Significance of Demand Forecasting

AsprovaMost business decisions of an organization are made under the conditions of risk and uncertainty. However, an organization can lessen the adverse effects of such risks by properly determining the demand or sales prospects for its products and services in future. Demand forecasting is a systematic process that involves anticipating the demand for the product and services of an organization in future under a set of uncontrollable and competitive forces. It helps businesses find a proper balance between supply and demand. In order for this to work, the supply chain must ensure that the amount of items produced satisfies customer demands without a surplus of inventory being left over. At the same time, the forecast must be accurate enough to satisfy customer demand; otherwise, the manufacturer will fail to deliver the right amount of finished products to the customer. Forecasting is an imperfect science, but it is also a necessity for several reasons given below:

Support Deliverables Planning Proper forecasting can help determine when increases in deliveries are needed. Historical reports may be used to research whether demand for a certain product increases during certain times of the year. The inventory levels for the store can then be increased during that time of the year to meet customer demands. The same effort is used to reduce deliveries, as well. When demand decreases throughout the year, then fewer inventories can be ordered to reduce overstock. In essence, forecast information allows organizations to devise and execute transportation planning economically and effectively.

Enhanced Growth Prediction– Demand forecasting helps an organization in deciding about the expansion of its business. If the expected demand for products is higher, then the organization may plan to expand further. On the other hand, if the demand for products is expected to fall, the organization may cut down the investment in the business. This further helps an organization to hire human resource according to requirement. For example, if an organization expects a rise in the demand for its products, it may opt for extra labor to fulfill the increased demand.

Better Financial Management-Proper forecasting will lead to accuracy in the purchasing and planning department, which can provide savings to the company. Spending excess amounts on unwanted inventory prevents the company from using this money on other vital resources. Some of these resources, such as investments, are important for growth and development of the company. Proper forecasting also helps the company purchase smaller amounts of inventory. These smaller quantities allow the company to remain flexible by being able to quickly respond to any changes in consumer demand.

Accurate Inventory Levels-Accuracy in sales forecasting allows supply chain managers to make accurate predictions in the level of inventory required to meet customer demand. An organization that practices lean philosophies must have the ability to make accurate predictions on the level of inventory necessary to produce products. Lean management requires the company to keep the lowest level of inventory in stock to meet the demand. With lower levels of inventory, the accuracy of the amount stored on hand becomes even more important. Inaccurate forecasts can result in overstocking or stock outs.

By minimizing inventory investment and increasing revenue opportunities, best-in-class Asprova solution enables a clear look into the future. In collaboration with demand forecasting software, our advanced planning and scheduling features facilitate businesses to generate accurate forecasts based on true demand which eliminate poor results such as lost sales, product obsolescence and overstocks – all that can equate to lower revenues and margins.

 

Designing the Supply Chain

Supply chain design is the practice of creating living models to represent the existing structure and policies of the end-to-end supply chain, optimizing to identify a better future state supply chain and continuously running what-if scenarios to test new strategies and react to changing market conditions. When a company’s supply chain capabilities are directly aligned with its enterprise strategy, the results tend to be superior performance and a strong market position.

Manufacturing giant Toyota uses extremely sophisticated inventory and product life-cycle management capabilities to move products through its channels in half the time maintaining excellent quality. This is a major factor in Toyota’s consistent ability to outpace its rivals in profit margins. Would Toyota’s supply chain model work for your company? Probably not. Every successful company should have an operational design and management style tailored to its own purpose and strategy. Here is a proven process to design a supply chain network that best meets your business objectives.

Clearly Define your Strategy-The most critical step of the network analysis and design process is to identify your primary strategy. If it’s too limited then you will fail to consider and prioritize all the market requirements and factors on which participants compete (features, price, delivery, etc). Strategies also cannot be platitudes, promising all things to all people. Corporate strategy needs to define how you are going to be different and better than your competitors, and it needs to set specific, measurable goals. Then it should be communicated to the organization thoroughly and repeatedly.

Use High Quality Design Data Today’s technology can help you make better decisions as there are many vendors offering supply chain network optimization tools. Alternatively, you can cost efficiently configure your own. Make sure the software you select fully addresses the decisions you need to make and can represent your unique business and logistics network. Typical model components include capacity limitations, customer service requirements, lead times by mode, operating capabilities and the cost of different options.

