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The Chicken and the Egg in Forecasting Software

What came first, the chicken or the egg?  While that was a real head-scratcher in elementary school, the business world is full of examples where cause and effect seem to have the same circular relationship.  In the case of a company’s balance sheet, the resulting momentum of this repeating cycle can be good news or bad news.

Let’s take a look at one example that feeds into our favorite topic, forecasting software, with the chicken and egg being played by inventory problems and margin erosion.  Inventory problems, be they stock control, inventory write-offs, out-of-date products on the shelves, or lost working capital, can lead to margin erosion.  The margin erosion can in turn lead to cutbacks in technology of the very sort that would work to repair the errors in inventory.  The problem with down economic times for a company is that the money ‘has to come from somewhere’ to make technology investments, and if growing revenue isn’t the source, then it will mean allocating capital from the budget.  Easier said than done, and this is where analysis and proof-of-concept come into play.

Looking at the analytics, inventory problems are one of the largest costs on the balance sheet, and can take the form of everything from costs of extra storage, wasted production space that could be allocated to more profitable or even neglected purposes, and forced discounts to clear the inventory.  Even worse, if your business is B2C, unhappy customers may shift their dollars and hard-earned loyalty to another brand.  If your business is B2B, your customer could be another manufacturing plant, and the last thing they need is an unreliable supplier when they are trying to plug the holes in their own supply chain.  So the case can be made that there is a break in the system.  But is it process-related?  Technology-related?  Both?

Let’s say it’s both.   In a perfect world, your continuous improvement or operations specialists have been on top of the process problem, and they are addressing the problems iteratively, and without the pain and suffering of a re-haul of the entire supply chain.  But either way, when technology is lacking, the case must be made for the losses present that will be resolved with the new technology, whether it’s homegrown or 3rd party.  If it’s 3rd party, the demos of the potential technology solutions should illustrate innovative  forecasting modeling, an intuitive and powerful user interface, an ease of integration into the current process and  IT infrastructure, and optimum visibility by stakeholders into the supply chain.

The last item – visibility – is one that Deloitte defines as “the ability to monitor supply chain events and patterns as they happen, which lets companies proactively—and even preemptively—address problems”.  In their Supply Chain Risk Survey, “The Ripple Effect”, they call visibility one of the pillars of supply chain resilience.

Visibility was just one of the attributes of the forecasting technology that we were able to deliver to Intermatic, a global leader in energy management solutions.  Intermatic chose Demand Foresight in their forecasting software search, and subsequently were “dramatically increasing the accuracy of demand”, at a level of 25%.   This spring’s issue of Supply Chain World magazine features Intermatic’s success story, with their endorsement of Demand Foresight not only for the expected reduced forecasting errors, but for the mobile capability that allowed a just-in-time environment where sales could enter orders, and the factory could immediately begin working on the products:  visibility.

New supply chain technology assessment should be governed by the honest evaluation of all interested users, with the realization that resistance to change, as well as a tightening-of-the-belt mentality as it relates to technology investment, will need to be addressed.  At the end of the day, it doesn’t matter what came first – the inventory problems or the margin erosion.  The driver for the supply chain software initiative has to evaluate all of the vendor capabilities, and balance them with the internal user priorities – not an easy task – to find a provider with not just the right product, but the willingness to listen, understand, advise, and commit to the success of the project – a partner.

References: Deloitte, “The Ripple Effect”; Supply Chain World, Spring 2013

Do You Minimize Supply Chain Risk With Demand Forecasting?

Supply chain management, like life, is a game of preparation for, protection against, and recovery from risk…

Risk is everywhere.  Our reactions to it, however, are what separate the good, the bad, and the ugly, and can align the future playing field.  In other words, it’s how proactive you are in risk aversion and even on capitalizing on risk, that defines your company.  Deloitte’s recent report:  “The ripple effect:  How manufacturers and retail executives view the growing challenge of supply chain risk” can give insight to how your company lines up.  The report showed results of a survey taken by 600 executives at large and small businesses alike regarding their supply chain risk concerns, along with some words of advice from Deloitte.

One interesting result was the opinions of the most costly outcomes of the supply chain risk.  The top two most costly outcomes were said to be margin erosion and physical product flow disruption.  Talk about risk!  According to the report, “Executives considered margin erosion to be more costly than other types of supply chain risk events, with 54 percent of respondents citing it as one of their top two issues. This may be because margin erosion is a relatively high-profile, easy-to-measure problem, and executives are thus well aware of it.  ” It’s even personal, since it often affects their own compensation.

