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Running head: MANUFACTURING VS.

SERVICE INDUSTRY FORECASTING

Manufacturing vs. Service Industry Forecasting Comparison


Franklin Whiddon
ISCOM/374
November 2, 2015
Dennis Druhe

MANUFACTURING VS. SERVICE INDUSTRY FORECASTING

Manufacturing vs. Service Industry Forecasting Comparison


Inventory is often viewed as a tangible item that can be picked up, touched, or moved
from one area to another. In the manufacturing industry, this definition of inventory defines items
that are created and moved to a customer. However, not all businesses manufacture goods. The
service industry must also create and maintain inventory that may on the surface seem tangible,
but is actually intangible. For example, the service industry may include various forms of
transportation, communications, business services, legal services, tax preparers, hospitality
services, and even a dry cleaning business. This is just a small list of the many businesses that
may be classified under the service industry. Notice that the businesses listed may exist in the
form of an office or building and may have various types of inventory, but the product they
provide the consumer is a service, such as a place to sleep, clean and pressed clothing, or a flight
for vacation. The bottom line is that both the manufacturing industry and the service industry
exist to cater to customers and become viable and profitable ventures for all stakeholders. This
paper will compare the manufacturing and service industry and analyze the impact of forecasting
on inventory strategies.
Service Industry Impacts on Forecasting Decisions
Businesses use forecasting as a means to meet customer demand while maintaining
minimal levels of inventory until the next replenishment cycle (Murphy & Wood, 2004). The
problem with forecasting is that there may be a product or service but the actual demand is
unknown. Over forecasting creates an added burden of costs. Under forecasting carries the
possibility of non-performance. While the manufacturing sector may be able to offer a
comparable item if another is out of stock, the service industry is left to provide a service of
value to a customer or risk that customer looking elsewhere for that service. Service industries

MANUFACTURING VS. SERVICE INDUSTRY FORECASTING

must forecast demand just as the manufacturing sector, but the inventory that service industries
provide may be in the labor necessary to handle demand or in the information it has already
gathered and packaged to expedite processes creating the value a customer wants or needs
(Chopra & Lariviere, 2005). The service industry may have to forecast how many customers will
visit an establishment or require the services they provide. Instead of an ability to survey a
known customer base (such as the manufacturing sector ability), the service industry may be
serving the public or other businesses in which there is no established relationship. Instead,
forecast models for the service industry may focus more on what may not happen in order to
anticipate the needs for the future and begin a strategy to remedy those gaps.
Adjusting Inventory due to Inaccurate Forecasts
Forecast models seek to match the optimal level of inventory to meet the exact demand at
some point in the future. Though many models, software programs, algorithms, and formulas
seek to assist with finding this exact number, they cannot predict consumer behavior which
results in forecasts always being incorrect. Whether the response is relatively close or above or
below the prediction, inaccurate forecasts carry consequences. Inaccurate forecasts in either the
service industry or the manufacturing industry may lead to lost sales, excess inventory, shortage
of inventory, over staffing, under staffing, or even loss of the inventory altogether due to
expiration, dumping, or wholesaling (Taylor, 2012). Additionally, inaccurate forecasts may also
disrupt the supply chain by halting replenishment cycles that come from manufacturers or
suppliers resulting in excess product further up the chain that requires disposition. Forecasts that
fall short of demand create heavier workloads further up the chain as well that may cause added
costs to manufacturers or suppliers as they try to catch up with demand. In the service industry,
over estimating demand may result in unnecessary staffing needs or under staffing due to

MANUFACTURING VS. SERVICE INDUSTRY FORECASTING

demand being higher, requiring customers to wait longer or have backorders of service needs
being filled.
Though forecasts seldom reach the perfection we desire, there are strategies to employ
with inventory to negate the pitfalls of forecasting. One of these strategies is safety stocking.
Safety stocking allows a certain level of inventory to be carried above the forecast level or above
the normal minimum depletion reorder level that triggers reorder points before total depletion of
the inventory. This will allow a safety net in the event raw materials become scarce and allow a
manufacturer to continue servicing a customer until certain levels are replenished. For the service
industry, this may mean that there will be a certain amount of staffing maintained that will at
least minimally meet customer requirements. An example of this may mean that an airline may
carry a plane only half full to maintain customer satisfaction of those wanting to reach a certain
destination. In turn, the plane may then return or move to a different destination now with a fully
loaded plane, this while attaining corporate goals of the airline. The bottom line to any forecast
or inventory level is customer satisfaction.
Successful Customer Service
Customer service finds its rightful place at the front, middle, end, and back again of a
supply chain (Murphy & Wood, 2004). The supply chain revolves around the customer and the
viability of a business is in satisfying the needs of the customer. Logistics attempts to supply
customer satisfaction by creating value within the supply chain and passing these savings to the
customer. In other words, logistics strengthens the bonds between the relationship of the
customer and the business by creating long term value and in turn, long term customers.
Understanding customer expectations should be the underlying reason to drive innovation in the
supply chain. But how can we measure customer satisfaction? One of the more recent trends is to

MANUFACTURING VS. SERVICE INDUSTRY FORECASTING

measure your business through key performance indicators (KPIs). Instead of measuring
profitability of the business and the customer, businesses would do well to measure KPIs such as
order quality, timeliness, effectiveness, and customer growth. These KPIs focus on processes
internally that continually point to customer satisfaction. The measure of success for a business
should be found in the satisfaction the customer achieves. Attention to the KPIs a business sets if
they are customer oriented will allow continual evaluation leading to value from the supply chain
and passed to the customer.
Conclusion
The manufacturing industry and the service industry may be different in what they offer,
but they remain similar in the various metrics used to develop forecasts. Inventory strategies
drawn from these forecasts may differ in tangibility alone but remain important for both
industries. These strategies also help determine healthy business-customer relationships and
ultimately drive customer satisfaction.

MANUFACTURING VS. SERVICE INDUSTRY FORECASTING

References
Chopra, S., & Lariviere, M. A. (2005, October 15). Managing Service Inventory to Improve
Performance. MIT Sloan Management Review. Retrieved from
http://sloanreview.mit.edu/article/managing-service-inventory-to-improve-performance/
Murphy, P. R., & Wood, D. F. (2004). Contemporary logistics (8th ed.). Upper Saddle River, NJ:
Prentice Hall.
Taylor, T. (2012, July 19). Dealing with Inaccurate Forecasts. Retrieved from OPS Rules
Management Consultants: http://www.opsrules.com/supply-chain-optimizationblog/bid/191628/Dealing-with-Inaccurate-Forecasts