Strategy: Revisit your forecast frequency and methodology for better planning

In today’s world, the industry dynamics demand that corporate management execute new strategies rapidly. Organizations have started to realize the limitations of annual static plans and shortcomings of limited horizons. Long back, organizations were forecasting only once a year and now this trend is not to be seen anywhere at least in their wish list. The trend has moved to complete forecasting activity at least once a quarter but still if we ask them about their satisfaction on this frequency, we will hear that they would like to forecast every month for better planning and budgeting. Lot of factors like volatile demand, new markets opening up and old markets saturating, supply inconsistency etc. contribute to the need of forecasting multiple times in a quarter. A rolling forecast, which is a best practice, that is revised on a monthly or quarterly basis can ensure that financial planning is continuous and dynamic.

Introducing new methodologies , process and tools to forecast is the next step that most CFOs and CIOs have introduced some time back. To add to this, techniques like scenario analysis modeling help them provide better insights into future financial indicators and the risks and rewards of strategic actions.

The other methodologies that have come to the fore these days are lot more different from the methodology that focused more on the history of demand. Some of these include:

• Zero based budgeting where the team starts forecasting with a clean slate with no history at all
• Performance based budgeting which is also called as result oriented planning and budgeting
• Driver based budgets which defines the drivers first and then the planning and forecasting is based on performance of these drivers

Interesting fact here is that while using any of the above techniques, the organizations still are not able to get rid of the historical data syndrome and have started blending the alternative forecasting methods with this obsession of theirs and coming out with a new way.

Now, let us look at the role of technology here. Certainly, technology will help the organizations to increase their ability to forecast as and when market conditions change, it will help the forecasting team to conduct simulation or “what if” scenarios and it will add to the existing capabilities to incorporate business drivers into the ongoing forecasting processes. In addition of the above, it is also recommended to adopt technology solutions for multi dimensional reporting, ability to drill down at multiple levels and ability to align sales forecasts with actual business revenue targets and costing forecasts.

Interestingly, today’s ERP software products are modeled around these needs and can help the organizations immensely in their endeavors to revisit their forecasting, frequency, methodology and techniques. Infact, ERP software providers often package financial planning, budgeting and forecasting applications as a subset of a more all-inclusive category of Enterprise performance management solutions which are extremely useful. While evaluating the ERP software products in this area, we must look at some critical features and then take an informed decision.

Strategy: Catalysts to achieve your Lean Objectives

Few weeks back, I wrote an article on the role of demand planning, forecasting and inventory optimization in achieving Lean Manufacturing. This article evoked a great response among readers and since the comments on this blog were not working for some time in between, I got maximum comments in my mail box or in the discussion I posted on one of the social media sites.

The responses were largely questions and expert opinions and I thought to share some of them here with the readers as these are highly rich in content and will be helpful for all of us to think about our strategies to achieve lean manufacturing with or without the help of planning.

Largely, there were two schools of thought on whether planning (forecasting and demand planning) helps in achieving lean manufacturing to an extent that the investments made in these areas are justified and are able to provide the returns accordingly. Thoughts were divided and one group was sure to say that forecasting is just a guess and will remain a guess so it is sheer time wastage to improve your guesses and hope that these will help you in your lean objectives whereas the other group was as sure as the first one on the fact that forecasting can surely help in achieving lean objectives as it reduces inventory and improves the service levels, which makes easier for the manufacturing operations to stick to a single product line for optimum period so that the manufacturing line efficiency improves.

To quote some of the responses, Wally Johnson (VP Supply Chain/Operations at EPIC Technologies LLC) said, “A forecast is nothing more than an educated guess. The better your guess, the closer you get to maximizing you revenue and minimizing the waste in either lost sales or excess inventory. As you reduce your lead times and your ability to respond, the forecast becomes less important. At the limit, planning is reduced to communicating needs to suppliers and aggregating immediate needs from customers. So, no planning doesn't help you get lean, but the less lean you are, the more you need it”. Another comment from Michael Pitcher (President, Operations Excellence LLC) is - “Forecasting can be used, at least initially, to size buffers and marketplaces. This is especially true for new products, cyclical/seasonal products, or short life-cycle products. Once buffers are established, actual pull must be used to recalculate and resize buffers and marketplaces. So, there can be value to demand planning and forecasting. On the other hand, it can be a huge waste of time and energy when over emphasized.”

We had quite an opposite viewpoint from Connie Wendzicki (COO at Griffin Technology), who says – “The demand planning is what you do to calculate the correct inventory levels when you implement the lean system. These inventory levels have to be revised frequently as the demand and supply patterns change. Even Toyota had an extensive planning department to accomplish this function. If you set-up lean without figuring out the right inventory levels you can be in for a few big surprises! On the other hand - analysis paraysis is not good either. Better to put the system in place with the best inventory levels you have vs. wait forever until you figure out what the "perfect" inventory levels and reorder points should be. There is some tolerance for error. You will at least see where the problems are (where inventory is piling up or where lines are starved for inventory) if you implement the system and you can tweak it then”. Connie is helped by the comment from Ron Golan (Director at XML Limited) who mentioned that, “…my experience taught me to believe in continuously trying to optimize demand planning and forecasting - you may not hit bulls-eye, but the closer you get, the more efficient you are in minimizing lost sales and excess inventory. And the build-to-order approach - that might work for Dell, but is completely unpractical for so many other companies. Plus, in many cases you'll just be passing the issue to your suppliers, and remember some of us may be on the receiving end of this”.

Carlos Moreno (Senior Logistics and Supply Chain Analyst with Medtronic) mentioned a third approach with his comment – “Lean is a tool for continuous improvement is a cycle that never ends. It may be applied to improve lead times, supplier performance, operations and supply chain processes just to give some examples. Forecast and demand planning are useful as strategic and long-term planning tools and also subject for continuous improvement. Since forecast and demand planning are estimated guesses based on crystal ball projections (marketing and sales forecast), I would see them as variables out of the control of the supply chain management processes for inventory control and customer order fulfillment”.

These were few of the responses and comments and the one thing that came out clearly and I replied to them in most of my replies is that alone forecasting or demand planning is not enough and the another part of our strategy here needs to include reduction in lead times so that the dependence of operations on accuracy of forecast reduces. Basically, if the supply chain responsiveness is fast (in other words lead times are low) then the organizations have more capability of responding faster to the changing demands and hence they can achieve leaner manufacturing processes as well as lower inventories with improved service levels.

I liked the idea of freeing up of operations with their dependence on forecast accuracy and as put up by Swaminathan Appu Iyer (DGM – Distribution & Logistics at Reliance Retail Limited), “The manufacturer whose efforts to effectively forecast and plan demand are being undermined by an increasingly complex business environment. Manufacturers large and small are struggling with the fact that demand forecasting and planning, never a simple process, are today being made much more difficult by trends such as globalization, shortened product lifecycles, and customer demand for more product variety. In fact, many manufacturers are finding that, despite what they thought were their best efforts, forecasting error rates are actually rising”. This shows that planning is something that most organizations are still struggling with.

All these comments and inputs lead me to think about a joint strategy that has to have a blend of both i.e. a focus in planning as well as supply chain responsiveness to achieve our lean objectives. I echo comments from Charles Stuart (Director at TGX Limited) who says that – “Puneesh, I would like to clarify my view - it is as you also approach it - a blend of both. A forecast is a forecast - a guess, a prediction etc. Good tools and good process will generally make a better forecast. But fewer businesses put the same kind of effort into LT reduction which can have responsiveness and an inventory benefit. I have worked in businesses that have done both approaches with significant benefits from each element. I suggest it should not be either/or but both”

Before I sign off, I would like to thank all the experts who shared their approaches and thoughts on the topic. I could not highlight comments or inputs from all contributors in this post due to similarity in thought communication in rest of them but tried to capture the essence of all so that readers get to know from who’s who of the corporate world on the future strategies on the topic and accordingly design the same for their organizations.

Inventory Optimization: Where to Focus and How?

