Many Are We Going to Sell? Who Knows?
After several decades of pursuing a better forecast, are we making any
progress? The answer is yes. Lessons learned from the quality revolution
and wireless internet access have added some helpful tools.The breakthrough
came when the strategy shifted from searching for a formula to massage
past history and project future demand to a more holistic approach of demand
management. Demand management shifts the emphasis to looking to the future.
It is important to understand the differences between forecasting and demand
Forecasts have traditionally been derived from a mathematical calculation
based on historical data. Demand planning takes much more into consideration.
Future events such as promotions, price increases, new products and competitive
situations are considered. The assumptions about these demand drivers are
documented. Individuals clearly own segments or demand streams and are
accountable for establishing the plan and meeting it. For example, the
demand may be for 200 per month, but the southeast sales manager knows
how much his team is accountable for selling. Action plans to make sure
the plan is executed are established. The actual sales are frequently compared
to plan and adjusted, if needed. The same demand data is used for driving
all activities, including financial plans, in the business. Demand planning
is viewed as a process. Quality replaced accuracy as the demand measurement
and is used to drive continuous improvement. In short, a well-defined process
to anticipate customer orders has been established.
Order or Forecast -- What's the Difference?
A forecast is an anticipated customer order -- a commitment that hasn't
yet been made official by a customer. A customer order is a forecast that
has come true. Which one do we need to plan supply to support? Both! If
we wait until after the customer places the order, we usually don't have
time to make the product and meet the customer's delivery request or replenish
finished goods inventory before we get another order. In short, a demand
plan is needed if we have any chance of keeping the customers happy.
do we plan future demand for a product? Consider three types of demands:
1. Customer orders: demands already inhouse and entered or booked.
2. Forecasted orders: potential customer orders that are being pursued
by the sales people. Some of these may be a firm quotation or just an expression
of interest by a potential customer.
3. Forecast: future demands that are anticipated, but we do not have a
particular customer in mind yet.
first one is the best demand prediction we will ever get. The second, forecasted
orders, gives us a little less certainty but at least we have a specific
target on the radar screen. Forecasts are usually necessary because it
takes a lot longer to buy material and make the product (a parameter called
Time Fence) than the customer is willing to wait for delivery or even think
about committing to a product. As we look forward to anticipate future
demand, all three types of demand must be considered. Look at the example
months ago, we did not have any customer orders or forecasted orders for
December through May. The only demand was a forecast. We anticipated the
demand during December through March to be 800 and had not looked beyond
March. While we knew demand varies each month, we chose to use an average
of 200 per month until we knew differently. Thanks to the heroic efforts
of our crack sales team (and possibly a round of golf, dinner and a ball
game) we now have some firm orders and a several hot prospects. In the
meantime, the Supply Siders, i.e. manufacturing and purchasing, are waiting
for a clear signal to react if the demand has changed or should they still
plan on 200 per month? The sooner they know, the more likely they can react
have a firm order for 125 in December and two additional hot prospects
for 75 and 25 each. How hot are they? Is it likely both orders will be
firmed up and the demand will be 225 for December? Are the orders part
of or in addition to the total four-month forecast? What about January?
We already have orders totaling 175 and four hot prospects totaling another
200. Should we just wait and see? If the demand turns out to be 375, we
will have unhappy customers. If the hot prospects weren't that hot and
we don't adjust demand now, we will have some excess inventory. Or should
we just let the Supply Siders decide? Bad choice, after all, who is supposed
to be closest to the customer? What about February and March? Are the forecasted
orders in January part of the next two months forecast? Are we going out
of business in April and May? The forecast currently drops to zero. How
much demand should we plan in those two months? All good and critical questions
is the irony of this typical situation: someone will answer these questions
-- often by default and the wrong person. Some planner or buyer will decide
to not schedule more material for January delivery. In effect saying the
forecasted demands won't happen. Or they got burned in the past when the
demand did happen and start treating every order as in addition to the
forecast, thus overstating the demand. The visible testimonial to this
default action may be the layer of dust on products in the warehouse.
Planning: A Critical Role in Supply Chain Management
Every business has a combination of the these three demands. Someone needs
to determine the total demand plan to effectively manage the supply chain.
This role is a demand planning function. Here are a few key questions that
must answered as part of demand planning process:
- Are the forecasted
orders going to happen? Do any of them need to be rescheduled? If customers
expect a 4-week delivery, any forecasted orders in the next 4 weeks should
likely be rescheduled out.
- Are the Firm
and Forecast orders part of or in addition to the forecast?
- Does demand
on this product affect demand on other products, i.e. does it cannibalize
other product demands?
- Does the
total demand pass a sanity check? For example, if we sold between 100
and 300 per month last year, does a demand plan of 500 next month make
sense? Does a declining demand plan for a new product make sense?
- How does
the total demand compare to the Annual Operating Plan?
quality demand planning is no longer a luxury. It is a necessity. Many
companies are using TQM principles and tools to improve the quality of
the demand planning process. Wireless, handheld PDAs connected to the internet
offer an effective way for sales people to continuously communicate forecasted
are exciting times. Problems once considered impossible to solve are being
solved. Better forecasting is one of them!