Spares – Getting the numbers right

Case Problem

 Mr. Kumar, head of Construction Equipment business at Gordon & Cordon has to
plan the inventory of spares of heavy equipment and machinery in such a way that
the variable custom demands are met and also there is less burden of inventory
storage cost due to long shelf presence.

 Following three problems are to answered in particular

 Develop forecasting models for the spare parts.
 Suggest inventory categorization model for the spare parts.
 Suggest ways to Mr. Kumar to run a profitable spare parts business.
 Forecasting Models
Category 1

200 1400
150 1200
1000
100 800
50 600
0 400
200
0
1000

ug 9
ec 9
pr 9
ug 0
ec 0
pr 0
ug 1
ec 1
pr 1
ug 2
ec 2
pr 2
ug 3
ec 3
pr 3
ug 4
ec 4
pr 4
5
A /200
D 200
A 200
A /201
D 201
A 201
A /201
D 201

A /201
D 201
A 201
A /201
D 201

A /201
D 201
A 201
A 201

A 201

01
800

/2
/
/
/

/
/

/
/

/
/
/

/
pr
A
Values Forecast 600
Lower Confidence Bound Upper Confidence Bound 400
Values Forecast
200 Lower Confidence Bound Upper Confidence Bound
0
B-456 B-789 -200 G-789 H-456
-400 1200
200
800
100
400
0
0
Values Forecast
-100
Lower Confidence Bound Upper Confidence Bound
9 9 9 0 0 0 1 1 1 2 2 2 3 3 3
00 00 00 01 01 01 01 01 01 01 01 01 01 01 01
/2 g/2 c/2 r/2 g/2 c/2 r/2 g/2 c/2 r/2 g/2 c/2 r/2 g/2 c/2
p r
A Au D
e p
A Au D
e p
A Au D
e p
A Au D
e p
A Au D
e D-301
H-456
Values Forecast Forecast(H-456)
Lower Confidence Bound Upper Confidence Bound Lower Confidence Bound(H-456)
Upper Confidence Bound(H-456)
 Forecasting Models
Category 2
4
500
3
400
2
1 300
0 200
-1 100 100
-2 90 0
80
70
60
50
Values Forecast 40 Values Forecast
Lower Confidence Bound Upper Confidence Bound 30 Lower Confidence Bound Upper Confidence Bound
20
10
E-123 F-456
C-001 D-004 0
25 800
20
15 600
10
400
5 Values Forecast
0 Lower Confidence Bound Upper Confidence Bound 200
-5
-10 0
I-005

Values Forecast Values Forecast

Lower Confidence Bound Upper Confidence Bound Lower Confidence Bound Upper Confidence Bound
Forecasting Models
Category 3

8000

7000

6000

5000

4000

3000

2000

1000

0 09 0 09 0 09 00
9
00
9 10 01
0
01
0
01
0
01
0
01
0
01
1
01
1
01
1
01
1
01
1
01
1
01
2
01
2
01
2
01
2
01
2
01
2
01
3
01
3
01
3
01
3
01
3
01
3
01
4
01
4
/2 /2 /2 tc /2 /c 2 /20 /2 /2 /2 t/2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 t/2 /2 /2 /2 /2 /2 t/2 /2 /2 /2
pr un ug e b pr n ug c ec b pr n ug ct ec b pr n ug c ec b pr n ug c ec b pr
A J A O D Fe A Ju A O D Fe A Ju A O D Fe A Ju A O D Fe A Ju A O D Fe A

Values Forecast Lower Confidence Bound Upper Confidence Bound

A-123
Inventory categorization

 I have divided the spare parts mainly into 3 categories based upon the variation in their
demand.
 For category 1 products as shown in previous slides we can have the inventory stock
at lower forecasting limits as the variation in demand extremes is quite low, as a result
if there is any customers turnout the number will be less.
 Inventory for category 2 products can be stocked at the forecasted values as this
category includes the products with high frequency usage and moderate forecasting
variation.
 The last category includes the product with highest frequency usage and it also has
high forecasting variation, so the inventory for this product should stocked at upper
forecasting limit.
Suggestions

 Mr. Kumar should always be ready to serve 10% above the forecasted demand.
 Inventory should be stocked according to the forecasting plans and product frequency
as predicted in previous slides.
 Mr. Kumar should develop some strategy to cope up with the customers in case of
unexpected demand rise.
 Further marketing strategy needs to be devised to clear out the stock in case of fall in
demand.
Thank You!