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Traditionally, it has been understood that to improve customer service you have to have high levels of inventory. This ensures that orders are filled quickly. But it also means that the value of your inventory is high, to the detriment of your organization as it ties up cash and warehouse space that could be put to other and better uses. Managing inventory can be a daunting task for an enterprise with tens of thousands of products that are located in hundreds of locations. The fact that different functions in the organizations have different objectives and often conflict of departmental or sub-business interest adds another hurdle in inventory reduction.

Typically, the sales & service head of the organization will want the order fill rate, customer service and the order fulfillment lead time to be the best. This person will never want to lose any sales or for that matter do not want to see customer satisfaction going down just because the organization either could not supply the new product or the service parts at right time. This department will want that the organization should:

• Keep enough inventory of all product models or variants at multiple locations so that there are no stock outs, minimum transit time for product shipping and no unit down (production stopped) cases for their customers
• Make manufacturing operations flexible enough to respond quickly to changing market demand for a particular product model or variant so that they do not lose sales of a single unit for want of timely supply
• Ensure that the procurement & sourcing functions have quick replenishment efficiency with low supplier lead times or procurement starting at high safety stock levels

All of the above will lead in increase of inventory and will contribute towards what I call as reverse optimization of inventory.

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Let us see now, what will a manufacturing leader want to make sure, so that the success KPIs for the shop-floor are met and the production team increase production efficiency in terms of producing more units in same time, less over time is required and rejection rates are at the lowest ebb. Simple logic suggests that if the same model or variant is produced for a longer time, the jigs and fixtures will not need to be changed; the operations sequence will remain same and transition between production shifts will take minimum time – all this contributes to better productivity or efficiency in the production line but at the same time, producing not based on demand but to stock so that the production efficiency targets are achieved, will inflate the inventory.

Both the above examples are not bad practices and in-fact these are seen as best practices in industry if we see them in isolation, as they deliver value for independent business functions. The negative impact of these practices is that they make the job of the inventory owner more difficult.

The inventory owner’s main objective is to reduce the inventory to the lowest possible level so that more working capital is available for operations. This objective, as we saw above, conflicts with the manufacturing and sales/service business function’s objectives and this is the reason why inventory optimization and not reduction is the activity where we should focus on.

If the inventory owner decides to reduce the inventory in isolation based on some fuzzy logic which might be the best, keeping in mind different demand variations and patterns, it is highly likely that it will hit the objectives of other business functions negatively and the whole purpose will be lost. But, if the focus is inventory optimization in such a way that there is a trade-off between service levels and inventory level, production efficiency and order fill rate and so on, only then we can it a real win-win situation where organization as a whole, can gain substantially.

It is not that compromise between different business functions is the only way to optimize inventory. There are more factors that drive this initiative and can substantially impact the result. These are:

• Forecast accuracy – More is the accuracy of forecast, better will be inventory planning vis-à-vis market demand. So with less inventory, you will be able to maintain or increase your order fill rate and service levels
• Supply Chain Visibility – If, it is known to all stakeholders that the required material is in the way and will reach in a day or two, it will help in correct promises to the customer and while customer satisfaction will improve with better delivery performance, the inventory will also get optimized as no unnecessary panic buying will happen for emergency orders. Also, supply chain visibility means visibility of goods in the distribution centers or warehouses and other channels so that fastest and most economical way of shipping can be achieved which will again make sure that double inventory is not being purchased for a product that is available in some other warehouse or distribution center
• Supplier Lead Times – Less time to get supplies from supplier means faster replenishment and less time an inventory will stay in the warehouse. This also means that you will need to keep lower safety stock levels and thus overall inventory will be reduced
• Inventory turns – More is the number of times you sell and replenish your inventory in a given period, more will be available working capital and less will be obsolescence. The inventory carrying cost will reduce as a result, which is a key KPI of Inventory optimization
• Inter warehouse transfer – An analysis of inventory movement across warehouses might tell you that there is some inventory lying in couple of the warehouses for long with no demand for them in last 6 months and very low forecast in next 6 months. If this process can be automated to do the analysis and transfer the slow moving or dead inventory from one warehouse to another where it can be consumed faster, the inventory can be optimized considerably
• Field returns process – Lot of field engineers get the inventory (mostly service parts) issued from warehouse to service customer(s) and at least 40% of the time all issued parts are not consumed at the location. These parts are either kept at customer location or in the service van of the field engineer and either becomes obsolete/expire or are not visible at all for supplying against other demands. This results in duplicate buying and hence more inventory than required. A proper process around this, can not only ensure lesser inventory but will also reduce scrap (obsolete) inventory
• Accuracy in Bills of Material – Incorrect bills of material often increase inventory. For example, after a design change a casing will need only 5 bolts instead of 7 earlier but since the BOM was not changed after design change was approved and implemented, it still shows 7 bolts and every-time 2 extra bolts are getting issued as part of the back-flush which results in excess unused inventory in WIP. The production in-charge will return the excess parts to inventory as and when the priorities allow and till that time, more procurement of same part will be done based on the available visibility which results in inflated inventory. Correcting the bills of material will help in controlling this inflation of inventory
• Lot Sizes Review – Since the safety stock, demand and lead times that impact the inventory level requirements, keep on changing, a regular review of the lot sizes of items for procurement will always help in making sure that the procurement is as per the finalized strategy of stocking and will in inventory optimization
• Inventory accuracy – Lastly, if we are optimizing something but do not know the exact picture, then it is obvious that where will we reach. We need to make sure that the physical inventory matches the inventory in system as all the calculations on service levels, order fill rate etc. will be based on it only.
  

So, we saw that while it is important to iron out the conflicting interests between different business functions by discussing and finalizing the service levels, production efficiency and other KPIs along-with the inventory levels so that all business functions work as a team on one strategy and with same objectives in mind, there are other ways too that can help you in achieving optimized inventory without impacting other functions operations.

Demand Planning, Forecasting and Inventory Management's Role in Lean Manufacturing

Years (or is it decades) have passed after the introduction of Lean Manufacturing and the Lean Pandits still differ in their thoughts on what exactly is Lean and how it should be performed to get maximum benefits. A new school of thought that is emerging these days is that we need to identify first that 'how much lean' is lean enough and the role of technology (read ERP and SCM Software) plays a major role in maximizing the Lean Manufacturing benefits. The typical gains that a manufacturing organizations aim to attain through Lean is reduced inventory but still better fill rates, lower cost of manufacturing and distribution (Lean Distribution) , shortened cycle times and hence low inventory carrying costs are always on the wishlist. These objectives though, can be hit substantially with the limited knowledge the organizations have on their current performance but often they are caught trying to make out how can they measure where they were before the exercise and where they have reached. How much exactly they improved in terms of key performance indicators? Without additional software modules (such as forecasting, demand planning or Inventory optimization), a basic materials resource planning (MRP) or enterprise resource planning (ERP) system, it will not be easy for them to drive lean benefits completely.

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Lean focuses on execution, but you cannot get the most out of execution unless you do a better job of planning. You can perfect your shop floor execution according to lean principles, but if you're not making the right item at the right time, you are not going to win in the market. Execution alone is not enough. Demand planning, forecasting and Inventory optimization are areas of focus when applying technology to aid your lean initiative. Other than this, the major technology input is in the field of automation of manufacturing and distribution processes.

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While Demand Planning and Forecasting engines will help in right sizing your inventory, automation of manufacturing processes will help reduce the MFG lead times, increase MFG schedule compliance and will contribute in improving inventory turnover. The latest research report by Aberdeen "Lean Manufacturing: Five tips for reducing waste in the supply chain", also suggests that the one of the top actions for becoming best in class organization is that we need to leverage automated Lean Manufacturing and Supply Chain Tools.

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But the facts suggest that Manufacturers are understandably reluctant, especially now, to buy a lot of software modules they may not end up using right away. This is true more for the SMBs as they can not afford to have the same budgets as their larger enterprise counterparts and hence less utilization of technology in maximizing Lean Benefits. Moreover, they don't want their managers staring at the terminals as opposed to walking around the shop floor. But that is beginning to change now with at least some SMBs taking lead to incorporate technology inputs as part of the whole exercise as they have understood that have an equal need for supply chain visibility and better forecasting as their larger enterprise counterparts.