Structure Supply Chain to Optimize the Strategic Goals- Connect the dots between your strategic goals and how those get delivered by the company. Supply chains that are optimized for cost efficiency will look different than supply chains that are optimized for flexibility and responsiveness. Ask the question, “Which supply chain activity is perfect for my core competence and competitive differentiation?” This step is especially critical in making in-house/outsource decisions. So prioritize your supply chain objectives and accordingly build your supply chain network, choose your supplier base and business terms, devise inventory and planning policy that support your enterprise strategy.

Get Advice during Design Process- Many other businesses in your networking circles, supplier community or common technology users may be excellent resources for supply chain design experience and advice. Ask supply chain modeling software vendors about the design community they support and how you can get involved with other users. Many will be happy to act as a sounding board for your ideas and share the lessons they learned along the way.

Implement and Refine- The supply chain network analysis and design process is not static. Successful ideas are implemented and cost savings are realized. And then things change: a large new customer is added at a new location, more production capacity is added, demand takes a nosedive, or raw material prices swing dramatically. Thus, like all good planning processes, the supply chain network analysis and design process must be on going. This process should be revisited regularly (annually/quarterly) and/or when big things happen within the business.

Asprova provides useful lessons for future modeling and improves the overall effectiveness of network planning. Our advanced planning and scheduling solutions give supply chain designers a collaborative platform to expand the value of supply chain modeling throughout the organization.

 

Photo credits: Flickr © ILO in Asia and the Pacific

Improving Supply Chain Performance

asprovaGetting a 360-degree view of their supply chain is critical for manufacturers and distributors in today’s business world. Those that have unparalleled insight, visibility to their supply chain and understand how their company actually functions (versus how they expect it to) can find ways to optimize vendor relationships, focus on tactics that will increase supply chain efficiency and be able to monitor the myriad of factors that impact supply chain performance. By managing and improving environmental, social and economic performance throughout supply chains, the very best companies can conserve resources, optimize processes, uncover product innovations and save costs. Any manufacturing company that wants to enhance their performance must pay attention to the following key strategies:

Improve Demand Forecasting- Constructing a feasible, constrained and profitable demand plan is essential. Without accurate demand forecasting, manufacturers can only be confident in their ability to meet demand if they rely on inefficient stockpiling of inventory: The emphasis is on “just in case” processes, rather than “just in time.” Many companies now recognize that the only way to attack demand volatility is to expect it, and they are adopting the best practice and advanced technical tools to deliver improvements to forecast accuracy, inventory levels and working capital. For the rest, it is becoming increasingly clear that inadequate demand planning can do serious damage to shareholder value and overall profitability.

Create a Modern, End-to-End Supply-Chain OrganizationThe times of managing the supply chain in separate tiers is over. Sophisticated data analysis enables companies to manage supply chains end to end and, in industries such as manufacturing, almost in real time. Appoint a single leader with responsibility for end-to-end performance and for delivering improvement projects across tiers and traditional functions such as marketing, manufacturing, and procurement. Make sure your supply-chain organization combines operational excellence with strong analytical capabilities and data-driven, cross-functional decision making. Ensure your IT function is supporting them with nimble applications and platforms that enable collaboration and analytical decision making.

Join Industry Collaboration- Many companies recognize that complex supply chain challenges cannot be solved by individual efforts and that industry wide collaboration is required. Working in a pre-competitive environment, peer companies that share similar supply chains can set common standards and best practices for sustainability performance and allow suppliers to be evaluated on the same metrics. These collaborations help prevent audit fatigue, training redundancy and mountains of paperwork for suppliers working to meet similar requirements from their customers. Working with your industry peers is a great way to share knowledge about the sustainability performance of your suppliers.

Develop Training and Capacity Building ProgramsThis is an important step in improving sustainability and driving behavioral changes throughout your supply chain. First, formulate a comprehensive plan to increase productivity, reduce costs, and improve customer service and satisfaction levels. Then tie an incentive plan into the supply chain’s core mission, a critical element to building a performance-based approach. Incorporate your workforce into the culture of the supply chain by emphasizing ways in which employees and management may improve their workplace strategies and execution. This constructive training will drive a successful organization and improve supply chain productivity.

