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A gut-churning forecasting dilemma
By Enabliser John
Last week I wrote a little bit about what a burden Inventory can be for food manufacturing businesses, or any businesses really. This week I’m going to take a look at the first step in any Inventory Optimisation project – forecasting.
All too often, when I start talking to businesses about how they do their sales forecasting I get the same basic story – although I usually have to push a little to get to the real truth. What it frequently boils down to is this:
“We take last year’s actual sales figures and we add about 3-5%, then we decide if our gut tells us that’s realistic and we’re all set. If we know of anything special, a new product or a major promotion, then we try and factor in some estimate of what that means as well.”
There’s another question I usually ask to follow this admission – how often over the forecast period do you review your forecast accuracy?
“Regular as clockwork, we review just before the financial year end and just before calendar year end.”
What this means is that for six months (or more) these businesses are basing all of their inventory decisions (and as I mentioned in my last post, inventory is often a business’ top or second-top asset by value) on educated guesses that aren’t being amended to reflect actual events. That’s a big pile of cash and a big customer service bet being based when all is said and done on gut instinct.
The effects of letting your guts do your thinking can be significant.
Aside from the significant budgetary downside, overestimating demand is usually better than underestimating – but that’s the very definition of pick your poison decision making. Overestimating demand creates artificially high levels of inventory and safety stock (tying up cash and costing money to store and handle and for food manufactures this is compounded by excess wastage from expiry issues) but at least you have the materials to execute production and distribution when you do receive orders and your customers get the service level they need.
Underestimating demand creates rush orders for raw materials (usually in smaller quantities and thus at a higher cost, the cost of urgent shipping is just salt in the wound). Once the raw materials arrive your production team have to crash their schedule which means lost productive time as they reschedule, increased stress and dissatisfaction and potentially higher labour costs as you need to pay overtime or bring in casuals. Slotting this urgent order into the schedule means you’ve had to shift the originally scheduled work which then means you’ve either aggravated a different customer by moving their order or created a future stockout situation by removing a make-to-stock run (which naturally means this whole process just loops on itself). Alternatively, you might have pushed back some downtime for planned maintenance, with the inherent risks to quality and reliability that represents. The problems keep moving down the supply chain, but you get the picture.
Forecasting is important, and important decisions should be made by smart systems, not by your guts. Smart systems are what Enabling does.
Enabling customers benefit not only from process consulting expertise honed to a fine edge over hundreds of customers and decade of experience, but also from tools such as Sage Inventory Advisor (SIA).
SIA makes forecasting decisions easy by instantly analysing the historical performance of existing and/or like products and comparing them against a series of global best-practice algorithms. The best matched algorithm is then used to forecast forwards, and that forecast is continually updated automatically to incorporate actual performance. Factors such as seasonality, new product take-up or expiring product slow-down are all incorporated into the forecast. Additionally, at any time authorised users can review the forecast and adjust it to reflect any external influences (upcoming promotions most commonly) along with commentary from them on why the changes were made.
In short, SIA takes the legwork, the guesswork (and the gutwork) out of forecasting.
In my next post, I’ll look at stock policy – what a solid forecast lets us do with confidence and precision.
For more information or to speak to one of our Trusted Advisors, click here.