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Inventory Planning

Why New Horizon Inventory Planning?

  • Automatically calculate demand variance and supply lead time variance based on historical data
  • Allow to calculate safety stock plan based on demand variance and supply lead time variance
  • Allow to setup safety stock policy at higher level (for example, all rank A items) as well as at item DC level
  • Allow to use different safety stock calculation methodologies including days of coverage, service level and straight number

Inventory Planning: Challenges and Opportunities

While the formula using service level, demand variance and lead time variance to calculate safety stock is long existing, there exists the following limitations:

  • Challenge to calculate demand variance: Each item has its unique selling patterns. There are a few things to consider when calculating demand variance:
    • How many historical data points to use
    • What kind of data points we should identify as outliers
  • Challenge to calculate lead time variance: Supply lead time varies by time. And often lead time could vary due to warehouse receiving capacities. For international shipping, this could also be impacted by geo-political situations at the time
  • Limitation of the safety stock calculation formula: Safety stock formula assumes the variance is normally distributed. In real life, this is not true. It’s not uncommon that the formula may generate a huge safety stock (for example, 2 years worth of demand)
  • Seasonality: Safety stock formula does not take into consideration of demand seasonality. So over or under stock could occur if products are seasonal

The New Horizon Solution

New Horizon Inventory Planning was designed and developed using Adaptive Selection technology. The tool calculates the safety stock with the following unique features

  1. Automatically determine the historical data to use and what data to drop as outliers based on item’s historical sales pattern, thus able to calculate demand variance more accurately
  2. Automatically choose the best approach for lead time variance computation. Abnormalities in lead time will be report
  3. Put a limitation on the safety stock in case demand is too much volatile
  4. Automatically adjust safety stock based on seasonality

Results

Users are able to setup safety stock at any level they want. After using the inventory planning:

  • A service level improvement of 5-15%
  • An inventory reduction of 4-20%
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