Question

Cars arrive at Hungry Fredrik’s drive-through window on a Saturday’s morning. Cars which are waiting for the order have to stay on the drive way; each car leaves the drive way immediately after receiving its order. The input and throughput rates (in terms of number of cars) between 7am-12pm are displayed in the following table.

Time (hour)	Input (cars)	Throughput (cars)	End-Period Inventory (cars)
7-8	5	5	0
8-9	11	11	0
9-10	18	12	6
10-11	11	12	5
11-noon	9	12	2

(a) Suppose there are no cars on the drive way at 7am. Please fill up the “End-Period Inventory” in the last column and plot the inventory build-up diagram below. (b) On average, how many cars are waiting on the drive-way between 7am-12pm? (c) What is the “OM triangle”? Why can demand forecasting be critical in inventory management? Explain your answer.

Answer 1

• Inventory: The expectation (if not the stated goal) of using kanban is to keep inventory low, thereby increasing working capital turnover. But simply lowering inventory levels when information and capacity are lacking can be disastrous.
• Information: There are 2 components to this: information about your demand (how well you can forecast) and information about your supply chain (how well they can deliver). Often it seems that a lack of good information is simply accepted as a given. The link between strong communication among customers and suppliers and reduction of inventory is often not made. The stronger the information systems become the more stable and effective the kanban can be. Also, unpredictable material consumption is often internally driven. Taking the time up front to stabilize operations as much as possible will allow kanban to pay greater dividends later.
• Capacity: The relevant capacity here is that of the supplier. The faster a supplier can respond to a material request the more you can tolerate lower inventories and/or information gaps. Effective communication with suppliers is key to success, as is the recognition of chronic supply issues that must be clearly communicated (information) and buffered against (inventory).

Demand forecasting plays a critical role in inventory management. If you can accurately predict the future demand of products in your warehouse, you can ensure you hold the correct stock to maximise sales potential and profit. However, producing an accurate inventory demand forecast is no mean feat.

For enterprises, demand forecasting allows for estimating how many goods or services will sell and how much inventory needs to be ordered. Demand forecasting lays the foundation for many other critical business assumptions such as turnover, profit margins, cash flow, capital expenditure, and capacity planning.

It can also led to bullwhip effect. The bullwhip effect is a distribution channel phenomenon in which forecasts yield supply chain inefficiencies. It refers to increasing swings in inventory in response to shifts in customer demand as one moves further up the supply chain.