6 quick fixes to your demand forecasting strategy
These forecasting strategies will improve your company’s service, overstock and image
Ever stopped to examine the planning misconceptions which, very likely, are ripping you off? Today we’ll highlight the top 6, along with quick fixes that will keep your customers coming back and save your organization an S-ton in carrying costs!
These strategies may sound obvious at first. However, even today they continue to stump forecast management teams around the globe.
Let’s dig in…
Quick Fix #1 is about lead time forecasting. If you sit down today to create an order for your supplier, and realize that their lead time is actually running 4 days longer than normal, you are buying too late.
Lead time is a key driver of ‘how much to buy,’ as well as the critical decision of ‘when to buy.’
Alright, so you should have bought 4 days ago. Dang it.
Buying more now won’t help your service-level position, even though the extra amount on order might calm some nerves. You will still risk running out.
The extra amount simply means that next time you can buy less, or buy later.
Lead time helps trigger the forecasting decision of when to buy. Keep your lead times maintained and updated, and they will help you keep inventory in stock.
What’s at stake? Missed service. Learn more about lead time forecasting here.
Number 2 has to do with order cycle optimization. You can go ahead and put this next truth in the category of obvious inventory statements that are not always so obvious.
Many of your suppliers offer, or require, a bracket size when placing an order. If they don’t, your transportation team might request one. When you set a supplier bracket in dollars, weight, cases, cube or some other factor, you are actually dialing in an order cycle without always realizing it.
If it takes 10 days to sell 44,000 LBs. of product to your customer base, and your chosen bracket is a truckload of 44,000 LBs., then you can’t efficiently buy every 7 days
Many forecast management teams like to lock in a set 7-day order cycle.
It is possible that your supplier requires orders on Wednesday only. Whether it’s your decision or theirs, your inventory is out of rhythm with a 7-day order cycle. Your inventory will build up each week until you have so much on hand, that you feel forced to skip a week just to let the items deplete down to a more normal range.
If this is your situation, do everything you can to establish a 10-day order cycle. Do everything you can to have the order cycle in days match the bracket.
Remember, if you set the proper 10-day order cycle, it doesn’t mean that the order will happen exactly every 10 days. The order will still be due based on need, which should occur about every 10 days, on average. This will give you a replenishment rhythm that delivers the lowest day-to-day inventory possible.
What’s at stake? Excess inventory of 20% or more, typically.
Quick Fix #3 is to set alerts for crowded item categories so you can avoid them.
Sales and marketing teams love to offer a wide assortment. They want every color, size and packaging style. The more options the better, right?
Not so fast. Crowed categories result in heavy safety stock levels and reduced profits. Maybe that sounds great for the consumer, but it’s super-spendy for the retail or wholesale distributor. Demand increases rarely keep pace with the increase in SKU options in a category.
The result is typically a category of slower-moving items, requiring more safety stock for their erratic nature, and longer economic buying cycles. The bigger inventory expense is rarely taken into account when analyzing the profitability of each item, or the category as a whole. This must change.
Demand and merchandising teams should work together to watch the average forecast, deviation and inventory expenses of each category. Demand forecasting software allows you to set up alerts to easily identify when these values cross dangerous thresholds.
True merchandising decisions integrate the valuable inventory expense information available from your advanced supply chain management solution.
What’s at stake? Excess inventory and reduced profit
Requesting a 98% Service Goal is asking to be out 2% of the time. It is such an obvious statement, but we just had to say it.
If your inventory team is using a best-in-class forecast management solution, the service level goal is a precise instrument. Many retail and wholesale leaders have lived years without this level of precision, and don’t yet realize the importance of it. Accurately describe your requirements.
A 98% service goal sounds great, but many interpret the value with the idea that you will never be out of stock. Actually, your advanced forecast management system will work deliberately to run out 2% of the time! Yeah, you heard that right. It will actually try to be out of stock for 2% of customer demand over a long period.
If a 2% out-of-stock situation is too high, then request what you really need. You have that control. Perhaps it is 99%, or 99.5% or 99.9%. The forecast management system allows you to set a smart and strategic mix of service goals. Put great effort into precisely describing your service needs and inventory budget.
The service-goal control knob becomes the control knob of your inventory level.
What’s at stake? Missed service and lack of control over the inventory.
Quick Fix #5… Get smart about buying multiples; avoid “topping off” so you can balance your lines.
Buying multiples often jeopardizes your stock balance and increases your inventory.
Wholesale and retail distributors work very differently from manufacturers; therefore, they require a very different strategy for replenishment optimization. Manufacturers focus on items independently. Distributors, on the other hand, perform what’s called ‘joint replenishment.’ Distributors purchase supplier lines together, with the goal of having an equal time supply on all items.
For a supplier of 100 items and a 10-day order cycle, rather than purchasing several items each day as they reach their need, the goal is to purchase most or all of the 100 in unison, and work to keep them in harmony. Victory is found when the item group depletes down and reaches their reorder points as close together as possible.
One of the final steps of replenishment optimization is to round the items to any buying multiples or convenience sizes. This adds efficiency, but can slightly throw off the harmony.
However, when each item has large and unique buying multiples ranging from 20-30 days of supply, the harmony is lost. The line will be out of balance and the items will live independently, much like a manufacturing forecasting process. The inventory analyst might still place an order about every 10 days, but items that are hardly in need will be topped-off higher and higher.
This results in an unbalanced line of items, all sitting with heavier inventory than needed. It’s time to reach for smarter buying multiples and understand their days of supply. Check out this article for more on buying multiples strategies.
You can realize significant inventory reductions when you focus on refining buying multiples to balance operational efficiency and lower costs.
Today, an advanced supply chain analytics solution can show you the path to quick changes and forecast management victories.
What’s at stake? Excess inventory of 20% or more.
Finally, make your demand forecasting team your Sales team’s biggest differentiator.
When sales teams are hunting for new customers, and working to win over large customers, your inventory team should be a key competitive differentiator.
Pricing will be discussed, item assortments will be tested, but nothing beats a Sales team who can assure the prospect that they will have their items in stock.
Many distributors bring their head of demand planning into a prospective client as a key part of their sales process. It’s a huge plus if your VP of Supply Chain comes in showing critical screenshots and dashboards from their demand forecasting system, which they will use to collaborate in the future.
The prospect may be asked for a few years of history of what they have been buying, item by item. They’ll see how this history gets loaded into the forecast management solution, which immediately updates their forecasts and seasonal patterns to ensure great service from Day One.
The prospect can see how that history will help them as a customer, and get long-term confidence that there will be no disruption to their business – as well as loop how easy it is to get started.
Decide who is best to deliver this presentation and then build this opportunity into your Sales process. Your Marketing, Sales and Inventory teams should align and rally around this strategy.
What’s at stake? Missed sales opportunities, service and inventory disruptions.
The Best Fix: Forecast Management Solutions
One of the best things you can do to change the game is to implement a forecast management solution.
Distribution businesses have experienced huge results in the areas of service, overstock and image by implementing demand forecasting software. Reach out to us now or check out this guide to learn more.