I saw a discussion posting on the Supply Chain Movement discussion group in Linked-in. The discussion was around the fact that a company had difficulty getting accurate forecasts. To compensate, they’ve been increasing their buffer inventories and were looking for metrics to monitor their inventory levels. There were many suggestions around the best metrics to track and a couple suggestions for increasing forecast accuracy. All great stuff. I had a different approach that I thought I would discuss here.
As was pointed out by one of the commenters, there are strategies to improve forecast accuracy that should be explored. The problem is that no matter how much you try, the forecast is always going to be inaccurate to some degree. Traditionally, we would add buffer inventory to cover the demand fluctuations, but this is expensive. So how do you deal with forecast variability and reduce inventory costs? It comes down to your ability to respond when changes occur.
There are two factors to being able to improve responsiveness; 1) Reduce replenishment lead time – Use lean techniques to evaluate your value stream and reduce lead times. Most inventory levels are maintained to cover demand during lead time. Safety Stock formulas use variation during lead time as a key factor. Reduce your replenishment lead time and you can reduce inventory levels. 2) Reduce the lag between sensing a demand change and reacting to it. In other words, how long does it take before the event (a new order in excess of forecast for example) is recognized, the impact understood and an action plan is in place?
In many traditional systems, this can take days. This is time lost before the supply chain even knows about the change! Why so long? Traditional ERP systems perform planning in a batch process that can take hours to run. Often, this means MRP processing is run daily or sometimes weekly. This means that an order added first thing in the morning doesn’t get visibility beyond the top level assembly until after the next day. Then we still need to determine if we can accommodate the change and if not, what changes need to be made to the plan to make this happen. Traditional ERP tools are just not responsive enough.
What is needed is a response management tool. A response management tool provides visibility to the entire supply chain, models and emulates the ERP logic in each ERP system in the supply chain, allows the creation of simulation scenarios to try different response approaches, provides collaboration capabilities to bring those that can contribute together quickly, provides reporting tools including comparative scorecards that allow you to evaluate the impact of a change and the effectiveness of your solution. Finally, once the decision is made, a response management tool allows you to communicate the changes throughout your supply chain so that all are in alignment.
Reducing your replenishment lead time and improving your ability to sense and respond to changes in demand can result in the ability to absorb some amount of forecast error while lowering inventory levels.