BOOM! A sudden drop in demand is what Proponent, a large international aerospace distributor, faced at the beginning of what we can call the COVID-19 era. Sales went down significantly and for some parts, the demand totally disappeared. Due to the drop of sales, capital investments were put under the magnifying glass. In such a unprecedented event, forecasting demand and making the right investments in parts became more challenging. Action was required to ensure that the forecast will be a better fit on future demand. To tackle this problem, Proponent and Gordian distinguished three different areas within which we could influence the inventory decision making and optimize the balance between availability and financial investments.
COVID adjustment area 1: Demand
At first, we discuss the possibility to adjust the quantity of the historical demand the forecast is based upon. As shown above, there is a large gap between the historical demand and the COVID demand. When we make a forecast on the old demand, we compute a prediction that is too high. To narrow the gap, we should decrease the historical demand to the size of the new COVID demand. The most important reason to adjust the demand and not the forecast, is that the current demand pattern and characteristics of the part will stay intact. When we choose to adjust the forecast, we make an adjustment on a wrong prediction, which sounds illogical.
COVID adjustment area 2: Inventory Model
Secondly, we can make an adjustment on the inventory model by choosing a different approach or changing the settings from a current model. For example, when demand has totally disappeared, we could prefer a strategy to have no stock at all and only backorder the demanded amount, especially with non-critical parts. When we take a look at the graph again, we see that the red forecast line is showing a decreasing trend. However this trend is not going fast enough to bridge the gap. We could consider increasing the alpha of the current forecast method, which means the impact of the demand sizes of the last months becomes higher in calculating the forecast.
COVID adjustment area 3: Stock Availability
At last, we can accept a lower stock availability to lower the capital investments. In this case we reduce the safety stock to lower the expenses, which optimizes the cashflow. The most difficult task is to determine which parts make the biggest impact on lowering the capital investments while keeping the decrease of the stock availability as small as possible. This could mean that we want to have a different adjustment of the stock availability per set of items, for which the current sales should be leading.
Sustainable decision making during COVID-19
The goal of Proponent was to provide rules for sustainable decision making of inventory management during COVID-19, fitting the forecast and stocking parameters better while using limited financial investments. To achieve our goal, we used a segmented approach with several adjustments made within above areas. Depending on the properties of the parts, some of the adjustments were applicable. In the next few months, we will monitor the impact of the new forecast, stocking parameters and investments and will adjust where needed. Additional information about the total project and the approach can be found in the client case or please contact us when you want to brainstorm about different ideas!