Top Five Tips for New Demand Planners and Forecasters

In Smart Software’s forty-plus years of providing forecasting software, we’ve met many people who find themselves, perhaps surprisingly, becoming demand forecasters. This blog is aimed primarily at those fortunate individuals who are about to start this adventure (though seasoned pros may enjoy the refresher).

Welcome to the field! Good forecasting can make a big difference to your company’s performance, whether you are forecasting to support sales, marketing, production, inventory, or finance.

There is a lot of math and statistics underlying demand forecasting methods, so your assignment suggests that you are not one of those math-phobic people who would rather be poets. Luckily, if you are feeling a bit shaky and not yet healed from your high school geometry class, a lot of the math is built into forecasting software, so your first job is to leave the math for later while you get a view of the big picture. It is indeed a big picture, but let’s isolate few of the ideas that will most help you succeed.

 

  1. Demand Forecasting is a team sport. Even in a small company, the demand planner is part of a team, with some folks bringing the data, some bringing the tech, and some bringing the business judgment. In a well-run business, your job will never be to simply feed some data into a program and send out a forecast report. Many companies have adopted a process called Sales and Operations Planning (S&OP) in which your forecast will be used to kick off a meeting to make certain judgments (e.g., Should we assume this trend will continue? Will it be worse to under-forecast or over-forecast?) and to blend extra information into the final forecast (e.g., sales force input, business intelligence on competitors’ moves, promotions). The implication for you is that your skills at listening and communicating will be important to your success.

 

  1. Statistical Forecasting engines need good fuel. Historical data is the fuel used by statistical forecasting programs, so bad or missing or delayed data can degrade your work product. Your job will implicitly include a quality control aspect, and you must keep a keen eye on the data that are supplied to you. Along the way, it is a good idea to make the IT people your friends.

 

  1. Your name is on your forecasts. Like it or not, if I send forecasts up the chain of command, they get labeled as “Tom’s forecasts.” I must be prepared to own those numbers. To earn my seat at the table, I must be able to explain what data my forecasts were based on, how they were calculated, why I used Method A instead of Method B to do the calculations, and especially how firm or squishy they are. Here honesty is important. No forecast can reasonably be expected to be perfectly accurate, but not all managers can be expected to be perfectly reasonable. If you’re unlucky, your management will think that your reports of forecast uncertainty suggest either ignorance or incompetence. In truth, they indicate professionalism. I have no useful advice about how best to manage such managers, but I can warn you about them. It’s up to you to educate those who use your forecasts. The best managers will appreciate that.

 

  1. Leave your spreadsheets behind. It’s not uncommon for someone to be promoted to forecaster because they were great with Excel. Unless you are with an unusually small company, the scale of modern corporate forecasting overwhelms what you can handle with spreadsheets. The increasing speed of business compounds the problem: the sleepy tempo of annual and quarterly planning meetings is rapidly giving way to weekly or even daily re-forecasts as conditions change. So, be prepared to lean on a professional vendor of modern, scalable cloud-based demand planning and statistical forecasting software for training and support.

 

  1. Think visually. It will be very useful, both in deciding how to generate demand forecasts and in presenting them to management, so take advantage of the visualization capabilities built into forecasting software. As I noted above, in today’s high-frequency business world, the data you work with can change rapidly, so what you did last month may not be the right thing to do this month. Literally keep an eye on your data by making simple plots, like “timeplots” that show things like trend or seasonality or (especially) changes in trend or seasonality or anomalies that must be dealt with. Similarly, supplementing tables of forecasts with graphs comparing current forecasts to prior forecasts to actuals can be very helpful in an S&OP process. For example, timeplots showing past values, forecasted values, and “forecast intervals” indicating the objective uncertainty in the forecasts provide a solid basis for your team to fully appreciate the message in your forecasts.

 

That’s enough for now. As a person who’s taught in universities for half a century, I’m inclined to start into the statistical side of forecasting, but I’ll save that for another time. The five tips above should be helpful to you as you grow into a key part of your corporate planning team. Welcome to the game!

