When a manufacturer needs to measure the success and associated return on investment (ROI) of a demand planning process, the key is to identify the business process areas that need to be improved and then define the associated metrics that can then be measured and ultimately translated into ROI. While there are many process areas associated with demand planning, there are several key areas where manufacturers should focus that will derive the greatest process improvement for their demand planning. These focus areas require careful consideration before embarking on a project — a manufacturer must insure that it can adequately calculate value and ROI based on the economics of the portion of the process being improved.
Business Process Focus Areas
Forecast Accuracy: In any demand planning process improvement project, forecast accuracy is the most important starting point. Forecast accuracy is the key business metric that drives the effectiveness of the rest of the demand planning process at every manufacturer, and a forecast is only as good as the data you are relying upon to commit to and generate the forecast. If you are capturing only a portion of the data, then your forecast is susceptible to errors and fluctuations.
One of the most common mistakes is to rely on a historical perspective for forecasting and not have adequate reach into the demand side of the business. For this reason, the first step in improving forecast accuracy is to improve the reach of the demand planning process. For most manufactures, this means the demand forecasting process should be extended as far out to the point of sale as practical so that a more complete demand signal can be captured. All stakeholders in the forecasting process should be brought into the demand planning process, including internal sales teams, outside rep firms, distributors and key customers.
In order to avoid overwhelming the process participants with too much data, SKU granularity can be used to focus on specific products using a "key products" program. This is a simple way to get the process participants started. Then, as they get accustomed to the process, you can expand the number of SKUs to eventually capture a complete forecast for all products.
Forecast Cycle Times: An area where companies can greatly benefit and realize immediate and significant ROI is in changing their forecast cycle times. By doing this, manufactures can develop better visibility into changes in the forecast as those changes occur, which enables better exception handling responses. The fact is, companies that develop a forecast and commit to a plan on a quarterly basis risk having too much inventory. So much can change in just one week that a quarterly review and forecast just does not work anymore.
As a matter of practice, most companies are committing to a forecast and plan on a monthly basis. The reason for this is simple: capturing the necessary data, having the requisite meeting, and making the final decision is an arduous process at best. It just takes time to get all of the information together to allow decisions to be made.
However, with new technologies on the market today, companies are able to gather in real time the data that allow them to make decisions based upon events occurring that day versus having to wait a month to consolidate and review the information. Companies that employ technology that allows them to capture the data in a near real-time environment have been able to move their planning and forecasting timing from monthly to weekly. By making this change, enormous ROI can be realized because the data are relevant now versus reviewing data that are already one month old. Experience has shown that companies moving to weekly versus monthly forecasting will realize higher inventory turns, more streamlined and optimized inventory levels, higher customer satisfaction rates and higher margins.
Inventory Management: Improvement in forecast accuracy will have an immediate effect on another process area that requires close measurement — inventory management. Of course, there are many aspects to inventory management, but we're focusing this discussion not only on what is common to most manufacturers but also on what is used to measure the financial health of a company — on-hand inventory and inventory turns.