Supply chain · 9 May 2016

Are long term forecasts worth the time and effort?

long term forecasts
The real “art” in forecasting is to minimise the level of variation between the forecasted volumes and actual volumes

The most efficient supply chains occur when small business owners can predict future demand with a high degree of accuracy – but should this be something to aim for?

Forecasting allows you to plan your supply chain and procure what you need at lowest cost, and with the least waste.  The current hot topic in supply chain circles is big data, which allows managers to utilise a wealth of historical sales data and social media content to accurately predict consumer demand before an order has been placed, or even thought about by the consumer. Amazon have recently launched a pan-European service which picks, packs and ships stock to the nearest fulfilment centre based on forecasted local consumer demand and only charges the seller for the local delivery costs.

In order to benefit from enriched data sources, many business owners are striving for complete supply chain visibility by working collaboratively end to end. This visibility can only be achieved through the establishment of consistent data flows and transparency between all parts of the supply chain, from consumer behaviour through to the acquisition of raw materials. A combination of a fully integrated supply chain and the ability to accurately forecast future demand over the short term, allows small business owners to efficiently allocate resources to deliver customer demand on a week-by-week basis.

It’s widely acknowledged that any forecast is outdated as soon as it’s produced even if it’s created using sophisticated software algorithms, comparing all accurate data sources. The real “art” in forecasting is to minimise the level of variation between the forecasted volumes and actual volumes, through identifying the variables which are likely to be most volatile and attempting to control that variation. There are a variety of providers of industry specific forecasting software which utilise algorithms in an effort to smooth out demand and reduce the level of variation. However, a recent study by Retail Week, highlighted that 28 per cent of retailers did not use specialist software in order to forecast short and long term demand.

So, if a supply chain is fully joined up and adaptive to consumer demands is there still a need for a long term forecast?

All business owners, regardless of the size of their enterprise, need to forecast in order to provide strategic direction and ensure they stay ahead of the competition in the face of technological advances and changing markets. A company that can utilise existing data sources to highlight new products and emerging markets whilst developing a distribution network to service this demand will stay one step ahead of the competition.

An annual forecast is still required to calculate the base level of distribution resources required to service demand. The most cost efficient distribution networks operate with a base level of resources which is sufficient to deliver ”‘normal” levels of demand. Peak periods and volume spikes can often then be fulfilled through the use of short term hire equipment, as well as increasing operational labour through a combination of overtime hours and agency staff. The key point is that small businesses cannot operate an efficient supply chain which can flex to customer demand, without a sustainable, planned and well run core operation.

Through using long term forecasts, micro business owners can assess the suitability of their existing supply chain to service the current and future demands of its customers. This process tends to identify a point in time at which the existing network is unable to fulfil demand in a cost effective way, usually due to rigid constraints such as building size versus stock holding requirements.  A lack of physical space tends to be inextricably linked to stock management and replenishment principals. The leanest businesses tend to aim for a maximum of ten days’ stock cover within their warehouses, through accurate demand planning and establishing proactive supplier relationships. They also actively manage the disposal of old stocks, to maintain warehouse space for active and new lines.

All business owners should look to improve their stock management processes and flow of goods before looking to re-engineer their existing warehouse space, explore external storage options or relocate to a new site. Leaders who have identified a “pinch point” need to begin exploring the options for expanding their distribution network sooner rather than later, as the process typically requires a significant amount of time and resources – in the UK, there is a widely acknowledged shortage of high quality, available warehouse space to rent.

Long term forecasts are therefore likely to remain an essential component of supply chain management and those businesses which are able to utilise more in depth data sources are likely to be the most reliable at predicting future trends. As big data increases the accuracy of daily, weekly and monthly forecasts, it’s likely that day-to-day operations will be less focussed on the annual forecast, but strategic decisions around supply chain network design will always require a long term view of the future.

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ABOUT THE EXPERT

Simon Dixon is the managing director of supply chain and logistics advisors Hatmill. He has worked in supply chain management for the past 19 years, both in industry and in consultancy. Simon's client experience includes the top four UK supermarkets and over 50 other clients spanning sectors such as construction and ecommerce.

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