There’s one thing I’m reminded of almost every day at Smart Software that puzzle me: most companies do not understand how forecasts are created, and stocking policies are determined. It’s an organizational black box. Here is an example from a recent sales call:
How do you forecast?
We use history.
How do you use history?
What do you mean?
Well, you can take an average of the last year, last two years, average the most recent periods, or use some other type of formula to generate the forecast.
I’m pretty sure we use an average of the last 12 months.
Why 12 months instead of a different amount of history?
12 months is a good amount of time to use because it doesn’t get skewed by older data but it’s recent enough
How do you know it’s more accurate than using 18 months or some other length of history?
We don’t know. We do adjust the forecasts based on feedback from sales.
Do you know if the adjustments make things more accurate or less than if you just used the average?
We don’t know but are confident that forecasts are inflated
What do the inventory buyers do then if they think the numbers are inflated?
They have lots of business knowledge and adjust their buys accordingly
So, is it fair to say they would ignore the forecasts at least some of the time?
Yes, some of the time.
How do the buyers decide when to order more? Do you have a reorder point or safety stock specified in your ERP system that helps guide these decisions?
Yes, we use a safety stock field.
How is safety stock calculated?
Buyers determine this based on the importance of the item, lead times, and other considerations such as how many customers purchase the item, the velocity of the item, it’s cost. They’ll carry different amounts of safety stock depending on this.
The discussion continued. The main takeaway here is that when you scratch just below the surface, far more questions are revealed than answers. This often means that the inventory planning and demand forecast process is highly subjective, varies from planner to planner, is not well understood by the rest of the organization, and likely to be reactive. As Tom Willemain has described it’s “chaos masked by improvisation.” The “as-is” process needs to be fully identified and documented. Only then can gaps be exposed, and improvements can be made. Here is a list of 10 questions you can ask that will reveal your organization’s true forecasting, demand planning, and inventory planning process.