A classic and effective approach to inventory management

Many organizations base their demand forecasts and replenishment polices only on judgmental or qualitative approaches. This paper presents an application where quantitative demand forecasting methods and classic inventory models are used to achieve a significant inventory cost reduction and improved customer service levels at a company located in Guadalajara, Mexico. The company currently uses a naive method to forecast demand. By proposing the use of Winters method, the forecast accuracy was improved by 41.12%. Additionally, as a result of an ABC analysis for the product under analysis, a particular component was chosen (it accounts for the 70.24% of the total sales and 60.06% of the total volume) and two inventory policies studied for that particular component. The first inventory policy considers the traditional EOQ model, whereas the second one uses a continuous-review (Q,R) policy. The best policy achieves a 43.69% total cost reduction, relative to the current inventory policy. This policy translates into several operational benefits for the company, e.g., improved customer demand planning, simplified production and procurement planning, lower level of uncertainty and a better service level.