Improved forecast accuracy leads to many downstream improvements in operations and ultimately, on the balance sheet. That is why Gartner, Inc., a highly respected information technology research and advisory firm, puts forecast accuracy at the top of its pyramid of supply chain metrics. In a study published in February 2012, Gartner stated that a 6% forecast improvement could improve the perfect order by 10% and deliver a 10-15% reduction in unnecessary inventory. These are very impressive numbers and a very good reason to work towards improving forecast accuracy.
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, demand planning
, erratic demand
, forecast accuracy
, forecasting model
, Gartner Inc.
, historical data
, low demand volume
, Mean Absolute Deviation
, Mean Absolute Percentage Error
, unnecessary inventory
I was reminded recently that there are really only two ways to improve your organization’s profitability; increase revenues or decrease costs. Arguably, increasing revenues does not necessarily translate into higher profits.Take a moment to think about how much revenue it would take to bring the same amount of dollars to the bottom line as would a 2% decrease in operational costs.
Consider the cost of a shipping error. Shipping errors results in lower customer satisfaction and potentially affect customer retention rates. Customer service personnel can spend hours addressing a shipment error. Warehouse personnel must investigate what happened, potentially restock the wrong item then pick, pack and ship the correct item. A rush delivery further erodes any margins left on the sale. Even cash flow is affected. Accounts receivables staff may need to be notified.
Shipping the wrong item or the wrong quantity of an item is the most common error. Perhaps the wrong unit of measure was picked; say one carton was picked instead of one unit within the carton. Other types of errors include shipping multiple boxes when only one box would have sufficed and also errors in packaging that cause an item to be damaged while in transit.
Part of the problem is that the fulfillment process is often tedious and repetitious. When employees are not paying attention at each and every step, errors will happen. Manually checking every outgoing shipment is too costly. The answer to reducing shipment errors is automation. Studies have shown that automation not only increases inventory accuracy up to 99% and higher but also substantially decreases shipment errors. When automation includes built-in checks and balances such as visual cues and voice confirmation you have both automation and validation. Wow!
Back in the mid-nineties, I attended a conference on business forecasting. The focus was on the science of statistical forecasting, and, well…I may have drifted off during the second half hour of discussions on Winters’ triple exponential smoothing.
Fast forward 20 years to 2015.
I will be attending a business forecasting conference with a focus on the practice of demand planning and forecasting. Topics cover good stuff like organizational alignment against a single forecast and how to engage all functional areas with the forecast development process. In the past, most attendees were from the manufacturing sector. Today, the attendee list includes many distributors and retailers, indicating a broader recognition of the benefits of implementing a demand planning and forecasting practice.
The upcoming conference even includes representation from a large US healthcare organization — not just attending, but also speaking about their demand planning processes. Quite a surprise since healthcare providers have been slow to adopt modern supply chain practices. This is evidence of an emerging awareness most likely fueled by the affordable care act which its changes in reimbursement that threaten to significantly reduce revenues. Kudos to this leading healthcare organization for sharing their story!
Organizations that want to mature their demand planning practice must add value to their statistical forecast and measure their performance in doing so. The added value comes from gathering insights that will impact forecast numbers. For example, planners are no longer working in isolation; they are collaborating internally and even externally with supply chain partners. Because of improved processes, planners are more aware of product lifecycles and of planned marketing and sales initiatives that will impact future demand. Furthering this evolution, organizations that measure forecast accuracy may apply demand shaping strategies in the form of price changes and/or marketing campaigns in order to meet revenue objectives.
The rewards are great! Without compromising desired service levels, companies are able to maintain much lower inventories. In this way they are liberating millions of dollars normally tied up in inventory and refocusing that capital on growth initiatives. This is the promise of demand planning and forecasting. The changes over the last 20 years have been evolutionary and revolutionary – this upcoming conference will have my full attention.