As we approach the midpoint in 2013, there is still a lot of economic uncertainty complicating your supply chain planning processes. Some look at this shaky economy and postpone needed investments that can position their organizations for a strong future.

However, this is not the time to retreat from your supply chain improvement initiatives. Rather, it’s a time to double-down on your efforts to prepare for the inevitable business opportunities that lie ahead.

Economic recovery is a time of sales opportunities. You want to make sure that you’re prepared to take advantage of them. Good demand and inventory planning can help.With the right software and planning processes, you can achieve a sound statistical basis for decision-making going forward while making informed adjustments as circumstances dictate. You can improve your ability to read demand signals, spot trends, model future events, and bring your inventory into balance with demand.

Here are six areas of demand and inventory planning where changes you make now can lead to big payoffs when new opportunities arise:

1. Optimize your inventories

When the customer calls, you want to be able to ship. At the same time, you want to control your costs. The surest way to meet that goal is to find the inventory “sweet spot.” That’s where you have the minimum amount of inventory required to satisfy product demand over a specified lead time and at a desired service level.

The ability to accurately set safety stock and inventory levels can set you apart from the competition, and make a difference in your bottom line. However, getting to that point requires a shift in your planning focus from just forecasting future demand to optimizing stocking levels to fill future orders.

If you’d like to know more about achieving the “sweet spot,” you can find a good article published in APICS Magazine here.

2. Implement intermittent demand forecasting solutions

Companies in the service parts, auto aftermarket, and capital goods industries commonly experience intermittent, “slow moving” demand for a large percentage of their inventory items. Accurately forecasting demand and estimating safety stock levels for these types of items is probably the toughest challenge demand planners face. If you can accurately forecast your intermittently demanded parts and products, and have the correct amount of inventory and safety stock on the shelf, you’ve got most of the competition beat!

The reason for this is that items that have intermittent demand do not have normal demand patterns or distributions, making them difficult to forecast using traditional forecasting methods (see the diagram below).

Bar chart illustrating intermittent demand

So, if you have an accurate means of forecasting intermittent demand and estimating safety stock requirements, you’ll be ahead of your competitors that don’t.

If you’d like to know more about forecasting and planning items with intermittent demand, you can find an informative white paper here.

3. Improve lead times

The economic downturn has forced companies to rethink their sourcing strategies because of uncertain demand back home, long lead times to obtain their goods, rising labor costs abroad, and increasing transportation costs. Shortening replenishment lead times can reduce the time required to get the products you need and helps make your supply chain more efficient. It also makes it easier to react to changes in demand when recovery comes.

4. Prioritize service levels

Prioritizing service levels for your products can help insure that the items important to your sales are given the attention they need. For items that are highly demanded, consider setting service levels higher than for those with less demand. Also try doing a revenue-based ABC analysis of your company’s stock-keeping units (SKUs) and set service levels accordingly in your software planning solution.

For example, you might set the service levels for your “bread and butter” items at 95-99% or higher, while setting service levels much lower (at 70-80% or even less) for other items. In this way, you may find that you need much less stock for some of your SKUs and more stock for others to effectively achieve your overall service level goals.

5. Use more recent demand history in creating your forecasts

Because the economy has been changing so fast, it may be time to shorten the demand history used in generating your forecasts so more emphasis is placed on recent trends and demand patterns—reflecting the “new normal”—rather than those contained in outdated history from 3 or 4 years ago. This, of course, should be done in consultation with your management team and preferably as part of an organized S&OP process that thoroughly evaluates both the risks and benefits of adopting this strategy.

6. Invest in technologies and resources that help you capitalize on opportunities

Investing in the right tools and processes increases your competitive advantage. If you aren’t doing so already, here are some valuable things to consider:

• Start an S&OP process, or fine tune your current process, to include key stakeholders in the supply chain and also ensure that demand forecasting and inventory planning provide key inputs in that planning process.

• If your forecasting software is not good at picking up trends, or cannot handle the portion of your inventory with intermittent demand, find software that’s up to the task.

