When the economy is in a down cycle, business professionals basically know what to do: Reduce production, thin out inventories, cut back on expenses, and so on. If they are slow to react to the downward trend, it will take longer to consume existing inventories, and costs will be higher than people would like until employees can get them back in balance with sales.
Returning production and inventory to an up cycle often is the more difficult process. Once caught with extra inventories and expenses on the way down, people naturally are reluctant to ramp up costs during recovery. The impacts of this slow reaction time are shortages and lengthening lead times, which can lead to lost business. As existing customers become frustrated and seek better service elsewhere, more agile competitors can end up increasing market share.
The purpose of forecasting is to provide a view of demand against which team members can build an operating plan during the sales and operations planning process. If the demand projection is wrong -- in either direction -- the operating plan will not provide the right products, in the right quantities, at the right times. The business will be unable to deliver adequate customer service. Consider these suggestions:
-- Weigh the risk of too much inventory and higher costs against the risk of losing sales and customers due to shortages and delays. Measure or estimate the forecast error via a straightforward formula that calculates the proper amount of safety stock based on desired service levels and lead time (a factor of forecast accuracy).
-- Lead time is a critical element of forecast flexibility and having extra finished-goods inventory is not always effective. If an organization can make products on demand in a very short time, then the inventory buffer should be at the major assembly, module, or critical-component level.
-- Take into account your supply chain partners since their flexibility and responsiveness in the distribution network will have a direct bearing on your ability to respond to changing demand and forecast inaccuracies.
-- Finally, understand the risks associated with responding to an expected change in the business level and manage those risks appropriately. Keep a close eye on inventory, but don't ignore the impact of lead time on your ability to be flexible and responsive.
Read more about fostering flexibility and responsiveness during unpredictable times at www.daveturbide.com
Showing posts with label forecast accuracy. Show all posts
Showing posts with label forecast accuracy. Show all posts
Wednesday, June 30, 2010
Tuesday, February 2, 2010
9 Priorities for 2010
Recently, Chain Link Research held a webinar in which they discussed the results of recent research on goals, challenges, efforts and impediments for the supply chain in the coming year. The results were interesting but not surprising.
1. The top priorities are customer satisfaction and responding to changes in the market (flexibility and agility).
2. The biggest challenge is forecast accuracy. Efforts are (and should be) focused foremost on the forecasting process, which was also cited as the most difficult challenge.
3. The top impediments are all people-related – organizational inertia, a reactive (fire fighting) culture, lack of manpower and corporate politics.
4. Perhaps the biggest surprise, and the best news in these survey results, is that cost reduction is not at the top of the list of goals. Respondents did, however, mention difficulty in meeting cost reduction goals as the number two challenge (presumably they’re already set and ongoing). Cost cutting, while necessary in challenging times and always a high priority for resource managers at any time, is reactive and does nothing, in-and-of itself, to promote the growth and long-term health of the business. An all-encompassing focus on costs often leads to deterioration of skills and capabilities (lack of investment in training, education, process improvement) and short-term actions that end up costing the company far more at a later date to remediate the damage done.
Better forecasts, shorter lead times and greater agility, a more effective planning process, improved customer satisfaction, and all of the other priorities listed in this research all contribute to an improved bottom line either through higher revenues and/or direct and indirect cost reductions. These are permanent, systemic improvements that continue to pay back year after year.
It takes an investment to achieve these kinds of improvements – money, surely - but also an investment in time, effort, and emotional energy. That can be difficult when the challenges of everyday business are overwhelming. But it’s an investment that is absolutely necessary and does deliver an outstanding return on that investment.
Read more articles by Dave Turbide at www.daveturbide.com or click here
NOTE: Dave Turbide is listed on the ChainLink Research Advisory Board but did not participate directly in this study.
1. The top priorities are customer satisfaction and responding to changes in the market (flexibility and agility).
2. The biggest challenge is forecast accuracy. Efforts are (and should be) focused foremost on the forecasting process, which was also cited as the most difficult challenge.
3. The top impediments are all people-related – organizational inertia, a reactive (fire fighting) culture, lack of manpower and corporate politics.
4. Perhaps the biggest surprise, and the best news in these survey results, is that cost reduction is not at the top of the list of goals. Respondents did, however, mention difficulty in meeting cost reduction goals as the number two challenge (presumably they’re already set and ongoing). Cost cutting, while necessary in challenging times and always a high priority for resource managers at any time, is reactive and does nothing, in-and-of itself, to promote the growth and long-term health of the business. An all-encompassing focus on costs often leads to deterioration of skills and capabilities (lack of investment in training, education, process improvement) and short-term actions that end up costing the company far more at a later date to remediate the damage done.
Better forecasts, shorter lead times and greater agility, a more effective planning process, improved customer satisfaction, and all of the other priorities listed in this research all contribute to an improved bottom line either through higher revenues and/or direct and indirect cost reductions. These are permanent, systemic improvements that continue to pay back year after year.
It takes an investment to achieve these kinds of improvements – money, surely - but also an investment in time, effort, and emotional energy. That can be difficult when the challenges of everyday business are overwhelming. But it’s an investment that is absolutely necessary and does deliver an outstanding return on that investment.
Read more articles by Dave Turbide at www.daveturbide.com or click here
NOTE: Dave Turbide is listed on the ChainLink Research Advisory Board but did not participate directly in this study.
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