Asprova is the manufacturing industry’s leading performance improvement solution suite. Our advanced planning and scheduling functions help organizations achieve sustainable cost reductions and improve supply chain performance while remaining focused on quality, productivity and better service levels.

 

 

Phot credits: flickr © The U.S. National Archives

Supply Chain Drivers

AsprovaIn today’s dynamic business world, forward-thinking companies emphasize the applicability of supply chain management as a crucial element of overall business strategy. However, companies that desire an effective supply chain management must first have a crystal clear understanding of each driver and how it operates. Each driver has the ability to directly affect the supply chain and enable certain capabilities. Then the next step is to develop an appreciation for the results that can be obtained by mixing different combinations of these drivers. Let’s have a look here at these drivers individually.

Demand Planning- To influence and manage demand more efficiently, companies are now shifting their focus from plant-level production planning to demand-driven focus. In adopting a demand-driven model, it is very critical to decide what a firm is best at selling, making and delivering and align firm’s sales force according to that. Ultimately, this demand-driven approach can improve demand planning and management by creating a more customer-focused mindset. But to best achieve this, agreement among company’s internal stakeholders- sales, marketing, finance, product development etc. – upon a consensus demand plan is imperative.

Location-Decisions are related to which activities should be performed in each facility. Managers must decide whether to centralize activities in fewer locations to gain economies of scale and efficiency, or to decentralize activities in many locations close to customers and suppliers in order for operations to be more responsive. When making location decisions, managers need to consider a range of factors that relate to a given location including the cost of facilities, the cost of labor, skills available in the workforce, infrastructure conditions, taxes and tariffs, and proximity to suppliers and customers. Location decisions tend to be very strategic because they commit large amounts of money to long-term plans.

Inventory-Inventory is spread throughout the supply chain and includes everything from raw material to work in process to finished goods that are held by the manufacturers, distributors, and retailers in a supply chain. Holding large amounts of inventory allows a company or an entire supply chain to be very responsive to fluctuations in customer demand. However, the creation and storage of inventory is a cost and to achieve high levels of efficiency, the cost of inventory should be kept as low as possible. Toyota has worked hard to shorten new product and replenishment lead times. As a result, the company is very responsive and carries low levels of inventory.

Transportation Movement of everything from raw material to finished goods between different facilities in a supply chain. In transportation the trade-off between responsiveness and efficiency is manifested in the choice of transport mode. Fast modes of transport such as airplanes are very responsive but also more costly. Slower modes such as ship and rail are very cost efficient but not as responsive. Since transportation costs can be as much as a third of the operating cost of a supply chain, decisions made here are very important. A mail-order catalog company can use a faster mode of transportation such as FedEx to ship products, thus making its supply chain more responsive, but also less efficient given the high costs associated.

Information- It is potentially the biggest driver of performance in the supply chain because it directly affects each of the other drivers. It is the connection between all of the activities and operations in a supply chain. To the extent that this connection is a strong one, (i.e., the data is accurate, timely, and complete), the companies in a supply chain will each be able to make good decisions for their own operations. This will also tend to maximize the profitability of the supply chain as a whole. Seven-Eleven Japan has used information to increase the responsiveness while also lowering cost.

Asprova is critical to identify, understand and measure how certain business drivers impact the supply chain and the company’s business growth. Our advanced planning and scheduling functions provide systematic, strategic coordination of planning, production, inventory, and information among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served.

 

Photo credit: Flickr ©Scott Maxwell

Supply Chain Visibility

farhanThe complexity and unpredictability of requirements make the supply chains most difficult to manage. One proven way to increase the reliability and responsiveness of supply chains is to increase visibility into everyday supply chain functions. Supply Chain Visibility (SCV) is the capability of a supply chain player to have access to or to provide the timely required information/ knowledge about the entities involved in the supply chain from/to relevant supply chain partners for better decision support. The aim is to provide controlled access and transparency to accurate, timely and complete events and data — transactions, content and relevant supply chain information — within and across organizations and services operating supply chains.

