Forecasting or demand management as we all know is far from a perfect science, but it is absolute necessary for any businesses. The business forecast affects all facets of the business from Finance to HR to NPD, but particularly Supply Chain. The Supply Chain function within any organisation, however structured will look to process the business FC in a variety of ways to try and ensure you manage supply to satisfy demand. Supply Chain teams and analysts will use a variety of supply chain mgt systems & tools to forecast demand, days, weeks and months in advance, usually on co-ordination with a commercial team, through some form of S&OP process.
Supply Chain Management
Most businesses will hold stock of their finished products & or the raw materials in which to make / process them. Any FC too high will lead to excess inventory levels, redundant inventory, thus affecting true cost of product and cash flow. Any FC too low means customers either won’t get what they want or the organisation pays premiums to satisy demand. Either way, this has implications on costs and service level. It will on a different level, impact on the view of an organisations capacity and its potential.
Supply chain management is the process by which the business ensures it has an effective level of supply to meet expected demand. Note: an effective level of inventory means different things to different businesses, whatever levels a business decides is effective must be costed accordingly, thus allowing financials to be more accurate and reflective.
Objectives of any Supply Chain Management process / system must be to build a competitive / comprehensive infrastructure, marry supply with demand and to measure its performance, cost and ultimately the ability to satisfy and react to customer demands.
Forecasting demand, and coordinating supplly chain activities to meet demand, can, depending on the nature of the market you are in and the size of your business can be full-time roles. Indeed the more focus / resource / skills / knowledge that can be utilised to improve the FC, the better.
Businesses with national or global reach often use sophisticated software and systems to forecast demand, SME’s or smaller businesses often forecast demand using simple techniques, wether it be knowledge and or Spreadsheet solutions.
NOTE: Some people can often be dismissive of Spreadsheet solutions, no need to be in my opinion, there is absolutely nothing wrong with keeping things simple and concise & indeed some so called high end systems are not always as flexible, user friendly and as as comprehensive as we would hope.
Methods such as moving averages and exponential smoothing seek to smooth out demand to allow for seasonality in the results. With moving averages, you drop the oldest sales numbers and add newer numbers, making the average move over time. Exponential smoothing is similar to moving averages, the older data here receives progressively less weight and new data receives greater weight. When there is definitive trend, moving averages and exponential smoothing forecasts often lag behind the trend. Any business needs to establish what works for them, some businesses are highly seasonal, e.g. Salads or Mince pies, others less so, e.g. Tea Bags, essentially needs to understand the market it operates in and all the external factors that affect sales, thus allowing it to choose the right methodolgy for its needs.
Too Much Inventory
If the business FC is too high, it follows that you will have too much raw materials and too much Finished Goods inventory than necessary and costed for. This will lead to an increase in costs such as labour, transport, and storage costs. Any product made will have some form of shelf life, most notably within the Food industry, further costs / loss of value will occur due to stock essentially becoming redundant.
The businesss may well end up selling inventory at a discount or indeed disposing of product, all of which affect the bottom line.
Not enough Inventory
Orders above your FC, may well sound good in priniciple and good for the business as a whole. If your business plans have been followed & inventory levels are too low to meet either the spike or growth in demand, you will run the risk of failing your customers . You could also artifically increase your cost base to meet customer demand, such as OT, extra deliveries / couriers, etc.. Again all affecting the bottom line.
The important thing to note here, is managing your customer expectations, under promise, over deliver. A managed customer is usually a happier customer and someone who is more likely to work with you! Its good to talk.
FC too high, too low, WHY?
Any published FC is out of date the moment it is published. It is imperative, that in order to mainatin Supply Chain efficiency and effectiveness that lessons are learnt. Why was there a dip in demand? why did demand not meet FC expectations? why was there a spike in demand? Once this is understood and appreciated the business FC can then be amended going forward to make it more reflective. This needs to be timely and regulary monitored.
Whether or not you run any form S&OP process in any form, it is critical that the FC is routinely challenged, ammended, updated and fed through any mgt information systems within the business.
Any Supply chain management software / systems should help facilitate the process of forecasting & be able to measure the effective process of marrying supply with demand. This will allow the Supply Chain team to manage inventory flow from materials in, to the end product to customer. Capacity, service, FC accuracy and cost should all be the deliverables measured and acted upon.
Whether you are an SME or a larger Blue chip organisation, Purely Supply Chain can help with a review of your systems and processes aand reccomend solutions accordingly.