Supply Chain

Minimizing Forecast Variation, a Key to Supply Chain Success

By: Alan Witthuhn

Publish Date: November 20, 2020

A critical question that Supply Chain Professionals should be asking is, how accurate is my forecast? The follow-up question should be, how do I measure it, and to what degree do my suppliers trust it?

Your forecast signal to your supply chain is the critical piece of transparency that enables a trusted partnership, allows your suppliers to execute consistently, and reduces waste on all points of supply.

Inaccurate forecasting tactics are a short-sided approach

Your internal Sales and Operations Planning (S&OP) and Sales Inventory & Operations Planning (SIOP) processes play an enormous role in the organization’s executing; the decisions made in those processes have a ripple effect throughout the supply chain. The growing number of matrix organizations with apparent control of forecast accuracy has proven to be critical in controlling the costs of demand fluctuations. Implementing control measures to ensure the forecast plan mirrors the production plan is vital in the processes that supply chain professionals should take the time to explore.

Does your organization over forecast demand as a reactionary measure to compensate for shifting customer requests? If so, are the organization’s support functions, like manufacturing, expected to execute with only a budget designed around 100%? It might be worth exploring the negative internal implications of this approach and the internal disruption it can cause your operation.

What about the mitigation strategy to increase forecast on individual components to alleviate the disruption caused by an underperforming supplier? How does this impact your suppliers’ trust in the forecast accuracy? How does it affect the variability when they recover and deliver over forecast on time? You then force your suppliers to adjust back from your forecast reduction to realign your inventory to normal, which has a lasting impacting their trust and your hidden costs.

Regardless of your organization’s horizon planning zones, using your S&OP process and knowingly providing false signals internally or extremally could provide valuable in the short-term business outcomes but has a further negative impact on your internal operations and your supply channels.

Three approaches to drive accuracy and speed

1. Create a more agile planning process.

Long-term planning is essential for organizations, but to what extent can the organization build flexibility to adjust constantly. Removing the rigidity in most current S&OP planning processes focuses on minimizing the overall demand variability by making small adjustments over shorter periodic windows. The internal interval for changes to the forecasting process should mirror the timing of your customers’ demand variation thresholds, the degree to which my customers demand changes that would require me to change my forecast. This approach aims at reducing the accordion effect of the conflicting battle between customer demand fluctuations and suppliers’ flexibility to execute. A supplier can react easier to frequent, small adjustment vs. infrequent, large adjustment, and ultimately reducing the entire bullwhip effect on its supply chain as well.

2. Systematic verification of forecast changes

Creating a trust but verify philosophy when it comes to forecasting is essential to ensure an accurate picture is provided both forward and backward within the supply chain. Most S&OP processes happen outside the MRP system, and syncing forecast changes sometimes manuals, introducing an increased margin for error. Even if your plans are automated, there still needs to be a rigorous process to validate the accuracy changes. Creating a check and balance process can systematically build internal and external confidence in the forecast accuracy.

3. Scenario planning to measure the impact

Technologies with enhanced built-in layers of the financial impact are impacted by forecasting changes and provide a visibility layer to all organizational levels. These costs could include potential expedites required to execute the new plan or inventory fluctuations in the supply chain. S&OP and SIOP can become more agile in nature with the proper application of technologies but provide lasting value to understand leadership’s financial impact as another deciding factor in making short-term forecasting changes. These are sometimes unavoidable, but a robust system can provide the necessary insights to make the right decision for the organization and supply chain.

When minimized, your organization’s forecast variation can provide tremendous value from stabilized communication and requirement within the supply chain. You can achieve a harmonious rhythm when you combine the appropriate planning processes and available technologies to reduce the variation, understand the impact, and create trust within the forecast. In an evolving environment where customers are becoming more demanding on moving at the “speed of retail,” this requires a sound structure approach to communicating a trusted forecast through your supply network.

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