Responding to the Future
'Forecasting may present problems' argues MÖBIUS consultant Alex Waterinckx, 'but managing demand is what really counts'.
Forecasting is difficult; therefore getting it right and using it effectively is paramount. Unfortunately, the unknown factors can seem immeasurable. However the supply chain is configured, and wherever in the process you switch from estimating demand to meeting orders, there are uncertainties to contend with and predictions to be made. If that’s true of mature products, it’s doubly true of new products and products that are approaching the end of their life cycle.
Möbius Business Redesign has developed a unique understanding of managing the apparently imponderable, and it has applied this understanding to a wide range of industries, from those producing fast-moving consumer goods to those operating in engineer-to-order environments. Aware that current forecasting techniques work well for mature products but provide limited support for the introduction and obsolescence phases of the product life-cycle, Möbius is a prominent participant in ECLIPS. This three-year research project, funded by the European Commission, aims to extend the state-of-the-art knowledge in supply chain management and includes introduction and end-of-life forecasting in its areas of focus. So far promising progress has been made on the introduction phase.
“In the case of new lines, it’s possible to look at previous product introductions to understand how they behaved and to identify how the new product relates to earlier cases,” explained Möbius consultant Alex Waterinckx, who is a steering member of the ECLIPS project. “I admit I was a little sceptical at the beginning, but I’ve been very pleasantly surprised by what we’ve been able to achieve so far.” This sense of gratification is shared by Van de Velde, the Belgian lingerie producer who has been involved in the early ECLIPS analyses.
But forecasting, however skilled, is just part of the story. It needs to be set in the broader context of demand management.
To explain the Möbius approach, Alex Waterinckx began with a reminder of basic principles. “A company has to safeguard its internal processes from the uncertainties (both internal and external) that are inherent in any business environment, whilst still guaranteeing the link with the market. You do that with the aid of three kinds of buffer: inventory, in the form of extra components and raw materials; capacity, by way of a reserve on lead times and production capability; and information, supplied by accurate forecasts, visibility and planning systems. Inventory and capability are certainly important, but they represent capital investment. Sound information however, can help reduce the investment requirement of the other buffers and ensure they are used effectively.”
Forecasting, he continued, is a vital element of the information buffer. “If customer demand is the biggest source of uncertainty, it follows that you have to forecast. That’s a crucial part of demand management. But it’s only a part. What’s most important is what you do with your forecasts. It’s relatively easy to make forecasts, but using them effectively to deliver the value you require – that’s where the difficulty lies. Understanding demand involves more than predicting it, it involves managing it.”
By extrapolating from the statistics of the past, it’s possible to get close to an accurate sense of future customer requirements. But sound demand management can further reduce the uncertainties (and so reduce the capital investment in surplus inventory and capacity). It works, in part, by integrating market intelligence. So a corporate agenda with a specific timetable is called for, where the planning department’s proposals are passed to other departments (such as sales and marketing) as the company works towards a coordinated plan of demand management.
But statistics take the process only so far. There are also events to be managed. Forecasting can establish a baseline demand, which simply represents what’s required if the market stays as it is. Markets however are not static, and events such as promotions, product launches and the phasing out of obsolete lines are all part of a changing environment. Managing such events with full awareness of their implications can allow a better understanding of future demand. In addition of course, the demand plan needs to be regularly reviewed and adapted, and this can involve managing the volumes and specifications of the forecasts. Also customer management, may form part of the programme. If customer demand proves higher than the plan has committed itself to, some temporary redirection of demand may be considered in an attempt to influence customer behaviour in a way that’s more consistent with the supply chain’s capabilities.
All this needs clarity of approach and purpose. There may for instance be some complexity of demand, where separate channels have to be envisaged. If we consider the case of a manufacturer of construction material with sales representation across Europe, forecasting demand country by country might seem the logical step for them, but matters are not that simple. In each country there are two sorts of customer: do-it-yourself customers, whose requirements are small but repetitive, and large construction companies, who order for major projects as and when contracts are won. So it may be appropriate for some businesses to design and manage different (but interconnected) demand channels.
“It’s not a question of a company applying a simple rule, or of a consultant coming in to perform a magic trick,” insisted Alex Waterinckx. “What’s very clear is that in designing demand management, it’s necessary to be in very close contact with your customers – who are, after all, the experts in their own operations and markets. A demand management plan is the result of very rigorous analysis, and this is where a consultant – rather than just software – can have an effect. Software can do all the right things as long as you press the right button, and it can be configured in many ways. But we at Möbius can help with managing the software package. We don’t build the car, but we can tune the parameters within its engine, and we can teach you to drive it.”
Möbius assistance, however, is not just a matter of a few tutorials in the use of software. It involves working with the client on the full range of core processes of demand management. This entails focusing on customer and product portfolios; it entails setting up the structured communication and clear agenda that are needed to develop coordinated and committed forecasts; and it entails establishing a coherent and ongoing cycle of sales and operations planning. It also follows through into actual performance, examining the relationship between forecast and hard reality and looking at the need to influence demand. This programme needs to be supported by the organisation as a whole as well as by the demand management team and the appropriate systems and algorithms, and here, too, Möbius can help in process design and implementation.
“We understand very well the basics of statistical forecasting, and we also know how it can be applied in practice,” concluded Alex Waterinckx. “We know how to design the corporate agenda and communication channels that support effective demand management, and we work in close collaboration with the client company. There are step-by-step gains to be won in both increased customer service and increased inventory rotation. In fact, a complete demand management redesign can lead to forecast performance increase of 30% and related safety stock reductions of 15%. You can see therefore, why I say that demand management has much more significance than just making next month’s forecasts.”