 

 

 

The Supply Chain Blame Game: Top 3 Excuses for Inventory Shortage and Excess
  1. Blaming Shortages on Lead Time Variability
    Suppliers will often be late, sometimes by a lot. Lead time delays and supply variability are supply chain facts of life, yet inventory carrying organizations are often caught by surprise when a supplier is late.  An effective inventory planning process embraces these facts of life and develops policies that effectively account for this uncertainty.  Sure, there will be times when lead time delays come out of nowhere.  But most often the stocking policies like reorder points, safety stocks, and Min/Max levels aren’t recalibrated often enough to catch changes in the lead time over time.  Many companies only review the reorder point after it has been breached, instead of recalibrating after each new lead time receipt.  We’ve observed situations where the Min/Max settings are only recalibrated annually or are even entirely manual.  If you have a mountain of parts using old Min/Max levels and associated lead times that were relevant a year ago, it should be no surprise that you don’t have enough inventory to hold you until the next order arrives. 

 

  1. Blaming Excess on Bad Sales/Customer Forecasts
    Forecasts from your customers or your sales team are often intentionally over-estimated to ensure supply, in response to past inventory shortages where they were left out to dry. Or, the demand forecasts are inaccurate simply because the sales team doesn’t really know what their customer demand is going to be but are forced to give a number. Demand Variability is another supply chain fact of life, so planning processes need to do a better job account for it.  Why should rely on sales teams to forecast when they best serve the company by selling? Why bother playing the game of feigning acceptance of customer forecasts when both sides know it is often nothing more than a WAG?  A better way is to accept the uncertainty and agree on a degree of stockout risk that is acceptable across groups of items.  Once the stockout risk is agreed to, you can generate an accurate estimate of the safety stock needed to counter the demand variability.  The catch is getting buy-in, since you may not be able to afford super high service levels across all items.  Customers must be willing to pay a higher price per unit for you to deliver extremely high service levels.  Sales people must accept that certain items are more likely to have backorders if they prioritize inventory investment on other items.  Using a consensus safety stock process ensures you are properly buffering and setting the right expectations.  When you do this, you free all parties from having to play the prediction game they were not equipped to play in the first place. 

 

  1. Blaming Problems on Bad Data
    “Garbage In/Garbage Out” is a common excuse for why now is not the right time to invest in planning software. Of course, it is true that if you feed bad data into a model, you won’t get good results, but here’s the thing:  someone, somewhere in the organization is planning inventory, building a forecast, and making decisions on what to purchase. Are they doing this blindly, or are they using data they have curated in a spreadsheet to help them make inventory planning decisions? Hopefully, the latter.  Combine that internal knowledge with software, automating data import from the ERP, and data cleansing.  Once harmonized, your planning software will provide continually updated, well-structured demand and lead time signals that now make effective demand forecasting and inventory optimization possible.  Smart Software cofounder Tom Willemain wrote in an IBF newsletter that “many data problems derive from data having been neglected until a forecasting project made them important.” So, start that forecasting project, because step one is making sure that “what goes in” is a pristine, documented, and accurate demand signal.

 

 

Blanket Orders

Customer as Teacher

Our customers are great teachers who have always helped us bridge the gap between textbook theory and practical application. A prime example happened over twenty years ago, when we were introduced to the phenomenon of intermittent demand, which is common among spare parts but rare among the finished goods managed by our original customers working in sales and marketing. This revelation soon led to our preeminent position as vendors of software for managing inventories of spare parts. Our latest bit of schooling concerns “blanket orders.”

Expanding the Inventory Theory Textbook

Textbook inventory theory focuses on the three most used replenishment policies: (1) Periodic review order-up-to policy, designated (T, S) in the books (2) Continuous review policy with fixed order quantity, designated (R, Q) and (3) Continuous review order-up-to policy, designated (s, S) but usually called “Min/Max.” Our customers have pointed out that their actual ordering process often includes frequent use of “blanket orders.” This blog focuses on how to adjust stocking targets when blanket orders are used.

Blanket Orders are Different

Blanket orders are contracts with suppliers for fixed replenishment quantities arriving at fixed intervals. For example, you might agree with your supplier to receive 20 units every 7 days via a blanket order rather than 60 to 90 units every 28 days under the Periodic Review policy. Blanket orders contrast even more with the Continuous Review policies, under which both order schedules and order quantities are random.

In general, it is efficient to build flexibility into the restocking process so that you order only what you need and only order when you need it. By that standard, Min/Max should make the most sense and blanket policies should make the least sense.

The Case for Blanket Policies

However, while efficiency is important, it is never the only consideration. One of our customers, let’s call them Company X, explained the appeal of blanket policies in their circumstances. Company X makes high-performance parts for motorcycles and ATV’s. They turn raw steel into cool things.

But they must deal with the steel. Steel is expensive. Steel is bulky and heavy. Steel is not something conjured overnight on a special-order basis. The inventory manager at Company X does not want to place large but random-sized orders at random times. He does not want to baby-sit a mountain of steel. His suppliers do not want to receive orders for random quantities at random times. And Company X prefers to spread out its payments. The result: Blanket orders.

