Forecasting Your Way to Success
Author: Jeffrey Fink

In this article we will define forecasting as it relates to the materials requirements planning (MRP) process, discuss the risks of inadequate forecasts, provide some practical forecasting techniques, and a list of some benefits that arise from effective and well-maintained forecasting/demand planning processes.

Manufacturing-Related Current Metric:

First, a macro-level overview of the manufacturing sector in the United States:

The sector has experienced 18 consecutive months of growth, from June, 2013 through November, 2014.

In 2015, the Institute of Supply Management (ISM) has forecast manufacturing sector growth in Gross Revenue (+5.6%), Capital Expenditures (+3.7%) and projects Capacity Utilization of 83.7%.

Forecasting Definition

Simply put, forecasting is an estimate of future demand, or an attempt to predict future events or trends, usually from an analysis of pertinent data.  An accurate forecast can reduce uncertainty and provide visibility to future demand and raw material/production requirements, manufacturing capacities, as well as budgets.

In a master-planned environment, demand planning (a multi-step operational supply chain management process which is used to create reliable forecasts) can provide an effective foundation for aligning supply and demand across the supply chain in, for example, raw material/component part timing and requirements; finished-goods inventory levels; marketing and collateral sales materials; capacity planning, as well as many other supply-chain-related functions.

What are the benefits of a reliable, accurate forecasting process?

What sorts of benefits can your company expect if you create and maintain an effective forecasting/demand planning system?  There are many benefits that can accrue: A smooth-running order-to-cash process; as well as happier, more productive employees!  Specifically, your company can expect the following:

  • Higher Profit Margins
  • A More Predictable Sales/Production Cycle
  • More Efficient Production at Lower Unit Cost
  • More Efficient Use of Production Capacity
  • Higher Customer Service Levels (both internal as well as external)
  • Higher Inventory Turns
  • Lower Overall Stress!

What are the risks and costs associated with the absence of forecasting or from poor or inaccurate forecasts?

There are many problems and costs associated with inadequate or ineffective forecasting processes.  There are additions to overall costs through extra charges as well as through increased time needed in the production process.

Specifically, the following can occur:

  • Capacity-Planning impacted by changes to the schedule
  • Need to react and perform expedites or “catch-up” activities in order to re-align supply and demand
  • Need to schedule over-time or extra shifts
  • Decreased margins due to increased costs associated with inadequate planning
  • Production work-order start and due-dates can slip/move-out or be delayed
  • Customer Service Levels can be negatively impacted, putting future sales in jeopardy
  • Lost sales due to stock-outs or inadequate inventory levels
  • Creation of slow-moving/obsolete inventory items (SLOBS)
  • Either Excess or Stock-Outs of Raw Materials/Component Parts

What other internal factors can impact the forecasting process?

Internal stakeholders can also have an impact on the forecasting/demand planning process. Most importantly, internal stakeholders can have differing and conflicting goals.  For example, Marketing/Sales generally would want to have multiple, varied stock-keeping units (SKU’s), while operations/production would likely prefer one (or few) set-up(s), with minimal change-overs, and long production runs of similar-to-build products in order to minimize unit production costs.  Also, Finance would want low levels of finished-goods inventory, or high levels of inventory turns, while Marketing/Sales would prefer a higher level of finished-goods inventory available to satisfy potential customer demand.  All of these conflicting goals will need to be accounted for and incorporated into the forecast planning process.

What are some practical forecasting techniques?

Where is a good place to start the forecasting/demand planning process?  The first place is your company’s historical sales information:

Historical Sales/Demand Trends: The longer the period of historical demand data available, the better the chances of establishing a reliable forecast.  However, more recent data is typically more useful in maintaining or modifying the forecast.  Your ‘rolling’ forecast should always be adjusted based on current demand information.

It is very important to measure demand, not orders or shipments, which can be under-stated due to material shortages or production delays, etc.  If your company was not able to supply all of the demand during a prior year, you do not want to make the mistake of projecting that same low shipment figure into your future forecast: You need to estimate the actual demand for that future time-period.

Also, it is not necessary to forecast what you can calculate.  In other words, you forecast independent demand (Sales, for example); you calculate dependent demand (demand that is dependent upon the independent demand).  Your MRP (Materials-Requirements Planning) system will be able to calculate the demand for the lower-levels items based upon the top-level forecast.

Customer Input: Your customers can provide a great deal of useable information and data that can reduce forecast errors and provide a more predictable demand model.  Setting up a process for weekly or monthly customer updates, along with adequate notice of future promotions or new product launches can provide valuable value-added information that can enhance your forecast maintenance activities and smooth out the Sales/Operations-Planning Process (S/OP).

Seasonal Factors: Many products exhibit consistent above-average or below-average demand based upon the time of year, or season.  This information is important to consider when making future forecasts, and is more reliable with longer periods of past demand data.

Supplier Sales Data/Trends: Your vendors and suppliers can provide a wealth of actionable data and information, with the added bonus that they probably supply your competitors as well!

Trade/Industry Groups/Organizations: Every industry has an associated trade or common-interest organization (APICS, ISM for Supply Chain, for example).  They provide a great deal of useful industry data and forecasts that can be incorporated into your demand planning process.

In conclusion, setting up an effective forecasting/demand planning system can lead to increased productivity, lower costs, higher margins, and happier, more satisfied customers!

 

The next article in this series will discuss Kanban Procurement Systems.

For more information, please contact SSG at (310) 539-4645 or inquiry@ssgnet.com