Is your forecast fit for purpose?
In the vast majority of companies with fast moving supply chains, such as CPG, Life Science and Distributers, forecasting or demand planning appears to play a pivotal role. In these companies it is the short-term time phased forecast of customer demand that drives the replenishment of materials through the supply chain. This involves, for every item, a time phased replenishment plan being calculated and executed right through the network and multiple bills of materials and is designed to ensure adequate stock is in the right place at the right time to meet actual customer orders.
Supply Chain Performance
This methodology seems very sensible – especially given that it includes a planned safety stock to compensate for forecast error. But how effective is it? One method of evaluation is simply to track the performance of your own supply chain – do you consistently achieve your planned service levels? Are all your on-hand inventories consistently balanced and right sized? Is your level of supply chain intervention (ie. expediting and fire-fighting) negligible?
Focus on Schedule
Most companies cannot answer ‘yes’ to all those questions – more often than not adequate service levels are just about achieved through a continuous focus upon schedule amendments and, despite aggregate stock levels being excessive, there are always quite a number that are under imminent backorder threat or already in deficit.
The two most commonly cited reasons are: supply schedule in-adherence, and forecast inaccuracy.
The former is indeed sometimes a problem, especially when machines break down for long periods or there are major quality issues. But, more often than not, supply are doing an adequate job making roughly what is required within a generous planning lead-time parameter – despite all the schedule amendments and re-prioritisations that Planners request from them!
Inevitable Forecast Inaccuracy
The real problem in a forecast push MRP environment doesn’t originate in supply – it begins with the forecast. And it tends not to be the forecasts of your high-volume items, those that account for the majority of your aggregate volume but a minority of your portfolio – these items tend to have quite accurate forecasts and skew your overall mix accuracy up to, perhaps, 80%. The real problem lies with the remaining 80% of your portfolio where demand volumes are medium to low and forecast error percentages are c40% and greater. These are the items for which the supply chain is continuously being driven by a very inaccurate demand signal and for which schedule interventions are the rule, not the exception, as Planners try to prevent the development of back orders. Unfortunately, schedule interventions, though necessary in these circumstances, actually destroy Operations and Supply Chain performance. They use capacity (either spare or unplanned – both are expensive!) and cause the lead-times of interrupted items to increase, thereby contributing to future supply service misses and another round of destructive expedites. Such supply chains invariably end up using excessive planning lead-times (to compensate for all the schedule interventions) and hold excessive, but still unbalanced, stocks.
Misuse of Forecasts
The root cause of poor supply chain performance when forecast driven MRP is in use is not, strangely enough, forecast inaccuracy per se. The real root cause is that a forecast is being used to generate a time phased supply plan in the first place. Demand is intrinsically variable and, in today’s VUCA* world is becoming ever more volatile and, therefore, impossible to forecast with a reasonable level of time-phased accuracy. So the majority of forecast driven supply plans are inevitably inaccurate, service issues arise and the logic of traditional MRP is such that Planners become overwhelmed with un-prioritised exception messages that encourage further value destroying schedule interventions.
Transform Supply Chain Performance
MRP can, however, be operated in a manner which:
- delivers planned service levels, from
- up to half the average level of inventory, using
- significantly less capacity and lead-time,
- without need for expediting and fire-fighting or high levels of item level time phased accuracy
and it is currently delivering this sort of benefits in some of the world’s most advanced CPG supply chains.
Find out more in our thought paper “Demand Driven SCM – how to win Competitive Advantage with Flow”: