“Yokohama Tire Canada: Forecast Accuracy and the Cost of Being Right“

Offering some comment and reaction to supply chain, forecasting and demand planning blog posts that caught my eye in recent months. In April, Jonathon Karelse, marketing manager of Yokohama Tire, teased a then-upcoming presentation he was giving at an Institute of Business Forecasting event.

While I did not have the opportunity to see Jonathan’s presentation, one claim he makes in his preview post did catch my eye. I bring it up because I often find myself in some version of this discussion when I’m talking with companies that want to attack their supply chain management issues and become more profitable.

Consider that the result of demand planning is only profitable to the extent that it is actionable – that is, if links above or below in the participant’s supply chain are unable to respond to the data, it might be a purely academic exercise.

I contend that it is not academic at all — even if your supply chain can’t react — because the issue isn’t forecast, the issue is timing. If the forecast identifies a demand signal that a company can’t or won’t respond to, it’s still good to know in the first place. Secondly, perhaps next time the company can learn and adjust for the opportunity by adding extra capacity or additional storage in a more favorable location or what have you; again, tough to say without seeing the speech. Last, you can calculate the opportunity cost of not having acted.

Karelse correctly points out the importance of keeping cost and benefits in mind — no argument from me — but the business Intelligence that he mentions should be integrated into a company’s demand planning, S&OP and forecasting processes with the software being used — not as a parallel process. Upper management is absolutely correct to drive for utmost accuracy, because even if the company decides not to act on a forecast (e.g., someone is optimally supplied), at least they are able to measure the difference and understand the opportunity cost.

“Why Every Business Needs a ‘Plan V’”

A BusinessWeek guest blog from Harold L. Sirkin used the recent volcanic eruptions in Iceland as a jumping-off point for musings on modern-day continuity planningn for business in the global age:

We may or may not see more such disruptions; who knows? What we do know is that any disruption that does occur will have far more serious ripple effects than anything seen in the past. That’s what happens when companies from everywhere are competing for everything with companies from everyplace else.

Wouldn’t debate this any more than I would over apple pie being good; however, how do you move from the theoretical stance below to the potentially unsustainable practice of simultaneously being ready for everything from global warming to Godzilla? For manufacturers, he recommends strategic inventory reserves, redundant manufacturing locations and alternative distribution networks. I don’t know many mid-sized manufacturers who can afford such preparedness.

It is extremely hard to run a profitable business focused on the .1% scenario and still make enough money to be alive when the .1% scenario comes to pass. This isn’t to say that you shouldn’t do the planning. This is something that can be helped by a process (and supporting technology) that combines comprehensive short- and long-term (high-level and execution-level detail, as well) forecasting and planning scenarios, taking into account the day-to-day business and what is most profitable right now.

From this assumption, you can then allow management to consider some strategic options. For example, “It may cost us a bit more to have an extra DC in South Africa, but the sales forecast shows growth that would support that DC in about three years. Why don’t we accelerate that investment to provide more fleixibility now and provide competitive insurance in case the .1% scenario happens.” That may be a more practical and sustainable approach.