By Scott MacDonald, Senior Consultant at Libra Change
The need for sound demand planning and forecasting has never been more apparent than in today’s climate. The last three years have thrown up numerous obstacles on both a local and a global scale.
With good demand planning and forecasting, businesses can reduce the amount of free cash flow tied up in excess inventories, resource plan accordingly leading to reduced labour costs and budget effectively knowing where sales will be generated and costs spent. The benefits span all departments and can serve a business greatly.
This article will discuss the key problems affecting demand planning and forecasting as well as ways of achieving improvements and how Libra Change can facilitate these changes.
The last three years have been bumpy across the supply chain sector. COVID trading has resulted in deteriorated sales history and false sales trends, as well as increased import costs for both finished goods and raw materials. Companies have become reactive adapting to these changes; adjusting processes to fit the current scenario but with disjointed communication between siloed departments.
During the pandemic, companies struggled to keep in stock, as the well-documented haulage crisis affected deliveries into warehouses, as well as the shortage of raw materials. Consumer demand varied erratically and finished goods stock shortages became a norm. To counter this, many reacted by increasing safety stocks and ordering more robustly, leaving them with excess inventory due to what is known as the bullwhip effect. In turn, excess stocks drive sales departments to react by pushing offers on products, creating new sales trends where none existed before.
With these issues in mind, companies are now faced with uncertainty around their demand planning and forecasting processes and systems. What process is correct, are all departments following the same point of truth, is the information received correct and how do we create the new norm?
There are several ways in which we can improve forecasting and demand planning, but it is also important to understand what benefits we can derive from doing this.
Transparency between departments is one of the base foundations of effective planning. There is a need for a business to understand where its sales are planned to be generated from, what budgets are in place, where promotions are being planned and when sales will spike due to historic trends. As a result of these, specific areas can be targeted by the business to inform better decision-making during the forecasting and demand planning process; who are the key suppliers and where is new business coming from?
Key Performance Indicators (KPIs) are a catalyst for Continuous Improvement. With the correct measures in place, forecasting decisions can be taken that facilitate effective planning and vice versa. Reliable data, driven by effective planning is key; poor planning increases KPI variation thus further fogging decision-making. Material and Enterprise Resource Planning (MRP & ERP) benefit enormously from having a solid set of KPIs. They allow us to see where inventory levels are high, what stock is slow moving and fast moving, where the stock is being held and the value of the inventory in each area. They also allow us to see what labour levels we need and where, to maximise efficiencies in each area of the business. Armed with this information, demand planning decisions can be made to reduce high-value or slow-moving stock, increase fast-moving stock levels and free up cash flow to be invested in other parts of the business.
Possibly one of the most important factors is transparency between the business and supplier. Understanding supply chain constraints and lead times go hand-in-hand with successful demand planning and forecasting. Communication between both parties needs to be clear and open, with the integration of systems where possible. Issues up and down the supply chain are laid bare and forecasting decisions can be made with this in mind to benefit both. Long-term forecasts can be made where reliable KPIs back-up sales information and suppliers are able to plan their own stocks and supply. This can also be a lever for future price negotiations between both parties, reducing minimum order quantities where there is trust and commitment between supplier and consumer.
Drop shipping is also becoming a more frequently used strategy in the e-commerce market and involves a high level of trust between supplier and consumer. However, the benefits are that stock holding is shifted to the supplier, reducing warehouse and inventory costs significantly.
In current times, businesses are having to look inwards to find productivity and profit savings as supply chains continue to be significantly disrupted. A Libra Value Review allows clients to quickly identify the opportunities and where to focus effort for the greatest reward. Libra Change has over 20 years’ experience delivering business improvement projects and are experts in supporting the implementation of impactful and sustained change.
We have implemented new supplier agreements via increased communication that have benefited supplier and consumer alike. Validation and benchmarking of internal processes to Lyons Seafoods were completed with joint results plans developed between supplier, Lyons and the customer. This process delivered benefits in excess of £1m p.a. and allowed engagement of Lyons Seafoods stakeholders in the process to perform a detailed analysis on point of origin sources.
In-house process evaluation and improvement led to a suite of business processes and systems to underpin master data management and enhanced supplier data sharing to be created between Sainsbury’s and their suppliers. They were presented with a dashboard of their ‘worst performing products’ with the focus being on addressing the areas of greatest opportunity on a week-to-week basis. A SKU analysis tool was embedded in the B2B data sharing solution, to allow suppliers to analyse product set-ups and other key drivers of underperformance, leading to a more stable order profile to suppliers and profit improvements measured in excess of £50m p.a.
We adopt a structured approach to the value review using our PIPS philosophy, putting people at the heart of the methodology. We employ clearly defined processes, driven through management information and integrated systems, to ensure all possible opportunities are captured and maximised.
If you are in need of support with your demand planning and forecasting processes, contact Mike Sacker (firstname.lastname@example.org) or on 07771 666792 to find out how Libra Change could help you.