Compounding the bottom line impacts of supply chain risks are the growth of risk events themselves.  “Such disruptions are not only more frequent, they are also having a larger impact. Fifty three percent of executives said that these events have become more costly over the last three years, including 13 percent who said they had become much more costly. Studies have found that natural disasters are occurring more frequently, and the economic impact of each event is usually greater than before. For example, five of the 10 most expensive natural disasters have taken place just within the past four years.”

With all of the above cited concerns, let’s go back to the matter of proactive risk aversion and whether or not the concerns are a call to action for these executives. 71% of the executives claim that supply chain risk is an important factor in their companies’ strategic decision making, and 63% say that their company has a risk management program focused specifically on the supply chain.  But there are obstacles, and there seems to be a gap between concern and action.  A tool that Deloitte says may help avert supply chain risks is predictive modeling. A surprising survey result is that only 36% of the executives use this technology. By investing in this and other technology, companies go beyond traditional understanding of risk to building resiliency against risk, and safeguarding against the dangers of margin erosion and physical product flow disruption.  The bottom line.

Our clients have recognized the importance of technology to identify, address, and manage their risks across their value chains.  They need to bring causal factors in to the forecast to reflect macroenvironmental pressures on the supply chain.  They want to minimize their investment by having a tool that can be designed to their processes, not vice versa.  They are interested in a best-of-breed tool that  provides the best demand forecasting available to minimize their risk.

As pointed out in our video, in life, if you know there are risks, you avoid them.  Why wouldn’t you do the same in your business?

Groundhog Day Results – Forecasting Accuracy Needs Innovation

Groundhog Day 2013: The results are in. Punxsutawney Phil, the pesky rodent with 15 minutes of fame every February 2 since 1886, did not see his shadow this year, and so we are looking for spring right around the corner…  Maybe.  Groundhog Day festivities have their roots in European weather lore, where a badger played the part of the modern day

Groundhog Day Forecasting

Source: rantzz.wordpress.com

groundhog.  My personal tie to Groundhog Day is much closer to the 1993 comedy starring Bill Murray.  But behind the fun and festivities lie some somber statistics.  According to the StormFax Weather Almanac and records kept since 1887, Punxsutawney Phil’s weather predictions have been correct only 39% of the time.

Industry hopes to do much better with forecast accuracy than 39%.  Statistical models are invaluable in building confidence and success for companies struggling to compete in the global marketplace and vie for the dollars of a customer in a recession squeeze.  So many factors are out-of-control for the executive today, who deals not only with weather disruptions from the statistical norm, but many other outside factors:  loss of revenue channels, bad relationships and impacts from other links in the supply chain, and a lack of supply chain talent in their own organizations.  Executives then look inward to best practice technologies to attain the best possible supply chain results possible and thereby to weather the storm.

As supply chain technology evolves, the better tools move beyond statistics, and with neural networking can learn as they go, drawing from sources like their customers’  POS data, current market share, and unemployment figures.  They take the team to the next level of maturity, still accepting the input of the professionals, but not leaving any available external information on the table.

Superstition, if you want to call it that, can block progress when management does not want to relinquish control of the data to the powerful new methodology, and defeats the purpose of investment and training in the tools that were there to help in the first place.  The best S&OP software will have the transparency and ease-of-use to allow the whole organization to overcome those fears.  It will be backed with dedicated education and training to make it quickly become a part of the company culture.

Superstition can also divert selection of best-of-breed software to large enterprise software, with a feeling of safety that the larger and more all-encompassing the software, the better.  It may feel like a safer, easier, and less controversial choice.  It may have a weaker forecasting engine than other best-of-breed software.  It is less work in the short run of the procurement process, but also offers far less gains in the long run of the lifetime of the supply chain.

Without powerful forecasting, businesses can still rely on operational improvements to guard against supply chain losses:  adding supplier diversity, forming alliances with like businesses to fill holes when inventory predictions come up short, using local supply chains for local demand, and consolidating distribution centers.  But imagine the power of combining all of these far more costly operational improvements with the software that provides the best forecasting accuracy available on the market.

Source: www.mnn.com

Another relative of Punxsutawney Phil’s is Gnocchi the Squirrel, who by virtue of eating more peanuts out of a Romney bowl than an Obama bowl, predicted a win for Romney last November.  More superstition.  Demand Foresight uses innovative technology that is unlike any on the market, and partners with your company to take your forecasting accuracy out of the shadows!