Inventory Management and Demand Planning
As the cost of holding stock increases and the need to provide exceptional service levels becomes the norm, efficient demand planning and inventory management is key.
The Bisham team has vast experience of purchasing, demand management and inventory level optimisation which was gained in senior management positions in industry. With a broad range of experience across retail and manufacturing combined with in house models Bisham Consulting are able to use proven methodologies to optimise inventory levels for the whole supply chain.
Why do we need forecasts and demand planning? We are already surrounded by plans: the Finance department produces detailed financial forecasts for the business, Marketing and Sales teams produce selling forecasts and the Production planner painstakingly calculates requirements and outputs. Many Sales and Production plans are ‘Push’ plans, aimed at selling and/or producing as much as possible. Why? Because Sales believe they will sell more and must have the stock to deliver, and production plans are designed to maximise output and minimise production costs. Demand planning encourages businesses to look at the factors that are ‘Pulling’ actual sales: consumer demand, specific promotional response, etc and then production and supply chain resources can be adjusted accordingly. Adjusting the focus to an analysis of demand can bring numerous benefits, not least:
- Increased Customer Service
- Reduced Inventory
- Improved Supply Chain Capacity & Cost Control
- Increased Supply Chain
- Responsiveness and flexibility
Sounds counter-intuitive? It has been proved not to be. It is a fact that companies often do not have the stock they need to sell today but they do have plenty of stock that is not selling. Demand planning allows the business to review an integrated plan on a regular basis, to bring together sales, production and financial plans, add up-to-date demand information and produce a single, more accurate forecast that can satisfy the requirements of all departments and customers.
All businesses make plans, but how accurate are they? It is difficult to quantify the benefits of demand planning, however it may be possible to see how much would have been lost if forecasting was not accurate. Forecasting demand, reasonably accurately, is key to the process of demand and supply chain management. Forecasting is never perfect; errors can result from either under-forecasting or over-forecasting. Shortfalls from under forecasting can be made good through increases in production and shipment costs, although there can be lost sales. In the case of over-forecasting, losses to the business come from discounts that must be offered to dispose of excess or obsolete inventory and the costs of holding excess stock or transhipping excess products from one distribution centre to another. Efficient Supply Chains must maintain the lowest possible inventory consistent with the highest possible service levels that match the company’s objectives, whilst keeping costs down. The short term benefits of integrated business planning will include improvements to:-
- Transport planning
- Inventory requirements planning
- Production scheduling
- Capacity planning
- Manpower planning
- Sales and marketing planning
- Purchasing planning
- Financial planning/budgeting
In the longer term the infrastructure provided by the demand planning process can be used as a platform for business modelling and what-if analyses.
Forecasting and demand planning tools are widely available and many ERP systems have demand planning features. However forecasting software alone is unlikely to provide hoped-for improvements, it must be linked into a recognised company-wide process of sharing information and making (joint) decisions. To implement demand planning into a business there are a number of prerequisites:
- Defined processes
- Defined responsibilities tied to performance incentives
- Forecasting tool (and training) and appropriate links/interfaces
A demand forecast will be based on a statistical analysis of historical information combined with future assumptions based on a number of drivers. (e.g. Market development, promotions, new product launchers, competitive activity, Easter, Christmas, start of the school/university year, etc, ) The business needs to identify the departments that are responsible for deciding or monitoring these specific drivers. Individual roles and responsibilities need to be updated to reflect driver-related objectives, and compensation and incentives programs need to be adjusted and aligned across the company. As a starting point, the top drivers in each area should be identified. This allows the business to concentrate on the most important focus areas right away. Over time, additional drivers should be identified and included in the demand management process. It is particularly important that all departments co-operate in driver identification and subsequent assumption management. Demand Forecasting is not simply a sales function and cannot be used successfully without input from many sources.
On a periodic – usually monthly – basis, the demand forecasting and management process should be completed making it part of the normal month-end closing schedule. There are three phases:-
- Produce a statistical demand forecast based on known history and existing assumptions. Commercially available tools exist to calculate the best forecast available based on past history, combined with the known effect of forthcoming events e.g. new product launches, production issues, holiday periods, etc.
- Demand Forecast Review & Demand Management Analysis. A Forecast Analyst will review the forecast and add any other factors based on Market Intelligence that may cause a variance to demand (e.g. competitor activity, regional events, etc.). In a many-SKU business this manual review can be quite time-consuming and short-cuts will need to be found to minimise the turnaround time, focusing on Fast-moving items or known problem areas. A Management team must meet to review and approve the forecast.
- Consolidation, Forecast Adoption, Upload. Once approved, the forecast data will be combined with company strategy (e.g. customer service levels to be achieved, levels of inventory of raw materials and finished goods), and turned into Purchase Orders, Production plans, manpower and resource plans, transport plans, etc. Once this process is adopted: the Sales and Operations Planning Meeting (S&OP), it has to be accompanied by the willingness and the ability to react flexibly to short-term changes in forecast demand. Forecast accuracy can be monitored by comparing actuals with original forecasts. Targets can be set to improve this accuracy and every effort made to determine what causes variations in demand, so that these fluctuations can be recorded and used in future planning cycles.