The need for visibility is driven by both the desire to improve the supply chain and the need for compliance from the customer and legislative requirement, especially for those who are operating globally. Visibility is often included in the risk management toolkit. By coupling process changes, the improved intelligence from supply chain visibility, and fast decision cycles, organizations hope to out-maneuver interruptions in the flow of material, capital, or information. Here are some tips to help enable end-to-end visibility across your enterprise:

  • Sense and respond are critical processes for supply chain visibility and can only be achieved through a collaborative network that is coupled with advanced analytics.
  • Visibility encompasses not only sensing data, but also how to analyze it and take appropriate action across the extended enterprise.  Use predictive and prescriptive analytics to support your visibility goals.
  • Eliminate silos within your organization to take full advantage of end-to-end visibility. Create an outside-in way of thinking within your organization by focusing on customers and trading partners instead of looking internally.
  • Utilize cloud-based shared process and information layers within your information architecture to sit above physical assets, supply chain, and operational applications.
  • Make it easy for trading partners to connect by eliminating barriers to on-boarding.

Unfortunately achieving visibility is quite difficult, particularly for global supply chains. Many different companies and individuals are involved in a global supply chain, and all are operating under a different set of motivations and constraints.  Although a supply chain feeds a specific customer outcome, each participant is focused on their own self-interest. They all want to maximize their own profit, even at the cost of the rest of the supply chain, a typical capitalistic behavior.

Asprova makes sure that information is available smartly at your disposal and to other firms in your supply chain which improves visibility dramatically. Our advanced planning and scheduling functions has the ability to “see” from one end to the other in the supply chain, providing players a clear view of upstream and downstream inventories, demand and supply conditions, and production and purchasing schedules.

 

Quick Response Manufacturing (QRM)

Flickr  © Nathan

Flickr © Nathan

In today’s world of competitive environment, one of the key success factors for manufacturing firms is speed-not only speed of delivery, but of concept, design and production. Quick Response Manufacturing (QRM) is a company wide strategy to cut lead times in all phases of manufacturing and office operations. It can bring the manufacturing firm’s products to market more quickly and secure its business prospects by helping to compete in a rapidly changing manufacturing arena.

QRM reduces both external and internal lead times throughout an organization. Reducing external lead times means rapidly designing and manufacturing products for specific customer needs. The internal aspect focuses on reducing lead times for all tasks within the enterprise, such as the time to approve an engineering change or the time to issue a purchase order to a supplier.

Dr. Rajan Suri, the architect of QRM mentioned that it is based on four core concepts:

Realizing the Power of Time – Lead time is much more important than most managers realize. Long lead times create many organizational costs — much more than just WIP and Finished Goods! Such costs are four to five times labor costs. Shrinking these costs is a much bigger opportunity than reducing labor.

Rethinking Organization Structure – QRM transforms traditional functional departments into an organization consisting of “QRM Cells.” Although the cell concept has been known for some time, QRM Cells are more flexible, more holistic, and apply outside the shop floor too.

Exploiting System DynamicsBy getting managers to understand how capacity, batch sizes and other factors impact lead times, QRM enables them to make improved decisions that result in shorter lead times.

Implementing a Unified Strategy Enterprise-wideQRM is not just a shop floor approach; it is applied throughout the enterprise. This includes material planning and control, purchasing and supply chain, quoting, order processing and new product development. QRM provides a single, unifying approach for the entire enterprise.

However if a manufacturing company competes in a market that has large fluctuations in demand, QRM may not be the most appropriate business enabler. To react to demand, a manufacturing firm must closely partner with suppliers that will quickly accommodate the firm’s production schedule. It means increased reliance on suppliers. QRM is a business enabling philosophy that pushes authority down to lower levels and therefore, changes the roles and responsibilities of the employees. Employees can be extremely apathetic to these changes, which is an obstacle that could significantly hinder the implementation process and the success of QRM.

Asprova’s advanced planning and scheduling function allows manufacturers to gain market share and increase profitability by developing maximum flexibility and response in manufacturing to adjust quickly to changes in customer demand. Our ingenious software eliminates the barrier and overhead associated with schedule-driven manufacturing, providing QRM companies benefit from dramatically reduced working capital, improved quality and more flexible employees.

