The Smart Forecaster
Pursuing best practices in demand planning,
forecasting and inventory optimization
At year’s end, we are often caught up in thinking and planning for the coming year. Did 2013 turn out the way you expected? Will 2014 be dramatically different? Are there other factors—things we are planning to do; things we think our competitors might do; outside forces like changing taste, demographics or economics—that might change the course of business in the coming year?
Most companies that do a formal forecast start out with a statistical projection of past sales patterns into the future. Your forecast model should detect and characterize any seasonality inherent in your markets and include that in the projection. But that’s just the first step.
The next thing to consider is product lifecycle. Nearly all products go through a predictable cycle of introduction, acceptance and growth, maturity (demand levels off) and finally decline to obsolescence. These cycles can be as short as weeks or as long as decades. Clothing fashions and consumer electronics would be on the shorter end of the scale, while products like plumbing fixtures and construction equipment would experience longer cycles. In specialized situations like bus fleet management, entire fleets may be replaced over defined transition periods. In any case, the demand forecast should be adjusted to reflect increasing or decreasing demand according to the product’s position in its lifecycle.
Now comes the hardest part—predicting the unpredictable. In general, the future is likely to look a lot like the recent past in a similarity to Newton’s first law of motion: a body in motion tends to stay in motion unless acted upon by an external force. But it’s those external forces that can send your carefully calculated forecast right into the gutter. A competitor might slash their prices to take away some of your market share. New technologies might obsolete your product before the end of its expected life span. Changing tastes or new regulations might stop sales in their tracks.
But good things might happen as well. You might be the one to slash prices or improve your product and take away a competitor’s business. Your product may catch the fancy of the market and sales will skyrocket. A competitor may abandon the business or go bankrupt, leaving you with more opportunity.
Should you plan for these kinds of things? Certainly, to the extent that you can. You may know when you’ll run promotions or phase in the next product line. But the future, by nature, is uncertain. History and your business knowledge of the past lay the foundation for your view of the future. Statistically-based tools can help you create a risk-adjusted forecast, with safety stock recommendations that correspond with the level of risk you are willing to take. Beyond this, your key to success is agility—the ability to adapt to changing conditions. Prepare the best forecast you can, build your plans around that forecast—then monitor sales and market conditions closely and continuously. Look for early warning that things may be going in a direction other than you predicted.
You must be willing to recognize and adapt to changing conditions—in other words, don’t fall in love with your forecast and ignore evidence that it may be wrong. Pride of authorship in this case can be deadly to the business.
It is also important to have contingency plans in place so you will be prepared to make the necessary changes to procurement, production and inventory to respond to the new estimate of demand. The best tools for this are the shortest possible lead times (both production and supplier), good supplier relationships and a clear view of the world and your markets.
Forecasting is difficult mainly because people know it is likely to be wrong and nobody likes to be publicly and visibly wrong. Nevertheless, a good forecast is necessary to position the resources necessary to satisfy customer demands. Just be open to the first signs of change and be prepared to react quickly and decisively.
Dave Turbide, CFPIM, CIRM, CSCP, CMfgE is a New Hampshire-based independent consultant and freelance writer. He can be reached via e-mail at dave at daveturbide dot com.
Those of you who track hot topics will be familiar with the term “digital twin.” Those who have been too busy with work may want to read on and catch up. While there are several definitions of digital twin, here’s one that works well: A digital twin is a dynamic virtual copy of a physical asset, process, system, or environment that looks like and behaves identically to its real-world counterpart. A digital twin ingests data and replicates processes so you can predict possible performance outcomes and issues that the real-world product might undergo.
In this blog, the spotlight is cast on the software that creates reports for management, the silent hero that translates the beauty of furious calculations into actionable reports. Watch as the calculations, intricately guided by planners utilizing our software, seamlessly converge into Smart Operational Analytics (SOA) reports, dividing five key areas: inventory analysis, inventory performance, inventory trending, supplier performance, and demand anomalies.
Dealing with the day-to-day of inventory management can keep you busy. But you know you have to get your head up now and then to see where you’re heading. For that, your inventory software should show you metrics – and not just one, but a full set of metrics or KPI’s – Key Performance Indicators.