Why Weekly Forecasting?

(Part One)
by Jon Schreibfeder

Recently I received a call from a distributor who had a dilemma. They were running out
of a particular popular product every month. The buyer's frustration vibrated through the
phone line as I spoke to her.
She explained, "We're doing a pretty good job at estimating future demand of the product.
The average difference between the forecast demand for the month and actual usage is
less than 10%."
I explored another area. "How consistent are the lead times? Could shipment delays be
causing the stock-out problems?"
"No," she sighed, "the vendor always delivers four business days after we order the
product."
"How many customers do you have for the item?"
"We have several large customers who place a large order for the item each month, and
several smaller customers who pick up a few pieces when they need them."
"When do you receive the large-customer orders?"
"Usually in the first 10 days of the month."
The buyer had just uncovered the problem. Her replenishment system forecast demand of
future usage by month. For example, in September it predicted sales of 550 pieces or
about 25 pieces per business day (assuming 22 business days in the month). Actual usage
was 539 pieces. Her system automatically calculated the following order point for the
item:
Order Point = Anticipated Lead Time Demand + Safety Stock
Anticipated Lead Time Demand = 25 pieces/day x 4-day lead time = 100 pieces
Safety Stock = 50% of lead-time usage = 50 pieces
Order Point = 100 pieces + 50 pieces = 150 pieces
The order point is a "minimum" quantity for the product, and is equal to anticipated
demand during the lead time plus a safety stock quantity. Safety stock is insurance
inventory to protect customer service from unusually large usage or shipment delays

during the time it takes to replenish inventory. When the stock level falls below the order
point of 150 pieces, a replenishment shipment would be issued to the vendor.
The problem is that the distributor does not sell 25 pieces per day throughout the month.
Here is the weekly usage recorded for the September:
Week Business Days Weekly Usage Usage/Business Day
1

324

81.0

132

26.4

40

8.0

33

6.6

10

10.0

The majority of the demand for the product (324 pieces, or 60.1% of total monthly usage)
occurs in the first week of the month. The order point of 150 pieces represents less than a
two-day supply in the busy first week of the month. If we reorder a product when there is
a two-day supply on the shelf and it takes four days to receive a replenishment shipment,
it is not surprising that the item experiences regular stock-outs.
We recommended that the company change the time period of their forecast from months
to weeks. Analyzing history over the past 12 months, we found that a formula that
averaged usage for the same week in each month over the past four months resulted in the
least forecast error. We went back and reforecast the five weeks of September. Note that
the fifth week included one business day for September and four business days for
October (i.e. the start of the next high volume time period):
Week

Weekly Forecast Business Days Forecast/Day

Week 1 (Sept)

331 pieces

82.8/day

Week 2 (Sept)

135 pieces

27.0/day

Week 3 (Sept)

37 pieces

7.4/day

Week 4 (Sept)

47 pieces

9.4/day

Week 5 (Sept) + Week 1 (Oct)

336 pieces

1+4

67.2/day

Each week would have had its own order point:

Week

Lead-Time Usage

Safety Stock Order Point

Week 1 82.8/day x 4 days = 331

166

497

Week 2 27.0/day x 4 days = 108

54

162

Week 3

7.4/day x 4 days = 30

15

45

Week 4

9.4/day x 4 days = 38

19

57

168

504

Week 5 67.2/day x 5 days = 336

Each new order point becomes effective at a date equal to the first business day of the
week minus the lead time. So, four business days before the start of week one, if the stock
level of the product was less than 497 pieces, a replenishment order would be issued. If
the stock level was equal to or greater than 497 pieces, the buyer would leave the item
alone because he has plenty of stock available to see him through the first week of the
month. The result: The distributor will have this critical item available when their
customers want it. Also notice that the order point drops during the period of the month
with less usage activity. We are not ordering the material far in advance of when it will be
needed. This will help improve the inventory turnover and overall profitability of the
distributor.
Weekly forecasting works well for products that experience cyclical patterns of usage
throughout a month. Next month, we will examine two additional applications for weekly
forecasting: new stock items and products whose sales or usage is dependent on a
particular event.

"What you sold or used in the past is usually a good indication of what you will sell or
use in the future". This is one of the basic "truths" of forecasting future demand of
stocked items. In our last article, "Why Weekly Forecasting (Part One)," we examined
why, for some products or industries, maintaining usage history by week rather than by
month will result in more accurate forecasts. These tended to be items whose usage
followed a cyclical pattern throughout the month. For example look at a bar graph of the
usage, by week, of this item over a three-month period:

Notice that 50% - 53% of total usage each month occurs in the first week of the month. If
we are to base our stocking decisions on selling an average of 5.0 - 5.6 pieces per day, we
would probably not have enough stock for the first week in each month where usage is
10.7 to 12.9 pieces per day. As a result, the demand forecast for this item should be based
on weekly usage. There are other situations where maintaining usage by week is
necessary for accurate forecasts of future demand. In this article we will look at two of
them: new stock items and products whose usage is dependent on a specific event.

New Stock Items

It is common for new stock items to have a spike in sales or usage volume soon after they
are introduced. This temporary high volume may be due to:

Promotions for the new item or salespeople featuring the new item in sales calls.
Customers wanting to try the new product.
Customers establishing a normal stock quantity of the product in their inventory.

Whatever the cause, this spike in sales is often followed by a dramatic decrease in usage:

Though the duration of the temporary increase will vary, it can usually be measured in
weeks rather than months. Look at the usage of a specific new item that was added to
inventory in January:

The item will be overstocked if we base the stocking decision for February on January's
usage of 295 pieces. Because it is hard to predict when the "peak" of the new item usage
will occur (as well as the subsequent "trough"), buyers should review the usage of new
items every week (and make any necessary adjustments to replenishment parameters)
until a consistent pattern of usage is observed.

Items Associated with a Specific Event

Lights for Christmas trees, fireworks for the Fourth of July, and pumpkins carved for
Halloween are examples of items associated with a specific event but all specific-event
items are not necessarily "holiday goods." Several of our clients sell industrial supplies.
Many of their manufacturing customers schedule plant shutdowns and maintenance
around July 4th and the week between Christmas and New Year's Day. Again, for many
items, we see a usage pattern in which the quantity sold in one or two specific weeks in
July and December is very different from the usage in other weeks of the month:

As in our other examples, if we were to stock based on monthly usage (i.e., four or five
pieces per day), we would not be adequately stocked for the scheduled plant shutdown
weeks. Accurate forecasting for these seasonal events again requires examining weekly

usage that is, the quantity sold or used in the same week last year, adjusted for
increasing or decreasing trends in business.
An accurate demand forecast allows use to meet or exceed customer expectations of
product availability with the least amount of inventory. While few demand forecasts are
100% accurate, we must continue to strive to reduce the forecast error (i.e., the difference
between the forecast and actual usage) to better predict future demand of products. After
all, no major league baseball player has ever achieved a batting average of 1,000 but
this fact does not stop them from trying to improve and play better baseball. Shouldn't
you also continually do your utmost to improve the profitability and productivity of your
investment in inventory? One of the ways to do this is to apply forecasts based on weekly
usage whenever it is appropriate.