The Fatal Flaw in Blanket Policies

For Company X, blanket orders are intended to even out replenishment buys and avoid unwieldy buildups of piles of steel before they are ready for use. But the logic behind continuous review inventory policies still applies. Surges in demand, otherwise welcome, will occur and can create stockouts. Likewise, pauses in demand can create excess demand. As time goes on, it becomes clear that a blanket policy has a fatal flaw: only if the blanket orders exactly match the average demand can they avoid runaway inventory in either direction, up or down. In practice, it will be impossible to exactly match average demand. Furthermore, average demand is a moving target and can drift up or down.

Hybrid Blanket Policies to the Rescue

A blanket policy does have advantages, but rigidity is its Achilles heel.  Planners will often improvise by adjusting future orders to handle changes in demand but this doesn’t scale across thousands of items.  To make the replenishment policy robust against randomness in demand, we suggest a hybrid policy that begins with blanket orders but retains flexibility to automatically (not manually) order additional supply on an as-need basis. Supplementing the blanket policy with a Min/Max backup provides for adjustments without manual intervention. This combination will capture some of the advantages of blanket orders while protecting customer service and avoiding runaway inventory.

Designing a hybrid policy requires choice of four control parameters. Two parameters are the fixed size and fixed timing of the blanket policy. Two more are the values of Min and Max. This leaves the inventory manager facing a four-dimensional optimization problem.  Advanced inventory optimization software will make it possible to evaluate choices for the values of the four parameters and to support negotiations with suppliers when crafting blanket orders.

 

 

Optimizing Inventory around Suppliers´ Minimum Order Quantities

Recently, I had an interesting conversation with an inventory manager and the VP Finance. We were discussing the benefits of being able to automatically optimize both reorder points and order quantities. The VP Finance was concerned that given their large supplier required minimum order quantities, they would not be able to benefit.  He said his suppliers held all the power, forcing him to accept massive minimum order quantities and tying his hands. While he felt bad about this, he saw a silver lining: He didn’t have to do any planning. He would accept a large inventory investment, but his customer service levels would be exceptional.  Perhaps the large inventory investment was assumed to be the cost of doing business.

I pushed back and pointed out that he was not as powerless as he felt. He still had control of the other half of the procurement process: while he couldn’t control how much to order, he could control when to order by adjusting the reorder point. In other words, there is always room for careful quantitative analysis in inventory management, even when you have one hand tied behind your back.

An Example

To put some numbers behind my argument, I created a scenario then analyzed it using our methodology to show how consequential it can be to use inventory optimization software even in constrained situations. In this scenario, item demand averages 2.2 units per day but varies significantly by day of week. Let’s say the imaginary supplier insists on a minimum order quantity of 500 units (way out of proportion to demand) and fills replenishment orders in either three days or ten days in equal proportions (quite inconsistent). To spread the blame around, let’s also suppose that the imaginary supplier’s imaginary customer uses a foolish rule that the reorder point should be 10% of the minimum order quantity. (Why this rule? Too many companies use simple/simplistic rules of thumb in lieu of proper analysis.)

So, we have a base case in which the order quantity is 500 units, and the reorder point is 50 units. In this case, the fill rate is 100%, but the average number of units on hand is a whopping 330. If the customer would simply lower the reorder point from 50 to 15, the fill rate would still be 99.5%, but the average stock on hand would drop by 11% to 295 units. Using the one hand not tied behind his back, the inventory manager could cut his inventory investment by more than 10%, which would be a noticeable win.

Incidentally, if the minimum order quantity were abolished, the customer would be free to arrive at a new and much better solution. Setting the order quantity to 45 and the reorder point to 25 would achieve a 99% fill rate at the cost of a daily on-hand level of only 35 units: nearly a 90% reduction in inventory investment: a major improvement over the status quo.

Postscript

These calculations are possible using our software, which can make visible the otherwise unknown relationships between inventory system design choices (e.g., order quantity and reorder point) and key performance indicators (e.g., average units on hand and fill rate).  Armed with this ability to conduct these calculations, alternative arrangements with the supplier may now be considered. For example, what if, in exchange for paying a higher price per unit, the supplier agreed to a lower MOQ. Using the software to conduct an analysis of the key performance indicators using the “what if” costs and MOQs would reveal the cost per unit and MOQ that would be needed to develop a more profitable deal.   Once identified, all parties stand to benefit.  The supplier now generates a better margin on sales of its products, and the buyer holds considerably less inventory yielding a holding cost reduction that dwarfs the added cost per unit.  Everyone wins.

