Causal factors directly impact demand forecasting and your value chain

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The Wall Street Journal and Bloomberg are reporting some interesting data this morning and as such we naturally are wondering how many of you are using such data to help refine your demand forecasting.  If used correctly, these type of data inputs can serve as leading indicators of what is happening in a particular market and the potential impact on your specific value chain and therefore your bottom line i.e. EBITDA or cash flow.

Bloomberg is out with a couple of measures of inflation or in the current case disinflation.  Producer price index is down .7%, the consumer price index is down 1.4%, and a basket indicator called the JP Morgan Chase Global Inflation index (which includes the prior measures) is down 1.5%.

Separately, the Wall Street Journal is reporting that fuel prices dropped 2.5% from March 2013, and that that the cost of finished consumer goods fell 0.8%. And lastly, at least for this discussion, the housing market index came in at 44, which is 3 points higher than April 2013.

So, what does all this mean?  I don’t really know and quite honestly it doesn’t really matter what I think.  Sure there are all the high level discussions about disinflation (as opposed to deflation) potentially restricting profit growth.  However, it also works to keep the cost of money down, and with costs decreasing, consumers potentially have more money in their pocket to spend on consumable goods. This of course assumes that the extra cash is not ‘consumed’ in other ways such as higher taxes.

But while all of this is interesting in a Great Gatsby cocktail sort of way, the real issue is what does it mean specifically to you, your business, and your value chain (supply chain plus customers and vendors, etc.)?

And depending on your company and your industry, the answer will be different.  If you are in the general consumer product industry, then one interpretation is that the combination of decreasing costs means more cash to consumers and therefore that retail sales will rise, which might imply that you should be planning to increase production, and invest in increased inventories in order to meet increased demand, right?  Or perhaps more strategically, given your upmarket branding strategy – would a price increase make more sense and allow the competition to make the risk and costly investments in inventory and capacity?

The associated conversation is that assume demand does increase? Will that demand show up in 2 months?  3 months? Can you do something about it?  If your lead time is 3 months because you source from international suppliers (okay – might as well say China) then a one month lag in a causal factor might not help much.  On the other hand, if you have a rolling 13-month trend you are watching, this type of information becomes very applicable no matter what the lead time.

More specifically, say you are in the housing industry.  What is the impact of the market index climbing to 44?  More demand for say flooring product because more houses are being built and sold?  How long does it take for an increase of 3 points to impact demand?

The point here is that it is important that competitive companies have the ability to use this information; obtain it, track it, understand its impact on demand forecasting (short and long term) and to be able to do so without huge investments in man time to do the setup work.

Your planning and S&OP teams should have the data ready to go without need for setup and manipulation. Instead they should engage in the type of value-added actions such as the question and answers highlighted above, conducting  what-if scenarios and really making intelligent decisions that best position your company for success in terms of measurable criteria, i.e. market share, cash flow and EBITDA. I am extremely sure they will find that type of work much more rewarding:  who doesn’t want to be part of a team that can measure their contribution to success?

And as the great comedian Billy Connolly likes to point out – pay attention because it is all going to change tomorrow.

The Chicken and the Egg in Forecasting Software

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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 Know Your Execution Level for Your Demand Forecasting?

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I think this blog falls under the category – someone is always thinking, it just might not always be you.

You have hopefully read on this blog or perhaps in other venues the idea that demand forecasting has its greatest supply chain impact (and therefore financial impact) when improved at the execution level –the level that helps maximize the operational and financial performance.

And typically the implication and in some cases the outright declaration is that the lower the level of detail the better – supply chains do not produce product families or product categories.  They make actual products, SKUs, and items.  Forecasting at the family or category level only results in more error at the product level.  So it makes sense to ensure that the SKU level forecasting is where you measurably improve forecasting accuracy.

But … if SKU is good, SKU by location is better. And if SKU by location is better, SKU by Ship-to customer location by location is even better.  This could go on for awhile but the point is, the overall push has been for more information and accuracy at lower and lower levels of detail.

