The economy has been changing so fast that past demand history may not be a good indicator of future demand for your products. To improve short-term forecast accuracy, one solution is to shorten the demand history used to generate a forecast so that more emphasis is placed on recent trends and demand patterns rather than those contained in outdated history from two or three years ago. So, instead of using 24 or 36 months of demand history to create forecasts, consider using only the most recent 12. While there may be some risks in doing this, such as discounting relevant long-term trends and seasonal patterns, the increase in short-term accuracy may be worth it. In any case, the risks and benefits of this strategy should be thoroughly evaluated.
Pay Attention to "Slow-moving," Intermittent Demand
Companies in the service/spare parts, auto aftermarket distribution and capital goods industries commonly experience intermittent, "slow-moving" demand for a large percentage of their inventory items. Because intermittent demand is so difficult to forecast, most companies with this problem either ignore items with intermittent demand or forecast them only infrequently using seat-of-the-pants methods. In any case, they wind up doing a poor job of forecasting and inventory planning for as much as 70 percent of their SKUs. That's a lot of supply chain inventory, frequently running in the millions of dollars in value, and this means that there's a lot of room for cost savings.
If your software vendor offers an intermittent demand forecasting feature and you're not using it as part of your planning process, this is the time to come up to speed. If you're in one of those businesses that manages lots of intermittently demanded items but you don't have a tool to help forecast that type of demand, the investment in an appropriate software solution can pay for itself in a matter of months.
Invest in Technology and Training
Yes, I know it's hard to shake the money tree for new technology investments when money is tight, but please remember strategic investments can pay off handsomely. Get your top management team involved and make demand forecasting and inventory planning a corporate priority that can put more cash in the company coffers.
Look for value in your technology purchases by identifying software solutions that are scalable, yet have a relatively low total cost of ownership, fast payback and high return on investment (ROI). Frequently, you'll find these solutions offered by best-of-breed software vendors whose products are tailored to meet your organization's specific supply chain needs, while integrating directly and easily with your current IT infrastructure.
Finally, don't scrimp on training. Get your employees up to speed on the product features that are going to give your company the best returns. And, if it's necessary, get help reengineering your supply chain planning processes to take better advantage of your technology investments.
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In every economic crisis there have always been opportunities. I suggest you use some of the strategies I've outlined in this article to make changes that will help your business weather the rough seas ahead and better position itself to compete when times get better.
About the Author: Charles N. Smart is president and CEO of Smart Software, Inc., a Belmont, Mass.-based supply chain planning firm specializing in demand forecasting, planning and inventory optimization solutions. Smart has published numerous articles appearing in a variety of industry journals. He holds B.A. and M.A. degrees in applied mathematics from Harvard University and the M.B.A. in Finance and Economics from MIT's Sloan School of Management. He can be reached at firstname.lastname@example.org or please visit www.smartcorp.com.