 

 

Call an Audible to Proactively Counter Supply Chain Noise

 

You know the situation: You work out the best way to manage each inventory item by computing the proper reorder points and replenishment targets, then average demand increases or decreases, or demand volatility changes, or suppliers’ lead times change, or your own costs change. Now your old policies (reorder points, safety stocks, Min/Max levels, etc.)  have been obsoleted – just when you think you’d got them right.   Leveraging advanced planning and inventory optimization software gives you the ability to proactively address ever-changing outside influences on your inventory and demand.  To do so, you’ll need to regularly recalibrate stocking parameters based on ever-changing demand and lead times.

Recently, some potential customers have expressed concern that by regularly modifying inventory control parameters they are introducing “noise” and adding complication to their operations. A visitor to our booth at last week’s Microsoft Dynamics User Group Conference commented:

“We don’t want to jerk around the operations by changing the policies too often and introducing noise into the system. That noise makes the system nervous and causes confusion among the buying team.”

This view is grounded in yesterday’s paradigms.  While you should generally not change an immediate production run, ignoring near-term changes to the policies that drive future production planning and order replenishment will wreak havoc on your operations.   Like it or not, the noise is already there in the form of extreme demand and supply chain variability.  Fixing replenishment parameters, updating them infrequently, or only reviewing at the time of order means that your Supply Chain Operations will only be able to react to problems rather than proactively identify them and take corrective action.

Modifying the policies with near-term recalibrations is adapting to a fluid situation rather than being captive to it.  We can look to this past weekend’s NFL games for a simple analogy. Imagine the quarterback of your favorite team consistently refusing to call an audible (change the play just before the ball is snapped) after seeing the defensive formation.  This would result in lots of missed opportunities, inefficiency, and stalled drives that could cost the team a victory.  What would you want your quarterback to do?

Demand, lead times, costs, and business priorities often change, and as these last 18 months have proved they often change considerably.  As a Supply Chain leader, you have a choice:  keep parameters fixed resulting in lots of knee-jerk expedites and order cancellations, or proactively modify inventory control parameters.  Calling the audible by recalibrating your policies as demand and supply signals change is the right move.

Here is an example. Suppose you are managing a critical item by controlling its reorder point (ROP) at 25 units and its order quantity (OQ) at 48. You may feel like a rock of stability by holding on to those two numbers, but by doing so you may be letting other numbers fluctuate dramatically.  Specifically, your future service levels, fill rates, and operating costs could all be resetting out of sight while you fixate on holding onto yesterday’s ROP and OQ.  When the policy was originally determined, demand was stable and lead times were predictable, yielding service levels of 99% on an important item.   But now demand is increasing and lead times are longer.  Are you really going to expect the same outcome (99% service level) using the same sets of inputs now that demand and lead times are so different?  Of course not.  Suppose you knew that given the recent changes in demand and lead time, in order to achieve the same service level target of 99%, you had to increase the ROP to 35 units.  If you were to keep the ROP at 25 units your service level would fall to 92%.  Is it better to know this in advance or to be forced to react when you are facing stockouts?

What inventory optimization and planning software does is make visible the connections between performance metrics like service rate and control parameters like ROP and ROQ. The invisible becomes visible, allowing you to make reasoned adjustments that keep your metrics where you need them to be by adjusting the control levers available for your use.  Using probabilistic forecasting methods will enable you to generate Key Performance Predictions (KPPs) of performance and costs while identifying near-term corrective actions such as targeted stock movements that help avoid problems and take advantage of opportunities. Not doing so puts your supply chain planning in a straightjacket, much like the quarterback who refuses to audible.

Admittedly, a constantly-changing business environment requires constant vigilance and occasional reaction. But the right inventory optimization and demand forecasting software can recompute your control parameters at scale with a few mouse clicks and clue your ERP system how to keep everything on course despite the constant turbulence.  The noise is already in your system in the form of demand and supply variability.  Will you proactively audible or stick to an older plan and cross your fingers that things will work out fine?

 

 

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Top Five Tips for New Demand Planners and Forecasters

Top Five Tips for New Demand Planners and Forecasters

Good forecasting can make a big difference to your company’s performance, whether you are forecasting to support sales, marketing, production, inventory, or finance. This blog is aimed primarily at those fortunate individuals who are about to start this adventure. Welcome to the field!