Predictive Supply Chain

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Why Doesn't Forecasting Work?

Many departments and activities in a company are influenced by sales and inventory forecasts. Yet, everyone knows that sales forecasts are at best, not very reliable indicators of what will happen in the future. With that, how can you manage your supply chain operations when you’re starting with known unreliability? Look, we all know forecasts are seldom accurate!

It is as if the forecast is based on a shot gun, rough estimate approach. Starting this way can only lead to excess supply chain operating and delivery costs critical item stock-outs, and higher levels of expensive inventory, which then become wasted future obsolete inventory. To add to that, most companies do not frequently manage the inaccuracy and make the needed adjustments and enhancements to the starting point forecast. The effect of this is to only act when obvious issues surface, usually too late to adjust without extensive re-deployment, cross-transfers and redundant transportation and handling costs.

Maybe we can be bold enough to say; “Why bother to use forecasting at all?” when it’s used to plan and drive your supply chain operations!

Consider the following examples of real situations we have seen in our engagements - do any of these problems exist to a significant extent with your organization?

A large consumer products company suffers these things as a result of depending on poor forecasting to plan and manage its Supply Chain:

  • Tendency by Sales to over-forecast, with limited assessment of reasonableness by Operations or Senior Management.
  • Forecasts that are less than 50% accurate at the SKU level
  • Lack of a fully functional integrated ERP system, including an inventory forecasting module
  • Insufficient skilled resources to analyze trends and recommend adjustments to inventory levels or operations levels
  • Limited proactive monitoring of sales, which results in reactive adjustments later

In this example, the adjustments occur way too late and cause large increases in costs, major disruptions to operations and lower customer service levels.

These unintended adjustments result in:

  • Major markdowns to reduce inventory levels
  • Sub-optimal storage of finished goods
  • Use of expensive 3rd party warehouse space
  • Expensive cross-regional shipments to customers due to stockouts
  • Too much overtime in manufacturing during inventory buildup followed by short work weeks later in the year to reduce system-wide inventory levels

In the public sector, a major department that conducts equipment repairs for its customer’s also had severe difficulties in Supply Chain planning and execution, including;

  • Limited visibility into requirements, with forecasts primarily based on 5 year averages of specific repairs
  • Inadequate communication between repair operations and its customers
  • Reactive planning and scheduling processes when errors occurred, all at additional costs
  • Last minute diversion of equipment from one operation to one or more alternate locations
  • Highly variable workloads at each operation, resulting in overtime or underutilized workforce
  • Lack of detailed metrics to evaluate problems or progress
  • Inability to meet promise dates for repairs and return delivery scheduling

The common underpinning in these examples is an ineffective planning and delayed reactive execution approach characterized by limited reviews, lack of integration and shared vision across organizational silos, limited visibility, excessive inventory levels, compromised customer service levels, finger pointing, excessive transportation and high operating costs and costly obsolete product markdowns.

There is a better way – “Predictive Supply Chain”: The solution is a “predictive supply chain approach to planning and managing (executing) supply chain activities. It can be characterized by:

  • Integrated use of historical operation performance metrics, along with sales and production / buying forecasts
  • More formalized review / adjustment cycle informed by frequent data updates (use your technology to provide key metrics and visibility) translated into operating and customer service implications
  • Robust execution tools and methodologies, including better use of or better integrated systems, along with pre-determined predictive models, allowing for improved and proactive monitoring and execution flexibility
  • Review and staffing of the required number of skilled Supply Chain management personnel

Predictive Supply Chain Diagram
Predictive Supply Chain Diagram

The Predictive Supply Chain Diagram details the components and relationships involved to provide a better way to plan and manage your Supply Chain activities. Scott Sheldon has developed this method as a way to eliminate the extensive costs and errors associated with Forecasting unreliability. We have built this over years of work with our clients and have seen that this method is a “real world” approach to increasing execution abilities.

There are three major components in Predictive Supply Chain:

  1. Better use / integration of existing planning, deployment, and execution systems
  2. Improved metrics and data capturing and reporting
  3. Formal methodology of review and adjustment, using skilled associates

This methodology must have buy-in and involvement in key corporate departments, such as Sales, Marketing, Manufacturing, Distribution, Transportation and Inventory Planning/Deployment. Each must have pre- determined and integrated data so everyone is looking at the same thing. The review process must be formalized and include; who attends, what data is reviewed, how is consensus reached, and how are adjustments to execution made.

Predictive Supply Chain makes use of integrated systems, wherever possible. However, other methods, such as enhanced P.C. based tools and spreadsheets can also be used to fill the gaps. This is another key benefit of Predictive Supply Chain – you don’t have to wait for I.T. to build the system integration you may need!

In summary, benefits of Predictive Supply Chain methodology include:

  • Improved execution flexibility leading to lower operating costs, while providing better service levels
  • Decreased inventory levels (only the right products are stocked in the best place) and a reduction of obsolete and slow moving inventory as a result
  • Less frustration and better teamwork across the teams - everyone is on the same page
  • Common data and understanding of implications of change (internal and external influences) on your supply chain activities
  • An overall reduced operating cost!

Conclusion

Predictive Supply Chain will improve your ability to execute your supply chain activities. Over time it will also improve your sales and inventory forecasting, as long as the execution data is fed back into the forecasting methodology. It also avoids excess costs and disruptions to customer service requirements, resulting in a more reliable supply chain capability.

As we have worked with our customers, we have been integrating various Predictive Supply Chain components within their current forecasting and planning capability. We have now turned these proven concepts in to this new methodology for your benefit.

In addition to implementing robust Supply Chain technology solutions and operational strategy, we also have tools and models available for our clients to implement Predictive Supply Chain within their organization.