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The mantra, in my view, should be to Think Big, Start Small and Scale Fast when the organizations, specially the SMBs start to use the technology in this endeavor.

Optimize your inventory and unlock or free-up your working capital

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One of those rare enigmas that a supply chain expert is still trying to resolve is that how to have correct inventory in the warehouse so that the stock-outs are zero, on-time delivery is 100% and yet there is no over stocking or obsolescence.

There are multiple questions that bother the supply chain professionals and some of them are:

• Where to stock inventory – at the finished goods level or raw material level?
• How to address demand volatility?
• How to balance supplier lead times with cost & quality of item procurement?
• How frequently one should revise the inventory targets?
• What is more beneficial – Are bulk purchases at low cost really beneficial as they increase inventory?

Few months back, I came across a scenario of a typical manufacturing company where one of my friends who is part of senior management, was struggling to optimize the inventory. Their inventory carrying costs wetoo high and yet they lost sales because of stock outs. A big piece of the working capital was blocked in carrying the inventory. When we both did the drill down in an informal discussion, we found that following were the major reasons of their unbalanced inventory:

• The forecast is done in spreadsheets which impacts the accuracy, consolidation and low connect with past demand history – This makes the forecast more disjointed, less realistic and hence the procurement process that depends on this most important piece of supply chain, becomes skewed
• Though the company used to stock inventory in raw material form so that they had the flexibility to switch to different product variants looking at the demand, this process took a backstage after they started optimizing their inventory – this had a cyclic effect on supply chain as more often than not, the assemblies could not be completed as there was one or other part missing – This led to rise in unfinished and non usable inventory
• Production slowed after they took a decision that only if all material is available, only then the production of a model will start. Production department started crying foul as they lost production incentives for no fault of theirs. Voices heard about a possible worker strike and they were caught between devil and deep sea
• They thought over and switched to a process, where the production was given a plan as per the stock of raw material available and not as per the foreseen demand. They did this meticulously for those models that were always in demand so moving them out of shelf was not a problem – But all their plans failed when they saw that their most popular model too started fading in market due to competition prices. They tried to reduce the prices after negotiation with suppliers on raw material – started buying large quantities at lower rates but now they had another problem – huge stockpiles of finished inventory

The action plan that came out from our brainstorming and then later, the exercise done by their staff was:

• Start the process for moving to an ERP to improve and automate the forecast process as soon as possible
• Go back to stock inventory at raw material level instead of finished goods level as it has lesser shelf life and usage flexibility
• Collaborate with suppliers to work in a partnership mode (this is another story that I will take up in another post) so that they have visibility to their production plans and inventory levels and accordingly come closer to replenish the stock
• Balance the large quantity purchases with respect to foreseeable demand and accord more weightage to demand than raw material price
• Plan for day after tomorrow and as per demand – Till now they used to plan for tomorrow’s production and the production faltered if the raw material was not available. Assuming that one day in between will act as a buffer for procurement of unavailable components
• Reduce obsolescence of low shelf life material by optimizing their stocks and visibility
• Revisit the inventory targets every quarter in first year and as soon as the selected ERP is deployed, move to revising inventory targets every month
• Introduce category for critical and flexible components to utilize them to the fullest level
• Plan a strategy to improve inventory turns per annum
• Make efforts (after stabilizing forecasting) to move towards build to order scenario rather make to stock scenario

Today, more than 4 months have passed after our discussion and when we met last week, he was a much happier person with some actions started bearing fruits. They finalized SAP (even started the requirement gathering phase) as the preferred ERP. They started re-engineering the processes, automating them and nailing down the bottlenecks. The inventory turns per annum they calculated just last week improved to 3 from 1.8, six months back thus freeing up working capital. The list is long but it is a live example that just by optimizing inventory, which is a major driver for manufacturing companies, you can unlock your working capital that can be deployed at doing more useful activities.