During one of my stints working for a client in the US, the team was setting up the design for the best practices in demand management. As most of us are aware, the performance of any company reflects on how the demand management process works. Demand is the point of entry for the rest of the operation. If inventory is building, lead times are increasing and delivery dates are being missed, then the demand management is the first place that the folks have to understand and control. The strategies used for demand management is dependent on industries – as retail industries look for solution to capture the POS data to get a real-time semblance of the demand pattern. Asset intensive industries are dependent on how well they manage the S&OP planning process to determine the market addressable based on the rough cut capacity planning.
During the design planning session a team consisting of sales, planning, marketing and IT were gathered in a room. As we have probably realized that demand, itself, is an ambiguous term. People talk about – forecast (shipment forecast, sales forecast, booking forecast, unconstraint forecast), sales orders, inter company transfer orders, procurement forecast and purchase orders. It took the team a while to differentiate between the various types of forecast and what has to be the prime driver to manage the sales and operations planning process.
The other challenge for companies is the capture the information for all these types of demand. The most common element of the forecast is the shipment information that is historically archived. In a commodity business this is a good start to create a forecast during the annual planning process. The forecast based on the shipment is constraint based, clearly indicating what the company has shipped in the past, and is a good measure of generating a forecast for the future demand. The sales and marketing teams can use this forecast as the starting point to modify based on market intelligence reports and changes in the customer buying pattern. The modified forecast becomes the actual sales forecast that the business planners have to corroborate and conduct the rough cut capacity planning.
The following discussion will be mostly about the forecasting process. The bookings forecast, as conducted by sales department, on the other hand used in many companies are a way to hedge the sales forecast errors. Bookings forecast can be higher than the sales forecast if the sales think that a new order may show up before the end of the month or at the beginning of the next month. However, the bookings is not evil that has to be eliminated but should be controlled by the planning team. In the commodity business, where the demand is cyclical and seasonal, it is essential to level the production based on the demand variability. The planner has to determine the build up of the inventory or booking of capacity to meet future demand.
There are several best practices in managing the forecast, but based on my experience the key elements that a forecaster has to grasp is the reliability and the repeatability of the forecast. Assuming that the forecast is reliable with a high degree of forecast accuracy, which can be measured, based on the company business and processes and proper risk mitigation strategies should be applied. From a repeatability point of view, if the forecast is fairly level, it is easy to plan the supply to meet the demand and control the level of inventory in WIP as well as in the finished goods. When the demand is seasonal e.g. spikes in the demand at the end of a period, it should be treated carefully to ensure a steady supply without causing a situation of a stock-out. If the supply is flexible and reliable then the process can be run with minimum inventory. The risk for Just-In-Time increases as the rate of consumption increases and the supply has to keep up with the consumption. Best practices suggest that a steady supply is the best way to operate which will mitigate the risk of stock outs. Inventory planning, based on the repeatability of the forecast, plays a critical part to determine the level of inventory to maintain, which will keep the cost of inventory down as well as maintain high customer service levels. The repeatability of the forecast can help the inventory planner to size the finished goods inventory in the warehouse and the distribution centers thus promoting steady supply and high customer service levels. If there are any feedbacks or questions, please let me know.
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