• Find software that will take your forecast results and generate accurate inventory stocking levels to satisfy demand for your products, components or raw materials over specified lead times and at service levels you desire.

• Look for software solutions that are scalable, yet have a relatively low total cost of ownership, fast payback and high ROI.

• Finally, don’t scrimp on training; get all the training and consulting you need to get the “biggest bang” from your software investments.

Do you have anything to add? What are you doing to prepare for the economic recovery? Please leave a comment.

Charles Smart is the founding President of Smart Software. He currently serves as Vice Chairman, on Smart Software’s Board of Directors, as a company spokesman and in development of strategic business relationships. Prior to founding Smart Software, he was a management consultant at the Stanford Research Institute (SRI International) and Policy Analysis, Inc., and served as a Lieutenant in the U.S. Navy.

Bud Schultz, CPA, Vice President of Finance for NKK Switches, presented his company’s experience with demand planning during a recent webinar. The following is a brief summary of Bud’s key points; view the complete webinar by clicking here.

Q: Tell us about NKK’s business and demand planning challenges.

NKK Switches, based in Scottsdale, Arizona, is a leading manufacturer and supplier of electromechanical switches. The business involves many different switch types—toggles, push-button, rotary, even some programmable switch types. We are known for our high quality, and for our ability to meet an exceptionally broad range of customer requirements on a turnkey (custom configuration) basis. NKK Switches produces customized solutions from component parts sourced exclusively from manufacturing facilities in Japan and China.

There are literally millions of possible switch configurations, and we never know what configured solutions our customers will order. This makes our demand highly intermittent and exceptionally difficult to forecast. In fact, until fairly recently we considered our demand unforecastable. We operated on a build-to-order basis, which meant that customer orders could not be fulfilled until their component parts were produced and then fashioned into finished goods by NKK. This resulted in long lead-times, painful for our customers and a competitive challenge for our sales organization.

Q: What did you expect to get from improved product demand forecasting?

When we began to investigate the value of demand forecasting software (SmartForecasts from Smart Software), we tried to view the decision from a Return on Investment (ROI) point of view. We did some capital budgeting, making assumptions about potential reductions in inventory levels, reduced inventory carrying costs and other potential savings. Although the capital budgets returned positive returns on investment, we nevertheless were unable to move forward based on that information. We lacked confidence in our assumptions, and we were worried that we wouldn’t be able to justify the safety stock and inventory levels that the software would suggest.

What we didn’t expect was a challenge from our parent company. In light of the capabilities of a newly implemented ERP system, they would consider a new approach. If we could produce demonstrably reliable demand forecasts, they would consider procuring raw materials and producing switch components on a build-to-forecast rather than build-to-order basis. This opened the door to a much more profound impact. We tracked actuals against forecasts over a twelve-month period and found that our forecasts, particularly in aggregate, were exceptionally accurate: actual demand was within 3% of forecast. Once we were able to prove the validity of our forecasts, we were able to move forward with the parent company’s plan to manufacture product based on those forecasts.

Q: How did accurate forecasts of product lines with intermittent demand data transform NKK’s operations?

From the many different combinations we manufacture to order, individual switch parts can show very intermittent demand (long periods with zero orders and then seemingly random spikes), but we can identify more consistent patterns across switch series. All of the part numbers in a given series have common components and raw materials, such as plastic housing, brackets and other hardware, gold, silver and LEDs.

Providing our manufacturing facilities with reliable forecasts ended up allowing us to make dramatic changes. Our manufacturing plants could start procuring raw materials that in the aggregate would eventually be used in production of different part numbers within that series, even if the specific part numbers to be produced were unknown at the time the forecasts were made. And in many instances, despite the irregular demand history data, it was even possible for the suppliers to manufacture specific part numbers based on the forecast.

Once the program is fully implemented, we anticipate our leads times will be reduced to half the time or even less. Shorter lead times will result in lower reorder points, resulting in higher service levels while reducing our inventory requirements.

Bud Schultz leads all finance and accounting functions at NKK. His background as a Certified Public Accountant, attorney, engineer and pilot for the US Air Force provide unique perspective on finances for engineering and manufacturing operations.