degrees and forecasting/forecast truth and explicate how this might be managed. Ensure you include treatment of the issues originating if these relationships are ill managed. A elaborate account of each ( client service degrees, stock list retention degrees and forecasting/forecast truth ) is non required.

The activities associated with the stock list and material direction are really of import for the company non merely at operational degree but besides in footings of cost ; it is deserving adverting that the aforesaid activities absorb about 26 % of the logistics cost for the company. If merchandises demand was known with high grade of certainty and these merchandises could be pushed straight in the market so it would non be necessary to hold stocks and accordingly warehouse direction operations. However, the aforesaid conjectural instance is non merely non economically efficient but besides in the bulk of the instances in the existent concern environment non possible. Therefore, there is an pressing demand for a proper, cost-efficient, and operational effectual direction of the stock list which may good take to the balance of the storage costs by cut downing conveyance costs and the cost related to the non-availability of the merchandise avoiding the negative effects of the high fluctuations in demand.

A company is compelled to utilize warehouses for the undermentioned grounds: I ) to cut down conveyance and production costs, two ) to associate supply and demand, three ) to back up the production operations, and four ) to back up the selling activities of the company. Equally far as conveyance cost decrease is concerned, although the warehouse direction activities and the degree of stock list are increasing the logistics costs, these can better be balanced by the lower costs incurred through increased efficiency in conveyance and production operations.

Companies that are able to bring forth their merchandises merely a certain period of clip are forced to keep stock list in order to run into clients demand. This is besides the instance for companies which while holding the ability to bring forth whenever they want within the twelvemonth, they are forced to sell their merchandises at certain period ( s ) of the twelvemonth. In add-on, in instance that the natural stuffs of a company present high monetary value fluctuations within the twelvemonth so it is frequently of involvement purchasing these natural stuffs when monetary values are really low in order to guarantee autonomy for the approaching addition in demand of these merchandises and economic efficiency from purchasing these stuffs at low monetary values that can cover the stock list keeping costs.

There are many times that the stock can back up production operations from the position that many merchandises require some clip in order to mature. Besides during the ripening period, the company is non obliged to pay revenue enhancements on finished merchandises, which are still “ in advancement ” ( work-in-progress stock list ) . Finally, the stock list direction operations add value to the merchandise, since hive awaying a merchandise near to clients reduces the bringing clip and the merchandise is readily available for the client which besides increases the degree of service offered to the client and it is besides possible to increase gross revenues.

It is a common concern pattern that the logistics director produces his/her ain prognosiss with respects to the client demand, conveyance and bringing times, and the comparative logistics costs, which are used in strategic and operational planning and control of the company. In many instances the aforementioned required long-run prognosiss are either provided by other sections of the company ( non the logistics section ) or it is partial duty of the logistics section of the company.

The most widespread medium-term prediction methods which are highly utile for the decision-maker are the undermentioned: I ) the exponential standardization method, two ) the clip series analysis, and three ) the multiple arrested development analysis. The exponential smoothing method is possibly the most widely used short-run prognosis method, since it requires minimal informations used for perennial applications supplying satisfactory consequences in adaptative alterations.

Most of the jobs in the prognosis operations occur in: I ) the start of the procedure normally due to the deficiency of anterior information, two ) the irregular forms of clip series, and three ) in the geographic division of the information, and four ) in the test combinations used in order to cut down the anticipation mistake. Nevertheless, the logistics direction should be cognizant that there are options to the jobs happening from the prediction operations and these are related to be aftering the supply concatenation so that it is flexible and responds rapidly in alterations so that supply meets demand when the latter occurs.

Inventory is the most of import cost factor within the supply concatenation, which should be within the minimal possible degrees, equilibrating direct and indirect costs to the desired degrees while keeping the handiness of merchandises to the clients. The grounds related to the retention of stock list are either related to the degree of service offered to the clients or related to the decrease of the incurred costs.

First, stock list can take to better and increased response to the client demands for merchandises or services as it will enable the company to react rapidly to demand. This can non merely maintain the gross revenues degrees but besides to increase them. Second, a company by keeping stock list can promote the production of economic systems of graduated table in order to bring forth more in bigger and longest production rhythms. The stock list can function as intermediate countries which will take to the release of the production end product from fluctuations in demand.

Third, the company by purchasing and maintaining a cost-efficient degree of stock list ( higher that its immediate demands ) is of import since it can purchase in higher measures therefore cut downing conveyance costs. Fourthly, the company by keeping stock list which is purchased in order to cover future demands of the company, pays this stock list in today monetary values and non by future monetary values, which are by and large higher, therefore cut downing well the buying costs.

Fifthly, stock list helps the standardization of the negative effects caused by the fluctuation in the clip of production and transit of merchandises. Finally, stock list can be used to get the better of exigency jobs such as work stoppages, natural catastrophes, etc.

The care of stock list has non merely positive but besides negative effects. First, the stock list does non add immediate value to the merchandises but even binds capital that could be better invested bettering the company productiveness and fight. Second, the stock list is able to conceal the jobs of quality raised since it is used in order to function as a direct compensation for the merchandise of low quality, therefore rectifying quality jobs slower. Finally, stock list leads to the isolation of the company ‘s sections from each other and does non advance their alone design and coaction, which would go on if stock lists did non be.

