Introduction to Supply Chain

Analytics
Rohit Kapoor
 Summary of the Context
• Reading?
 Apparel A Timeline and
Generate forecastEconomics
of demand and
submit an order
to TEC Spring selling season

Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Receive order Left over

from TEC at the units are
end of the discounted
month
• Economics:
• Each suit sells for p = $180
• TEC charges c = $110 per
suit
• Discounted suits sell for v = $90
 Issues
• Salvage value
– Can it be negative?
• Forecasting
– How accurate my forecast is?
• Forecast on forecasting error!
• Intuition?
• Balancing the cost of ordering too much
– Against the cost of ordering too little.
Constructing a Demand Forecast:
Issue
• Demand Uncertainty
– Probability distribution
• How much demand uncertainty there is for the
apparel A?
– What is the probability that demand will be less
than or equal to Q units?
• Cumulative distribution function
– Discrete
– Continuous
 ACTUAL
ITEM FORECAST DEMAND ERROR A/F Ratio
3-in-1 Ski-Vertible Jacket 90 140 -50 1.56
Adventure Duffle Jacket 120 83 37 0.69
Bayside Half-Jacket 140 143 -3 1.02
Bayside Walking Shorts 170 163 7 0.96
Boat and Tote Costume 170 212 -42 1.25
Boat Socks, Slide 180 175 5 0.97
Classic Poplin Shirt 180 195 -15 1.08
• Data Polartec Sandal Socks 270 317 -47 1.17
Polartec Super 200 Fleece Vest 320 369 -49 1.15
from Power Dry Crewneck 380 587 -207 1.54
Reversible Down Jacket 380 571 -191 1.50
XYZ’s Ridge Runner Jacket 390 311 79 0.80

previous Stretch Gabardine Trench Coat

Stretch Web Coat
430
430
274
239
156
191
0.64
0.56
spring’s Summer Stripe Polo
Swix Ski Gloves
440
450
623
365
-183
85
1.42
0.81
season Torrent Stretch Parka 460 450 10 0.98
Torrent Twill Parka 470 116 354 0.25
with Traditional Wool Cruiser Vest 500 635 -135 1.27

similar Trail Model Rain Pants

Travel Jacket
610
650
830
364
-220
286
1.36
0.56
category Tropic Weight Flight Jacket
Tulip Collar Sweater
660
680
788
453
-128
227
1.19
0.67
Two-Layer River Driver's Shirt 740 607 133 0.82
Upland Field Coat 1020 732 288 0.72
Wicked Good Cloths 1060 1552 -492 1.46
Windbloc Fleece Vest 1220 721 499 0.59
Apparel A 1300 1696 -396 1.30
Wool Blazer Coat 1490 1832 -342 1.23
Wool Toggle Coat 2190 3504 -1314 1.60
Wool Tweed Blazer 3190 1195 1995 0.37
Wool/Cashmere Blazer 3810 3289 521 0.86
Wool/Cashmere Coat 6490 3673 2817 0.57
 Issue
• What about lost sales?
– How does company XYZ know actual demand
for a product that stocks out?
• Two ways:
– Keeping track of customer’s initial order?
– Time until stock-out occurs?
Forecasts and Actual Demand
 Relative Forecast Errors
• A/F Ratio
– Meaning of > 1?
– Meaning of < 1?
 ITEM FORECAST ACTUAL A/F Ratio Rank Percentile
Torrent Twill Parka 470 116 0.25 1 3.0
Wool Tweed Blazer 3190 1195 0.37 2 6.1
Stretch Web Belt 430 239 0.56 3 9.1
Travel Umbrella 650 364 0.56 4 12.1
Wool/Cashmere Coat 6490 3673 0.57 5 15.2
Windbloc Fleece Vest 1220 721 0.59 6 18.2
Stretch Gabardine Trench Coat 430 274 0.64 7 21.2
Tulip Collar Sweater 680 453 0.67 8 24.2
Adventure Duffle Bag 120 83 0.69 9 27.3
Upland Field Coat 1020 732 0.72 10 30.3
Ridge Runner Jacket 390 311 0.80 11 33.3
Swix Ski Gloves 450 365 0.81 12 36.4
Two-Layer River Driver's Shirt 740 607 0.82 13 39.4
Wool/Cashmere Blazer 3810 3289 0.86 14 42.4
Bayside Walking Shorts 170 163 0.96 15 45.5
Boat Mocs, Slide 180 175 0.97 16 48.5
Torrent Stretch Parka 460 450 0.98 17 51.5
Bayside Belt 140 143 1.02 18 54.5
Classic Poplin Shirt 180 195 1.08 19 57.6
Polartec Super 200 Fleece Vest 320 369 1.15 20 60.6
Polartec Sandal Socks 270 317 1.17 21 63.6
Tropic Weight Flight Jacket 660 788 1.19 22 66.7
Wool Blazer Coat 1490 1832 1.23 23 69.7
Boat and Tote Bag 170 212 1.25 24 72.7
Traditional Wool Cruiser Vest 500 635 1.27 25 75.8
Apparel A 1300 1696 1.30 26 78.8
Trail Model Rain Pants 610 830 1.36 27 81.8
Summer Stripe Polo 440 623 1.42 28 84.8
Wicked Good Clogs 1060 1552 1.46 29 87.9
Reversible Down Jacket 380 571 1.50 30 90.9
Power Dry Crewneck 380 587 1.54 31 93.9
3-in-1 Ski-Vertible Jacket 90 140 1.56 32 97.0
Wool Toggle Coat 2190 3504 1.60 33 100.0
 Interpretation
• Actual demand is less than 80% of the
forecast
– For 1/3rd of the product
• Actual demand is greater than 125% of the
forecast
– For 27.3% of the products
A/F Ratio Q F(Q)
0.25 790 0.0303
0.37 1199 0.06061
0.56 1779 0.09091
0.56 1792 0.12121
0.57 1811 0.15152
0.59 1891 0.18182
0.64 2039 0.21212
0.67 2132 0.24242
0.69 2213 0.27273
0.72 2296 0.30303
0.80 2552 0.33333
0.81 2596 0.36364
0.82 2625 0.39394
0.86 2762 0.42424
0.96 3068 0.45455
0.97 3111 0.48485
0.98 3130 0.51515
1.02 3269 0.54545
1.08 3467 0.57576
1.15 3690 0.60606
1.17 3757 0.63636
1.19 3821 0.66667
1.23 3934 0.69697
1.25 3991 0.72727
1.27 4064 0.75758
1.30 4175 0.78788
1.36 4354 0.81818
1.42 4531 0.84848
1.46 4685 0.87879
1.50 4808 0.90909
1.54 4943 0.93939
1.56 4978 0.9697
1.60 5120 1
Case of Continuous Distribution
• Empirical Distribution has been arrived at!
• Fitting it into normal distribution?
Actual Demand = A/F ratio * Forecast
Expected actual demand = Expected A/F ratio * Forecast
Std. dev. demand = Std. dev. of A/F ratio * Forecast
Expected A/F ratio = 0.9976
Std. dev of A/F ratio = 0.369
Mu = 3192
Sigma = 1181