If you work in Business or Supply Chain you feel the results and the immense pressure caused by inaccurate forecasts. You don’t believe that good forecasting even exists.
When customer demand exceeds forecast you are scrambling to get parts and materials, to secure capacity, and to expedite the movement of goods throughout the Supply Chain. When demand falls short of forecast you are left with too much inventory, excess capacity, under-utilized resources, and profit and cash flow pressures.
If only the planning people could forecast better all would be right with the world. But waiting for better forecasts is a bad, and a lazy approach.
It is much more important to create a more robust and resilient Supply Chain to dynamically respond to any fluctuations in forecasted demand.
Good Forecasting is a Pipe Dream
A highly accurate forecast is the dream of many. If forecasts were accurate there would be precision in execution and results. Variability would not be of any concern at all. Schedules would be adhered to, deliveries would be made on time, commitments would be met, financial results would be accurate, customers would be delighted, employees would be happy, and stakeholders would be sitting back at ease watching their company flourish.
I heard this language throughout my career. Why can’t “they” get their forecasts right? If only “they” would forecast better we wouldn’t have all of these problems? Let’s create an action plan to improve the forecasting.
Do you know what the result was of all of that talk and wishful thinking? Nothing! Forecasts never improved in any meaningful or sustainable way. If there were any improvements they didn’t last very long.
I believe the fundamental flaw in this type of thinking is that people think of good forecasting as a panacea. That is, they view good forecasting as THE solution to every problem. But the reality is that this is a very unrealistic expectation.
The very paradigm of good forecasting being the be all and end all solution to all of our Supply Chain woes is flawed. I’m not saying that people should not strive to improve forecasts. But what I am saying is that you cannot rest all of your hopes on getting better forecasts. If you do you will be sorely disappointed for years and years and years.
This is further complicated when you have Sales teams that operate unchecked. Without appropriate controls Sales teams will often project very optimistic forecasts if they are not held to account. This can be highly disruptive and it is a very real Supply Chain nightmare scenario.
A dramatically different paradigm needs to overtake and rise above this focus on good forecasting. That paradigm has to be one of creating a more robust and resilient Supply Chain that can seamlessly and easily absorb most fluctuations in demand, whether up or down.
A phrase I have used in the past to describe this paradigm is that of a “Lead Time Agnostic” Supply Chain. By that I mean you should design and implement a Supply Chain strategy that does not care what the lead time is for any aspect of the chain.
By way of example I distinguish been the order lead time for a component versus the replenishment lead time for that component.
The actual order lead time for a device, assuming that you are starting from scratch, can be months. From the time you order the first piece of that device until the time you receive that device can be months given the times required to acquire raw materials, go through the manufacturing process, and transport goods.
The replenishment lead time however can be dramatically different than the order lead time. For instance if you have established just-in-time processes, infrastructure, and inventories, any component that you need are available instantly. Conversely if you don’t need those materials you don’t need to pull them further through the Supply Chain.
Instead of relying on accurate forecasting, which is rarely achieved, it is more prudent and strategic to create a resilient and flexible Supply Chain. There are many techniques that can be employed to maximize this flexibility which are much more realistic to materialize than hoping and praying that forecasts will just get better.
Resilient Supply Chain Design is a Smart Strategy
Creating a resilient Supply Chain does mean adding a lot of extra inventory throughout your channels. Certainly some strategic positioning of inventory can provide a lot of valuable flexibility but there are financial and physical ramifications of carrying more inventory than is prudent.
Here are a number of techniques that you can implement to create a more robust and resilient Supply Chain and reduce your dependency on forecast accuracy.
- Reduce, if not eliminate, single or sole sourced materials and services. Implement dual sourcing strategies with pre-approved sources enabling you to scale up or down seamlessly.
- Identify and implement all opportunities to standardize materials and services and avoid customization everywhere possible.
- Review the personalization point (ie. the point in the manufacturing or transformation process were goods go from being standardized to being customized) of all materials to identify opportunities to defer the personalization as late in the manufacturing process as possible. This enables materials to be held as long as possible in a standardized form, increasing the ability to accumulate more standard materials faster, knowing that they can be quickly personalized.
- Actively reduce all cycle times, lead times, transit times, and processing times at all levels up and down your Supply Chain.
- Ensure your order management system distinguishes between open order lead time parameters and replenishment lead time parameters.
- Implement Vendor Managed Inventory (VMI), or Supplier Managed Inventory (SMI), for strategic materials.
- Deploy a “Don’t Touch” supply chain strategy wherein you minimized all excess handling, movement and storage of goods throughout your entire network. Drop shipping is a great example of cutting out unnecessary handling and enabling your Supply Chain to react much more quickly to fluctuations in demand.
- Adopt an Agile Supply Chain strategy to increase flexibility and responsiveness.
- Enable a clear and active Expediting and Supply line strategy, organization and business process to ensure immediate and impactful expediting of parts shortages whenever the situation calls for this capability.
- Consider creating a Parallel Supply Chain
- Expand fulfillment options from any channel, particularly in Retail. If one store or Distribution Centre has goods on hand that another store, closer to the customer, does not have, allow fulfillment from wherever the inventory resides.
- Treat all inventory as if it is in one single, virtual, warehouse, for utilization anywhere required.
- Build in redundant, but financially viable, extra capacity. Anyone in Retail knows that Black Friday/Cyber Monday demand can dramatically exceed that of any other time of the year. If your Distribution and Fulfillment infrastructure cannot handle this dramatic, short term, peak in demand, you will lose revenue and you will lose customers.
- Focus on process simplification everywhere.
- Create and deploy a Digital Supply Chain strategy built on real time end to end electronic connectivity at all levels of your entire Supply Chain. This will enable real time visibility to whatever is going on anywhere in your Supply Chain along with the ability to deploy and react to real time demand changes. Real time, informed decision making backed up with a Control tower infrastructure and process will ensure the most resilient Supply Chain response possible.
- Implement a Control Tower
Waiting for great forecasting accuracy is wishful thinking. I am sure there are always ways to improve forecasting results and forecasting tools and processes. And certainly you should pursue any opportunities to improve forecasting.
But hoping and thinking that forecasts will magically get better and answer all of your prayers for your Supply Chain woes is time wasted. You are much better served by spending your energy on creating a Supply Chain that is highly resilient, flexible, responsive, and dynamic.
We’ve articulate a number of proven techniques that you can deploy to improve the resilience of your Supply Chain. Some of these approaches are short term and some are long term. Some are inexpensive and some can be very expensive. Whatever set of techniques you use to create a resilient Supply Chain, as appropriate to your situation, it all starts with having this vision and then developing the strategy to support that vision.
Don’t wait for better forecasting. If forecast accuracy improves that is great. But don’t count on it. True Supply Chain leaders and visionaries will instead spend their energy creating a resilient and robust Supply Chain that is the envy of all of their competitors and peers!