New Logistics Model Improves Forecast Accuracy of Orders
Whether it’s dog food or iPods, tires or televisions, most consumers have endured a frustrating out-of-stock experience. Retailers hate it as much as customers &- perhaps more, because they lose money and credibility. Examining this problem at a specific link in the retail and consumer-packaged goods supply chain, a logistics researcher and his colleague discovered that application of a common error-correction model improves the accuracy of forecasting orders.
“The statistical model we used provides a better understanding of orders in a supply chain and can improve short-term forecasting,” said Matt Waller, professor of marketing and logistics. “It has been used heavily in macroeconomics but not in logistics. Our theoretical analysis suggested such a method should improve short-term order forecasts, so we used it to forecast distribution-center orders and found that it reduced error relative to baseline methods used by the consumer-packaged goods industry.”
Within the retail and consumer-packaged goods industry – which affects American consumers daily – the inability to accurately forecast supply orders is perhaps the greatest obstacle to establishing and maintaining an appropriate amount of goods on retail shelves. Suppliers annually devote millions of dollars toward human and technological resources, including sophisticated and expensive software packages, to address the problem and still struggle to find the right balance.
Supplied with 104 weeks of data from a global consumer packaged-goods company, Waller and Brent Williams, assistant professor at Auburn University, tested the performance of the error-correction model in the ready-to-eat cereal, canned soup and yogurt categories and found significant improvements in order-forecasting accuracy. Their findings will improve important supply-chain measurement standards, such as inventory turnover, gross margin return on inventory investment and in-stock levels. Improvements in these areas will lead to greater service and convenience for consumers and increased profits for retailers.
Waller holds the Garrison Endowed Chair in Supply Chain.