I saw this interesting discussion posted on a linked-in forum.
Balancing Inventory and Service
With a “hot” new product, or even your cold old products, how do you balance inventory and service? Forecasting isn’t the way. Who even listens to the weather man anymore?
This makes me think about the utility of demand forecasts in corporate Supply chains.
- Do Supply chains really use demand forecasts? I have seen many inventory strategies actually using the standard deviation of historical demand in their calculations. What happened to the forecast error?
- If forecast is not used, what is the alternative? What happened to medium to long-term planning?
So I decided to summarize my response to this question:
As long as you don’t leave your demand forecasting to the weather man, you should be alright. Most supply chain problems originate by ignoring the forecasting that is happening through out the organization. In a survey I remember reading a couple of years ago, on average 50% of the people in an organization were forecasting something or other.
If the forecasting process is bad, fix it! You ignore and move on at your own peril!
Even folks in supply chain who badmouthed forecasting actually were using an average run rate of some sort to determine their inventory calculations. There is an article from the Harvard Business Review in that talks about most organizations operating inside the inventory curve rather than on it. The inventory curve is a set of feasible points that trade off between service levels and required inventory.
Perhaps the reasons many companies operate inside the inventory curve, as suggested by the article, is because the supply chain function ignores the demand forecast and uses the historical average as their forecast for their inventory strategy.
If there is a reasonably good demand planning process installed in any organization, we can establish this will easily beat out the “run-rate” or any other average hands down.
Even in the case of iPad, a hot new product, the decision to create the product was a result of a market forecast that estimated potential users and share. The decision to build capacity and manufacturing was based on a long-range forecast.
Why different functions create forecasts?
Inventory is a problem but is only one of many problems. Organizations need to solve a variety of challenges and constraints to solve so they can thrive and grow. Organizations need to plan for the medium to long-term and manage the business accordingly. 50% of the functions forecast but NOT necessarily for inventory purposes.
- Senior management needs to forecast an EPS for investors and need to hit it within a reasonable threshold.
- Companies need a long-term forecast to assess what they need in capital investment and where and how to build the facilities for expansion.
- Even HR needs a forecast.
Thinking every function will be forecasting for the supply chain is like the Dilbert Cartoon “Sure – I will drop everything else and will focus on your problem.
So forecasting and planning is embedded in various functions and various forms through out the organization and is unavoidable. The key is how to leverage the forecasting responsibility and accountability already installed into a holistic process that can let you piggy back and obtain a supply chain forecast for your short-term and long-term planning.
Ignoring the corporate forecasting machine and creating an isolated forecast or an inventory deployment algorithm is a sure way to significant troubles – what we preach as the fragmented planning process or the lack of the often glorified “S&OP” process.
In reality, 50% of the organization involved in forecasting is not the problem. The real problem is when supply chain decides to ignore the forecast or the forecasting process and decide to move on in isolation.
Demand Planning LLC does use and recommend advanced algorithms for demand forecasting and leveraging customer input. But that is only half our story. We work with Sales, Marketing, Supply chain and Senior management to drive a holistic process to leverage demand information and build forecasting processes that are used across most of the organization. We call this consensus demand process or integrated business and operations planning.
APICS and supply chain professionals need to re-think their philosophy when they decide to abandon/ignore/side-step the demand forecast. Anyone who does so actually does a dis-service to the organization and to the profession! Ignoring the forecast can be a great marketing technique to sell expensive software that preaches using volumes of transactions data.
You can read more about the Demand Planning process at
http://demandplanning.net/demandplanningconsults.htm
and the S&OP process at
http://demandplanning.net/sales-and-operations-process-redesign.htm
