Reveal how forecasts are used with these 4 questions.
Often companies will insist that they “don’t use forecasts” to plan inventory. They often use reorder point methods and are struggling to improve on-time delivery, inventory turns, and other KPIs. While they don’t think of what they are doing as explicitly forecasting, they certainly use estimates of future demand to develop reorder points such as min/max.
Regardless of what it is called, everyone tries to estimate future demand in some way and uses this estimate to set stocking policies and drive orders. To improve inventory planning and make sure you aren’t over/under ordering and creating large stockouts and inventory bloat, it is important to understand exactly how your organization uses forecasts. Once this is understood, you can assess whether the quality of the forecasts can be improved.
Try getting answers to the following questions. It will reveal how forecasts are being used in your business – even if you don’t think you use forecasts.
1. Is your forecast a period-by-period estimate over time that is used to predict what on-hand inventory will be in the future and triggers order suggestions in your ERP system?
2. Or is your forecast used to derive a reorder point but not explicitly used as a per-period driver to trigger orders? Here, I may predict we’ll sell 10 per week based on the history, but we are not loading 10, 10, 10, 10, etc., into the ERP. Instead, I derive a reorder point or Min that covers the two-period lead time + some amount of buffer to help protect against stock out. In this case, I’ll order more when on hand gets to 25.
3. Is your forecast used as a guide for the planner to help subjectively determine when they should order more? Here, I predict 10 per week, and I assess the on-hand inventory periodically, review the expected lead time, and I decide, given the 40 units I have on hand today, that I have “enough.” So, I do nothing now but will check back again in a week.
4. Is it used to set up blanket orders with suppliers? Here, I predict 10 per week and agree to a blanket purchase order with the supplier of 520 per year. The orders are then placed in advance to arrive in quantities of 10 once per week until the blanket order is consumed.
Once you get the answers, you can then ask how the estimates of demand are created. Is it an average? Is it deriving demand over lead time from a sales forecast? Is there a statistical forecast generated somewhere? What methods are considered? It will also be important to assess how safety stocks are used to protect against demand and supply variability. More on all of this in a future article.