Bullwhip Effect: Minimizing Strategy

Bullwhip

Lee et al. define the bullwhip effect as “the amplification of demand variability from a downstream site to an upstream site”. The bullwhip phenomenon is observed in supply chains where the decisions at the subsequent stages of the supply chain are made greedily based on local information, rather than through coordination based on global information on the state of the whole chain. The first consequence of this information distortion is higher variance in purchasing quantities compared to sales quantities at a particular supply chain stage. The second consequence is increasingly higher variance in order quantities and inventory levels in the upstream stages compared to their downstream stages (buyers).

Understanding the causes of the bullwhip effect can help managers find strategies to mitigate it. Lee suggested that making demand data available at downstream site to an upstream site is a remedy to mitigate demand signal processing. Thus, both sites can then use same data while updating their forecasts. Their strategy can be achieved by using Electronic Data Interchange (EDI) and Point of Sales (POS). Using collaboration tools like Vendor Managed Inventory (VMI) can be very useful as these systems make available the demand data and inventory position information to members of the supply chain.

Now batch ordering has often led to bullwhip effect, which has serious implications for the whole chain. One reason that order batches are large or order frequencies are low is the relatively high cost of placing an order and replenishing it. Hence, discount on assorted truckload, consolidation by third party logistics and regular delivery appointment are solutions to the bullwhip effect. Smaller and synchronized batch sizes can also be seemed as a good way.

‘Forward Buy’ arrangement in which items are bought in advanced of requirements, usually to take advantage of manufacturer’s attractive price offer is another source for bullwhip effect. The simplest way to minimize the effect caused by such forward buying and diversions is to reduce both the frequency and the level of wholesale price discounting. The manufacturer can reduce the incentives for forward buying by establishing a uniform wholesale pricing policy. From an operational perspective, practices such as Continuous Replenishment Program (CRP) together with a rationalized wholesale pricing policy can help to control retailer’s tactics, such as diversion.

Asprova creates concrete information integrity between supply chain members, allowing for smooth dissemination of superior quality demand data from downstream site to the upstream site. Our advanced planning and scheduling functions improve operation processes, shorten lead times and reduce demand volatility which proves to be effective in mitigating the bullwhip effect. Nevertheless, it plays an active role in future development of supply chain strategic alliance.

 

Photo credit: ©Flickr davidd

Supply Chain Management

SPMAs Martin Christopher said “The focus of supply chain management is on cooperation and trust and the recognition that properly managed, the whole can be greater than the sum of its parts”. A firm in the supply chain must initiate the attempt to form partnerships and actively manage the chain. To do this effectively, it must show the partners where the improvements will arise and how these will lead to a gain for everyone in the chain. To establish trust among the members of the supply chain, the lead firm must also suggest how communication can be opened up and how every member will be ensured that it is receiving its fair share of profits.

One perfect example of this has been Toyota. For years it has gathered extensive data on customer buying patterns. Then Toyota has used this information internally to manage its own layout and inventory. Now it has shared all of this data with its most trusted suppliers. This approach has allowed its supplier who knows how to take advantage of this data an opportunity to improve its service to Toyota while decreasing its own costs.

Managing a supply chain is more complex and difficult than managing an individual firm. But, the principles of management used to integrate a firm’s own internal functions also apply to managing the entire supply chain. For example, a well-understood phenomenon in the management of a firm is that there is always a bottleneck that constrains sales. This bottleneck may be internal to the firm (a process that cannot produce enough to meet demand) or it may be external to the firm (market demand that is less than the capacity of the firm). This principle applies to the entire supply chain.

While the supply chain is driven by customer demand, it is constrained by its own internal resources. One difference is that these resources may not be owned by the same firm. It is possible for the output of an entire supply chain to be limited because one firm does not have capacity to meet surging demand. It is also possible for every firm in the supply chain to be operating at a low utilization because there is not enough demand in the market for the products from the supply chain. There are bottlenecks inside the supply chain just as there are bottlenecks inside firms.

Firms are using Asprova’s advanced planning and scheduling functions to aid their collaborative communication. Our software develops a set of methods by which supply chain partners could have joint sales forecast and/or production plans in which a revision by one partner would be immediately transmitted to the next partner. Therefore its members are aware of the location of their bottlenecks internally and also in the chain which allows for proper management of the supply chain.

