Why You Shouldnt Waste Effort Improving Forecast AccuracyHow often have you heard, or perhaps even experienced, sales teams blaming the operations teams for delays in product delivery and vice versa? In our conversations with both sales teams and operations teams, we hear about their many pain points, one of which is often poor forecast accuracy. The discussion will include a comment along the lines of, “If only we had a better sales forecast, we could …[fill in the blank].” Sales teams want to improve forecast accuracy because it impacts their performance and ability to get product to their customers. Operations teams want to improve forecast accuracy because forecasts drive procurement decisions, budgeting, production schedules, and delivery timelines. It can seem that a slight improvement in forecast accuracy would save headaches for everyone. In fact, many companies spend a great deal of effort trying to improve forecast accuracy via several different tactics: investing in more complex demand planning software, creating faster information feedback cycles or paying for improved data on market trends. In companies with low forecast accuracy, these measures may drive immediate wins, but most have already reached the point of diminishing returns and each incremental dollar produces little improvement.
For example, a recent client operates in an industry that requires extremely high service levels (quick response times, practically zero unscheduled down-time) and is plagued with uncertain demand, making for challenges in production planning. Supplier replenishment and planned production cycles times are longer than promised customer service times. Moreover, orders are frequently expedited due to “surprise” customer demand time, so the plants keep excess component inventory at all times in order to buffer against spikes in demand. OPS Rules was asked to work on improving forecast accuracy, with the expectation that a better forecast would stabilize demand on the plants and allow the client to move to larger batch sizes and better leverage economies of scale.
Our assessment, however, showed that the capital required to improve forecast accuracy even slightly was significantly overshadowed by the benefit the company could gain from investing a similar amount of money and effort into improving manufacturing flexibility. We recommended an end-to-end inventory optimization plan where products with predictable demand would be produced to stock, rather than produced to order. The inventory limits for each product were determined based on an optimal mix of postponement strategies and finish good levels. This slight alteration in inventory levels brought lead to several benefits:
- Costs of carrying excess inventory decreased. Conservative estimates project savings of approximately 16% of their total inventory versus approximately 4% due to ambitious estimates of an improvement in forecast accuracy.
- Optimized inventory levels indirectly impact manufacturing loads. In our client’s network, multiple plants make multiple products. After optimizing inventory levels, we were also able to adjust the loads on the plants to free up and specifically earmark capacity for uncertain spikes in demand.
- The new inventory policy also defined optimized levels of stock at each distribution center. This enables our client to meet regular customer demand with a high service level. Moreover, these targets came with tolerances and Key Performance Indicators the client would closely monitor. If the profile began to change, they already had a playbook in place to identify and react to changes in a timely manner.
For the same incremental dollar originally allocated to improving forecast accuracy, our client was able to significantly improve their supply chain performance by considering all aspects of their end-to-end supply chain, not just the offending metric.
The moral of the story is consider your options before throwing money at fixing poor forecast accuracy. Maybe your forecasts are sufficient, and the issue rests with uncertain or unstable demand. Improving the resilience of your supply chain puts your organization in a better position to respond to erratic demand patterns. Improving sales forecast accuracy is not always the shortest path to on-time delivery.
For another customer story of the benefits of end-to-end inventory optimization, sign up for our upcoming webinar with Pepsi below.
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