A Client Question
Since forecasting can deliver significant benefits with increased levels of service, inventory turnover and margin improvement, the question that inevitably arises is whether it makes sense to purchase a forecasting or demand planning system. Of course, the answer is “It depends”. In this client situation, goods were manufactured in Mexico and purchased from Asia, and key customers were large retail outlets. Demand seemed to change daily yet lead times were in the months if the ‘right’ stock wasn’t in the ‘right’ place at the ‘right’ time. Of course, they could cover some small changes by adding freight costs but that isn’t a recipe for profit. Improving the forecast would improve their success. Thus, the question turned to whether a system would have a ROI.
The Answer
In their case, they could achieve a rapid return on investment by using a forecasting system. However, let me say upfront that more often than not, I do not recommend a system. It completely depends on whether it will drive the appropriate level of improvement and associated results or not. In this case, we could easily drive dramatic forecast accuracy improvement since we started out at such a low level of accuracy due to the business environment, industry and key customers. The people understood the importance of the providing forecast feedback and although the key customers didn’t have “good” forecasts to provide, they could provide data we could analyze. In these types of situations, we are able to reduce inventory by a minimum of 20%; however, results can be far greater.
Food For Thought
Although forecasting systems can be a great idea to drive service, inventory and margin improvement, they do not always provide a return. Take a step back to understand your industry from a forecasting point-of-view. Is demand constantly changing? Are you supporting small numbers of customer/ location points with less than 25 items or is it 100 fold? Are you able to gain key customer input and/or point-of-sale data? Do you have anyone familiar with demand planning and forecasting to be able to make sense of what a system is telling you? And, last but definitely not least, have you found the appropriate scale for your forecasting system? Trying to kill a fly with an assault rifle is overkill. If you are interested in running your situation by us, contact us.