Forecasting is an imperfect science, but it is also a necessity for most businesses. That's particularly true when it comes to supply chain management. Proper forecasting helps ensure you have enough supply on hand to satisfy demand. Business analysts use supply chain management systems and other tools to forecast demand weeks and months in advance.
Supply Chain Management
Many businesses have to be on point when it comes to ordering supplies to meet the demand of its customers. An overestimation of demand leads to bloated inventory and high costs. Underestimating demand means many valued customers won't get the products they want. Supply chain management is the process by which a company ensures it has just enough supply to meet demand. According to the Association for Operations Management (APICS), supply chain management involves the "design, planning, execution, control and monitoring of supply chain activities." A few of the objectives are to build a competitive infrastructure, synchronize supply with demand and measure a company's performance.
Forecasting demand, and coordinating activities to meet demand, are full-time jobs. Companies with global operations use sophisticated software and systems to forecast demand, but small businesses can forecast supply chain needs using simple techniques. The methods of moving averages and exponential smoothing seek to smooth out demand to allow for seasonality in the results. With moving averages, you drop the oldest sales numbers and add newer numbers, making the average move over time. For example, to calculate sales over a four-week moving average, add weeks two through five, drop the sales from week one and divide by four. Exponential smoothing is similar to moving averages except that older data receives progressively less weight and new data receives greater weight. When there is definitive trend, however, the moving averages and exponential smoothing forecasts might lag behind the trend.
If your business overestimates demand, it ends up with more inventory than is necessary. This can increase your labor and storage costs if workers have to move this inventory to another storage facility to make way for new inventory. If your business supplies perishable goods, you might incur a further loss due to deterioration of unsold inventory. In such a case, you might need to sell inventory at a discount, which reduces your company's profit margins and income.
Shortage of Inventory
Suppose you suddenly find yourself inundated with large orders. This is a nice problem to have -- if you have enough inventory to meet demand. It's not so nice if you failed to forecast how much supply you would need and wind up with a shortage of inventory. In such a case, some disgruntled customers might take their business elsewhere. One option is to make a large, last-minute rush order, but this usually leads to much higher supplier prices, which reduces your profit margins and net income.
Supply chain management (SCM) software can help facilitate the process of forecasting and measuring the supply chain synchronizes the supply and demand cycle through the use of real-time information. As a result, inventory is less likely to sit unused. For example, a baked goods manufacturer using SCM software can monitor its inventories and place an electronic order to its suppliers in anticipation of a spike in demand. Experience is also an asset when it comes to managing your supply chain. Having years of demand data helps you better predict future demand.
Forecasting helps companies have a better look at the big picture, reduce unnecessary spending, schedule production and staffing, avoid missing potential opportunities and manage cash flow. Having the capability to make sound forecasts bring many benefits for a company on both organizational and operational levels.
CEL has developed Forecast Master, a holistic demand forecasting solution that help companies improve forecast performance by optimizing the forecast process (consulting), equip planners and forecasters with necessary skills and knowledge (training), and provide the best-in-class forecasting software (technology). Forecast Master improves forecast accuracy, reduce uncertainty and generate value.
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