The aim of stock list direction is twofold. On the one manus there is the strive for increasing the client service which is performed by the increased handiness of the merchandises and on the other manus the purpose is to cut down the cost of supplying this handiness.

The handiness of the merchandise at a specific clip and at a certain measure is estimated by the chance of carry throughing an order by the bing stock. The chance is referred to as the service degree and the degree of service of a merchandise is defined as:

Level of Service = 1 – ( expected figure of lost gross revenues due to non-availability of the merchandise / one-year entire demand )

It appears that the degree of service is expressed by a value between 0 and 1, which is normally pre-defined as an aim for the company. The chief purpose is to command the expected figure of lost gross revenues due to non-availability of the merchandise. When the merchandises offered by a company is more than one, the job increases in trouble.

The cost of supplying the needed service degree can be divided into three wide classs, each one is in struggle or balance to the other. These costs are: I ) the procurance costs, two ) the stock list costs, and three ) the cost of non-availability of the merchandise.

The procurance costs associated with the acquisition of merchandises for refilling of stock list and are frequently an of import economic force which frequently determines the measure of the orders. It normally contains the fabrication cost of the merchandise, the cost related to the readying of the production procedure, the cost of processing and transmittal of orders and the stuffs direction cost. Some of these costs are fixed and non dependent on the size of the order while others such as transit costs or production costs are to the full dependent on the order size.

The cost of keeping the related stock list includes the cost related to the usage of the comparative infinite necessary for the storage of merchandises, the capital binding costs, the cost of the services related to keeping the stock list such as insurance and revenue enhancements, and the cost related to the hazard of maintaining the stock list, such as the cost associated with impairment, harm, obsolescence or larceny of goods.

The cost of non-availability of a merchandise occurs when the petition can non be met from the bing stock. This cost can be divided into cost of lost gross revenues, which occurs when the order is withdrawn due to miss of the merchandise in stock and the cost of hold in carry throughing the order which creates peculiar bureaucratic costs. Of class there is besides the calumny cost due to merchandise deficit, which is the indispensable cost of future lost gross revenues but which can non be measured.

In decision, the logistician often finds it necessary to supply his/her ain prognosiss of demand, lead times, monetary values and costs for usage in strategic and operational planning. However, the truth of these prognosiss extremely affects the stock list degrees hold by the company. In instance that the prognosiss are of low truth so either the stock list degrees are high and the capital binded to stock list is high, which leads to moo fight and lost puting chances for the company, or the stock list degrees are low and the company faces all the negative effects mentioned at the old paragraphs ( e.g. , lost gross revenues due to inaccessibility of the merchandises ) and the degree of service offered to its clients is low. Therefore, a proper and cost-effective balance is required between the logician ‘s prognosiss for clients demand, the needed stock list degrees and the desired by the company degree of service offered to its clients.

2. Choose a different type of environment from fabrication and discourse how the rules of Logisticss still use in carry throughing the client demand.


It is easy to believe of logistics / supply concatenation in footings of traveling and hive awaying a physical merchandise in a fabrication scene. However, the logistics / supply concatenation rules and constructs can be applied to such countries as service industries, and environment direction.

Many companies designated as service houses in fact produce a merchandise. Examples include: Starbucks ( coffee-shops ) , Springer ( Publisher ) , and the European Central Bank. These companies carry out all the typical supply concatenation activities of any fabrication house. However, for service companies such as the Hilton Corporation, and Alcester Hospital, supply concatenation activities, particularly those associated with physical distribution are non obvious.

For illustration, a infirmary may desire to widen the exigency medical attention throughout the community and must do determinations as to the locations of the Centres. Another illustration may be the undermentioned: DHL must turn up terminuss and path pick up and bringing trucks. The Southern California Gas company inventories natural gas in belowground Wellss during the off-season in the part where demand will happen. The Alpha Bank in Greece must turn up and hold hard currency stock list on manus for its ATMs. The Federal Reserve Bank in U.S. must choose the methods of transit to travel off cheques among member Bankss. The Orthodox Church must make up one’s mind the figure, location, and size of the churches needed to run into displacements in size and location of folds, every bit good as to be after the stock list of its priest ‘s staff. Epson ‘s fix service for copying equipment is besides a good illustration of the logistics determinations encountered in a service operation.

Therefore, even though many service oriented companies may be administering an intangible, non-physical merchandise, they do prosecute in many physical distribution activities and determinations. The techniques, constructs, and methods of supply concatenation direction and logistics are as applicable to the service sector as they are to the fabrication sector. The cardinal harmonizing to Theodore Levitt, may be in transforming an intangible service into a touchable merchandise. Problems will stay in carefully placing the costs associated with the distribution of an intangible merchandise. Possibly because of this, few service houses or organisations have a physical distribution director on their staff, although they often do have stuffs director to manage supply affairs. However, pull offing logistics in service industries does stand for a new way for the hereafter development of logistics pattern.