Demand planning software packages can help manufacturers to:
- Establish baseline sales forecasts, incorporating multiple inputs;
- Perform sophisticated analysis that improves their use of human and capital resources;
- Optimize pricing capabilities; and
- Better understand their markets and customers.
Yet to get the most out of these function-rich tools, manufacturers must be willing to reorganize their planning processes—and to share the resulting insights with supply-chain partners and customers.
PREDICTING THE FUTURE
How does BMW know how many Mini Coopers it will sell in North America? How many Priuses should Toyota build to meet demand in the U.S. this year? Worldwide? When is it time to tweak production— upward or downward—to reflect a change in the market?
The short answer to all these questions is: No one knows for sure. The long answer is: Everyone needs and wants to know.
That’s why demand planning exists.
Demand planning hasn’t gotten the attention that enterprise resource planning systems (ERP) or customer relationship management (CRM) have received in recent years. But that’s not to say it isn’t a sore spot for many in the manufacturing and distribution communities. “When I speak in front of industry groups and ask how many people are happy with their sales forecasts, I don’t see any hands at all,” says John Pavain, president of Norwalk, Connecticut–based MaxQ Technology, a developer of demand management systems and a Microsoft® partner. “Demand planning is an area that most companies need help in.”
POOR FORECASTING = POOR PROFITS
Whether it’s for consumer packaged goods, industrial manufacturing, high tech and electronics, or automotive demand, sales forecasts often lack the sophistication needed to optimize both operations and profits. “We’ve been pretty wrong on forecasting—in both directions—for our suppliers and for our customers,” says the CEO of a multibillion-dollar high tech manufacturer. “In fact, we’ve been wrong pretty massively. With sales forecasting, it’s sort of, why bother? The people who do the forecast don’t know because the customers don’t know.”
Manufacturers and distributors routinely accept the idea that sales forecasts will err by as much as 10%, and often 20% or more. In some cases, companies have not only accepted the fact that forecasts are “soft,” they’ve begun using software tools to enable them to track the level of variance over time, adjusting their materials procurement, operations, and distribution plans accordingly. “We track our forecast accuracy, so that we can see a forecast wandering out of the norm,” says the director of production planning and forecasting at a large packaged foods manufacturer. “We want to know exactly the number of weeks we are above or below a certain accuracy level in our forecast.
That way, we build up a consistent trend of error.” Granted, this food manufacturer has a special business need — to minimize the amount of product lost due to expiration at different warehouses. Adds this executive, “The software we are using gives us the ability to look at the freshness level and inventory for each product at different warehouse locations.”
His company is able to adjust product levels at its warehouses as needed, while avoiding losses due to product expiration. This feedback capability allows the business to tweak both production and inventories for maximum profitability.
These problems are similar to those experienced in other industries, including high tech and electronics, where chips, subassemblies, and even finished products such as computers have limited effective shelf lives. Here, too, inventories must be managed in such a way as to maximize sales and minimize “spoilage” as products become obsolete or unwanted.
In industries such as steel, excess finished-goods inventory ends up as expensive scrap later melted down to fill new orders. Meanwhile, steel producers lose production time and waste labor producing and storing the unwanted inventory, some of which was rejected because its production was too late for customer demand. Indeed, an entire industry—the steel service center—has arisen to cater to the needs of steel customers who couldn’t wait for their orders to be coated, slit, shipped, and delivered. The automotive industry faces an even more complex problem. General Motors, for instance, began trimming production this year at certain plants in late summer and early fall to bring inventories more closely in line with slowing sales figures.
