





Lots of Zeroes: Basic Guidelines to Managing Intermittent DemandIt has been estimated as many as 50% of products and services have demand patterns with “lots of zeroes,” which creates special challenges for demand estimation. The failure to handle those “lots of zeroes” correctly can cripple the effectiveness of an operational process from semiconductors to cell phones.
However, this is not an insurmountable problem. By understanding the basics of intermittent demand, and following a few guidelines, it’s possible to manage the issue. First, though, it’s important to start with a couple of basic assumptions:
It is very helpful to divided products with “lots of zeroes” into two groups:
Structural zeroes The examples in this blog will assume four years of demand history where the time bucket is months. That represents 48 total observations. Tables 1, 2, and 3 provide examples of structural zeros.
Intermittent Zeroes Intermittent (other terms used are sparse and lumpy) refers to demand patterns where there are many zeroes (typically at least 50%), the dispersion or location of the zeroes does not show a particular pattern (i.e. random), and the nonzero values have a range of values without an apparent pattern. When a statistician uses the term “random,” it indicates that assuming randomness is the best we can do given the information available and any discernable pattern that can be found in the current data. It does not mean there is no cause for a zero or nonzero. Rather, it is simply the best we can do right now and it is optimal to deploy methods that provide insight with this assumption. How do we know if the assumption of random is reasonable for a given data set? The nonparametric statistical method called a run test is a powerful method (see Nonparametric Statistical Inference by Gibbons and Chakraborti). A run would be defined as a succession of 0s or non zeroes data set. For example in the data set 0 0 0 0 0 1 1 1 1 1, there are 10 members and two runs. In the data set 0 1 0 1 0 1 0 1 0 1 there are 10 members and 10 runs. In the data set 1 1 1 0 0 0 1 0 0 1 there are 10 members and 4 runs. When the number of runs is too small or too large, then we conclude the data set is not random. For our example we will assume the probability of getting a nonzero demand value is 20% and if there is demand, the possible values are 1, 2, or 3 (with equal probability, average of 2). If the total observations are 48, on average the number of nonzero cells will be 9.6 (=0.2*48) and the average demand value will be 0.4 = ((0.2 * 48 * 2)/48) = (0.2 * 2). Example intermittent demand & “best estimates” Table 4 has a randomly generated set of intermittent demands. How might we best estimate demand for each cell (year and month)?
Table 5 summarizes how “well” using zero as an estimate for each cell works. The actual demands are in rows 3 to 6, the estimated demand of zero is rows 8 to 11, and the error metric is in rows 13 to 16. The metric used is total absolute error. For each cell we calculate the absolute value of the actual value minus the estimate value, then sum across each year and each month. We see “zero” has a low forecast error – total of 21.
Table 6 summarizes how well using the average value (0.4) does. Its error metric value is 32.2.
Table 7 summarizes if how well using last year to estimate this year works, its metric is 34.
Observe that the estimate of “zero” works much better than the two alternative methods based on a standard forecast error metric. However, relying on the standard metric to identify the right forecast method will be disastrous to the firm. To understand this compare total actual demand versus total estimated demand. The “zero” method will instruct the firm to produce or acquire zero of this product. Note that the other two methods do much better at estimating the aggregate demand. Page 1 of 2 Next > 
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EBN Dialogue / LIVE CHAT
EBN Dialogue enables you to participate in live chats with notable leaders and luminaries. Open to the entire EBN community of electronics supply chain experts, these conversations see ideas shared, comments made, and questions asked and answered in real time. Listed below are upcoming and archived chats. Stay tuned and join in!
Archived Dialogues
Live Chat 01/15: CPOs ReShape Their Business Roles
Increasingly chief procurement officers (CPOs) are reshaping their organizational role to focus on creating results far beyond cost controls. A new IBM survey explores how. Live Chat 11/12: Examining the Cyberthreat to Supply Chains
The number of cyberattacks is on the rise and hackers are targeting the supply chain. Drew Smith, founder and CEO of InfoArmor, will be on hand to discuss the reality of today's threat landscape and what to do about it. 

 

