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Techniques for Accurately and Efficiently Forecasting Demand
This post was written by Michael Hinkley, an intern at Source One Management Services. If you are interesting in hearing his perspective on procurement as a career and as a part of the larger business, click here to listen to our conversation on BMP Radio.
Whether you’re preparing for a sourcing engagement or looking to improve supplier relationships, effective forecasting and planning is key to staying ahead of your supply chain and formulating a procurement blueprint. When buyers and sellers aren’t on the same page about expected volumes, usage schedules, and run sizes, both may experience surpluses or shortages. This, in turn, can lead to dire consequences for operational efficiency and the bottom line – yours and your suppliers’. For instance, the over unitization of warehouse space, as a result of a constant excess of inventory, will lead to increased effective unit prices. However, with accurate forecasting and improved supplier communication, you not only optimize your internal processes but allow your suppliers to run a more efficient operation with better turnover rates and proper resource allocation.
With effective forecasting, buyers can form efficient, collaborative relationships with suppliers. As a customer-controllable factor, effective forecasting is a valuable best-practice. Here are three helpful techniques that you can use to accurately and efficiently forecast your demand:
- Balance statistical modeling with collaborative, hands-on forecasting. When used in combination, these techniques will provide the highest possible level of insight. This balance encourages accountability and accuracy, and allows for quick and continuous improvement of your company’s supply chain.
- Take advantage of demand sensing capabilities and tools. It is critical to collect accurate market data about consumption in order to develop a sound procurement plan. Advanced software and other tools are available to help you collect such data. Leverage them to make more informed supply chain decisions.
- Check for accuracy and learn from experience. It is important to measure the precision of your forecasts at every level of the supply chain. This feedback loop promotes consistent learning and improvement so that you can create stronger forecasts in the future and stay ahead of demand.
Sure, it can be hard to develop accurate usage projections because of demand shifts, product recalls, or other uncontrollable factors that cause uncertainty. However, many forecasting missteps result from conscious decisions and are entirely avoidable. For example, it is common for buyers to over-commit to volumes in order to secure lower prices. In return for competitive pricing, suppliers will often mandate large run sizes. In this situation, while the buyer may achieve hard-dollar per unit savings, the high cost of this practice comes from larger product runs, exacerbating inventory levels and leading to over-ordering as a result of inaccurate forecasting. While the intention of securing a low price is rational and justifiable, the agreed-upon terms actually expose the customer to compounding risk as order sizes increase and they begin to pay for over-utilization of storage space.
In a recent sourcing project, we noticed that poor forecasting practices similar to those described above were driving high pricing from the incumbent supplier. For upwards of 15 years, the company had been approving large run sizes in order to achieve rock-bottom pricing. Eventually, we were able to identify the recurring forecasting problems. We responded by implementing a best practices forecasting and ordering program, which featured inventory triggers, smaller run sizes, enhanced predictability, and effective communication. As a result, storage problems were addressed and an agreement was reached that offered both lower prices and a sustainable warehousing model. In the end, we were able to facilitate a mutually beneficial scenario for the buyer and the seller.
By controlling your company’s procurement planning, you can achieve cost reductions and enhance your supplier relationships. Improving inventory management, increasing predictability, and facilitating meaningful communication with suppliers will allow you to implement forecasting best practices that will drive savings. Both suppliers and purchasers value a lean, efficient supply chain that ultimately leads to efficiency and the lowest possible costs for both parties.