The Blog

Market Awareness (Forecast is always wrong!)
Aralık 11th, 2016-Supply Chainadmin 0 Comments

Market Awareness (Forecast is always wrong!)

The most important component of supply chain is product. The whole process is based on the concept of connecting product with the customer. In today’s conditions, the foremost challenging issues that the companies have difficulty in decision-making process are what products will be produce, what level product diversity will be and which products will be kept in stock in where and how much. If you don’t produce extremely technological product which are not available anywhere, it must be understood that what requires and what expected customer from you. The customers actually do not look at the product; they search for a solution to their problems.

More important special thing than producing is selling. More important special thing than selling is cash proceeds. In that case, I believe the approach that the basic principle should be do not sell that you cannot collect, don not produce that you cannot sell.

There exists the process called S&OP (sales and Operations Plan) in most companies. This process is the plan phase for which produce will be planned to sell and starting from this point, which resources (human, material, equipment) will be needed for a certain period. Demand planning that we can also call, in fact, comes at the beginning of the processes where most of the mistakes are made.

Why?

Companies are generally doing the demand planning based on the forecasts of marketing/sales departments and stale sales data according to maximum capacity use by using heuristic methods in SKU based during demand estimation process. In accordance with this plan, production and material procurement plans are made and produced product are trying to sell. The process called classical pushing system or predictive production (Forecast driven) is completely this system.

Today, the foremost problem we’ve seen on the many businesses is excess of either raw material or semi-finished products and finished products. The company produces continuously, there are products in inventory but production plans are continuously modified because of lack of product that the customer wants (the customer wants apples but there are pears in inventory!), processes are managed in the chaos but still desired delivery performance cannot be obtained. These results are reflected to the costs and the concept is appeared called inefficiency. Even this may be more serious in the business with dealer network. Quota has been set to the dealers and asked to buy/sell planned products. However, these plans are generally failed and produced products remain in dealers’ stocks. Although nevertheless you say I have sold these products to the dealers, it is impossible to pay money of these products before dealer sells these products to the end user. Consequently, your stock + dealers stock that’s mean total stock does not allow to return all of the process healthily.

The root cause of this result is indigenizing forecast-based production strategy rather than demand-based production without fully understanding of real expectation on the market, heuristic and bullwhip effect which have been created from demand estimation errors generally done in SKU basis. In other words, the root cause is that you haven’t produced the right product.

In this stage, it is very important to access the actual information in order to make plans according to actual demand instead of forecast-based production by fully perceiving the actual expectations of the market. The possibility of hitting the long-term estimation is almost nil (forecast is always wrong). Especially in variety-based (SKU) estimations, this possibility is also further weakened and either there are inactive products in stocks on production systems stimulated with forecast-based production or market loss (opportunity cost) can occur with the reason of not produce the products that have real demand.

The research note that the bullwhip effect which was created from the reason of ineffective communication skill in supply chain can cause the stock increase and the importance of information in order to eliminate this problem is very high. Becoming clumsy of supply chain with the reason of bullwhip effect and generating inefficient consequences are also result of not being a part of customers to especially planning, demand forecasting processes.

The world becomes a global village due to internet. The possibility of making plans with more realistic forecasting is increased by taking snapshot of the data in real time through internet from the field (Point of Sales: POS) in order to understand what the market wants in real terms and develops suitable products. All stakeholders in supply chain can share the information in real time through common platforms via internet and this information bring competitive advantage by providing positive effects in terms of accuracy and speed.

In this context, another important factor is complexity of product. Product complexity, especially in fast moving consumer goods are very high. To be more diversity, inadequacy during packaging standards and increasing promotional activities are obstacles across the agility. Here, the answers to the following questions must be sought;

  • Where is the value within this complexity?
  • Does the customers’ requests provide in short-term or long term gaining?

Including customer to the processes during product development process and also specifying products and product types by coming to the mutual agreement with customers contributes decreasing number of product range. Similarly, elimination of products which does not produce much value in product collection, coordination effective and profitable promotional activities with the optimization in packaging processes and standardization are very important with regards to yield and speed. Unnecessary product development and production costs for the products which have no possibility to sell are precluded with presenting the products that’s in correct variant on field. In this context, having effective knowledge about agile production criterias for especially department which produce financial turnover (marketing/sales) and being avoided especially excessive promotional activities and decreasingly operating complexity of product contribute to this process.

In this regard, decreasing complexity of this context in order to focusing on the value requested by the customer is one of the issues that need to be considered first in terms of agility. This situation effects positively to the issues about being more competitive by eliminating opportunity cost.

The importance of modular product, modular process and the concept of subsequent diversification increases gradually as a result of increasing product range. Excess stock or stock shortage as a result of holding all types of product in inventory cause the sales loss and in this point, this dilemma prompt the manufacturers to quest of different strategies that produce correct product in a correct variant. Many researchers dwell on the importance of subsequent diversification, strategical alliance for suppliers and complexity of product/organization issues for agility. They emphasize the necessity of putting into final form of product by delaying as a result of not fully understanding actual demand at the beginning of the process. They also mention the necessity of using the production strategies together according to product family, before the disjunction point forecasting-based and after the disjunction point demand-based. Thus, they indicates that it is made demand forecasting truer until this step as a result of producing as a generic firstly for the products which have many variety, and as the moment the demand arrives, it can be given quick answer to the customer’ requests because it needs to watch only diversification steps in order to satisfy the actual demand due to being ready of generic products.

At this stage, identifying with the customers what the derivatives of the products are and designing generic base product in order to achieve these derivatives product is extremely important. By this means, generic base product are kept in semi-finished product inventory within the process and which variant request was taken, the generic product is sent by diversifying according to variant in received request from this point. If it should be able to summarized the process until here, I believe it should be mentioned the following issues

  • Understanding the actual demand and correct product (Understand the real demand)
  • Decreasing the variety and modular product (Reduce variant, Modular product)
  • Decreasing complexity (Reduce complexity)
  • Integrated demand forecasting (Aggregate planning)
  • Hybrid strategy (Postponement)

 

 

Leave a Reply


5 + 5 =