Supply Chain

Photo credit: © Nick Saltmarsh

Photo credit: © Nick Saltmarsh

As Alan Waller says “The supply chain lies no longer with an individual company; we have global networks cutting across countries and organizations. The only way to achieve this is to get players working to a common agenda-the collaboration agenda. We have been taught to compete: nobody has taught us to work together. The need and awareness is there but still nobody is taught how to do it.” It would seem a possibility that supply chain development may falter because of the prevalent way of management thinking. Therefore there is a real challenge to learn anew and, in so doing, to change. Learning and changing are indelibly connected; you cannot have one without the other.

Many companies start into SCM, by working only with the closest suppliers and customers. They should however, first ensure, that all of their internal operations and activities are ‘integrated, coordinated and controlled’. Nevertheless the full benefits of SCM will only come when there is an examination of all costs/service levels together with all the players. This will result in reduced lead times and improved total costs/service for all parties in the network. This means going beyond the first tier of suppliers and looking also at the supplier’s supplier and so on.

The format of inventory is raw material, sub-assemblies or finished goods. This is often held at multiple places in the supply chain and is controlled in theory by many different players who are usually, working independently of each other. This results in too much inventory being held throughout the supply chain. So the format of inventory and where it is held is of common interest to all supply chain players and must be jointly investigated and examined.

The customer is the reason for the business; so continually working to serve the customer better is critical. The customer is the business, after all. But who is the customer? The traditional view is perhaps the one that has placed the order/pays the supplier’s invoice; but by seeing the next person/process/operation in the chain as the customer, this means that there are many supplier/customer relations in a single supply chain. If all of these single relationships were being viewed as supplier/ customer relationships, then the whole would be very different.

Many researchers have suggested that the key to the seamless supply chain is making available undistorted and up-to-date information at every node within the supply chain. Asprova disseminates quality and reliable information throughout the chain for integrated thinking and effective planning. So clients are increasingly dependent on the benefits brought about by Asprova’s advanced planning and scheduling functions to: improve supply chain agility, reduce cycle time, achieve higher efficiency and deliver products to customers in a timely manner.

 

 

Photo credit: © Nick Saltmarsh

Business Process Re-Engineering (BPR)

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Flickr © Kevin Dooley

Business process re-engineering (BPR) is another stage in the advancement of quality thinking. It contrasts with the gradual improvements over time of total quality management and puts forward a more radical, innovative approach. BPR has been defined by Michael Hammer and James Champy as: “The fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance such as cost, service and speed”.

BPR is essentially to do with fundamental change. One aspect is that of the ‘clean slate’ – do away with what existed before and start again. This has been compared to running an old car. You can work on it to keep going or adopt the BPR approach, which is to get a new one. Hammer and Champy put forward the following seven ‘principles of re-engineering’.

  • Organize around outcomes, not tasks. It gives one person the role to perform all the steps in a process. This in turn provides job enlargement and increased job satisfaction.
  • Have those who use the output of the processes perform the processes. An example might be employees buying their own equipment (within guidelines) without going through the purchasing department.
  • Integrate information processing work into the real work that produces the information. Those who collect information should have responsibility for processing it (eg. statistical information through to final report).
  • Treat geographically dispersed resources on a centralized basis. Technology is increasingly making this approach workable.
  • Link parallel activities instead of integrating their results. The use of cross-functional teams, simultaneous engineering and early supplier involvement are examples of integrating activities.
  • Place the decision point where the work is performed and build control into the process. Educate workforce and allow IT supported decision making to the more empowered workers.
  • Gather information once and at the source. Avoid the mistakes of inaccuracy of data capture from the outset.

BPR must have top-management support to succeed. Owing to its radical nature, if resistance is encountered the champion or leader must be prepared to enforce change, even to the point of ruthlessness. After change has been achieved the role of people is paramount. They are expected to be better, and able to handle more complex tasks. This will not be accomplished without focused and appropriate ongoing training.

Asprova has the power to bend the rules and make firms think inductively and give them a competitive advantage. By implementing our advanced planning and scheduling functions, firms can pull out from traditional manufacturing thinking and embrace more modern practices such as the JIT or agile production; break down inter-departmental barriers and create harmony between sales and operation functions to improve quality and increase throughput. In essence, Asprova assists users to make extreme proactive decisions to improve their business performance.