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Balancing Supply & Demand – the Importance of Forecasts

October 11, 2019 Advisory

Early in my career, I managed the Demand Management process for a food processor. Our primary business was private label production, so we had a large number of SKU’s. Trying to forecast them all not only added up to a tremendous amount of (I suspected non-value-added) work, but the demand for some of the items was sporadic which made the forecasts highly volatile and inaccurate.

What’s the best way to handle this problem? We found that we could aggregate all the SKU’s wherein the product and packaging configuration (net weight) was the same into a Planning Family. Although the printed primary packaging was different for each, from a production standpoint the plant could run their MRP and MPS on the aggregated forecast since the standard throughputs and the generic BOM was the same for all like SKU’s.

The primary packaging was then managed on a reorder point/reorder quantity basis (with market intelligence for unusual events like promotions or new store openings added on top), using demand pull to generate orders from suppliers.

This solution not only made forecasting and planning easier (one item to plan for each Planning Family rather than dozens), but it improved overall forecast accuracy – the forecast of an aggregate will be more accurate than the aggregation of forecasts. The example below is typical: using 2 years of historical data I forecasted sales for each of three top automakers and summed the forecasts, then I aggregated the historical sales data and forecasted the aggregate. The error of the aggregated forecast is significantly lower than the error of the individual forecasts summed.

 

MRP does take an attention to detail, but rising above the tyranny of the detail can often yield productive insights. Forecasting can be a powerful tool. If you need help, Need help? Contact us.

About the Author

Gunther Brinkman is an agile senior manager with extensive experience developing and continuously improving operational processes. Gunther brings with him documented success in turnaround and fast-growth environments, for both publicly traded and private equity sponsored companies. Contact Gunther.

 

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