However, we recently ran into a company where that was not the case.  It is a consumer products company that operates at a very high level of RPMs.  And for their product and for their supply chain, forecasting at the SKU or lower level really does not make sense.  What makes the most sense for them is forecasting by product category or what they would refer to as chassis.  If they can get demand for the chassis accurately forecasted (said chassis representing 90% to 95% of the total material cost), then turning a chassis into a finished SKU is a quick and efficient process. The actual plates and other finishing components are inexpensive, easy and cost effective to order in bulk, quick to assemble, and are interchangeable with most of the chassis.

What’s the point?  It comes down to the fact that when you start the process of improving your forecast (for all the reasons that have been outlined many times), a real fundamental key to success is stepping back and thinking through what is your company’s execution level of operation?  Thinking through the execution level appropriate for you includes not just your supply chain but your entire value chain, especially as data proliferates through increased collaboration among enterprises.  Getting the answer right is critical to driving improved customer service, cash flow, and profitability.

Stephen Covey on Trust and How Demand Foresight Sees Its Importance

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We all know that there are many intangibles that influence success, but I’ve found that one of the most important is trust.

Stephen Covey, Jr. just started his nationwide tour this week here in Denver. He’s the son of Stephen Covey of “The Seven Habits of Highly Effective People” fame, and is headed toward the same success. The speaking tour is built around his book “The Speed of Trust”. As I listened to a promotional radio interview this morning, there were some key elements that I was reminded of that are so important in everyday life, and more specifically in how to build successful business relationships. Some of the high points from the interview:

  • Earning the trust of your client comes from offering value, keeping your word, and being responsive.
  • Lack of trust is like a ‘tax’ on the business relationship. Speed decreases and cost increases due to the additional justification and due diligence that is required to compensate for the lack of trust.
  • Everything is easier with trust – this is why testimonials are so important to get your foot in the door.
  • Long-term clients are created when you build and maintain that trust.

A personal example that I immediately thought of is something that I am still amazed by today. It has to do with a FedEx package and their promise to deliver when they committed. Last Christmas I procrastinated and ordered the perfect gift for my daughter online. Although I was cutting it close, FedEx promised it would be delivered by Christmas Eve. That’s all I needed! Well, the day came, all the other packages were under the tree, and the one key present still had not arrived by noon, 3:00 pm, then 6:00 pm. As you can imagine, I pretty much gave up. We went on with our family’s traditional celebration. But to my complete surprise, the FedEx truck pulled up at 9:00 pm with the package! Now I know the landslide of deliveries that FedEx has during the holidays, so I was willing to cut them some slack. However, I’m now an even bigger fan. This epitomizes how long-term customer loyalty often is won in the save-the-day moments like these, where our trust is rewarded with action.

Now something more relevant. In recent blog posts in both January and February we talked about the importance of choosing the right partner. This of course is closely tied to a foundation of trust. One of our key partners had a big problem in which our trusted partnership successfully enabled us to help them in a big way. On the night of February 7, 2008, an explosion and fire completely destroyed Imperial Sugar’s Savannah packaging facility, taking 14 lives and 60% of Imperial’s production capacity with it. The facility was offline for nearly 18 months.

Imperial needed immediate insight into how many customers it could serve with its available inventory. We worked hand-in-hand with them to ensure that the forecasting software and data were properly configured so that they had an accurate overview by product line.  This allowed them to uphold their “availability to promise” because everyone from production to sales could see, in real time, what could be delivered. Speed was required, and an established, trusted partnership was a critical component to their success, as they later stated in CIO Magazine, “Supply Chain Management to the Rescue”.

I can’t finish a post on trust without referencing the person we learned about in grade school who knows a little bit about honesty–Abraham Lincoln. One of my favorite quotes of his is, “The truth is your best friend”. How true and how important it is in successful business relationships.

Do You Minimize Supply Chain Risk With Demand Forecasting?

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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?