Is demand forecasting and inventory planning being ignored?

My main observation from a conference I attended on demand forecasting and inventory optimisation was that more manufacturers should have been there; the majority of attendees were from the larger consumer/FMCG companies. I’m not sure if it’s a ‘South African thing’, but too many hard-core manufacturers I have dealt with use a rough-cut, ‘rule of thumb’ approach to demand forecasting and inventory planning. While they may say it works, I wonder how they measure their accuracy.

Demand forecasting and inventory planning is obviously important for consumer goods and distribution-intensive industries, and the practice started and has grown in those sectors, but basic manufacturers should now be getting involved.

I know of large manufacturers who still do their planning using Excel. To create the plans takes a lot of time and effort, and once a month is what they can manage. However, in the kind of volatile world we now inhabit, could they become more efficient if they:

  1. planned on a weekly basis;
  2. tracked it and communicated it.

Doing that in Excel becomes a mass of effort + emails.

Companies go through levels of maturity when it comes to forecasting and palnning inventory requirements:

  • Level zero: crude, ‘rule of thumb’ calculations based on past experience. This is often done by a sales manager, or a plant manager, with scant regard for other departments.
  • Level one: use of simple statistics or formulas applied to historical data. These approaches don’t incorporate seasonality and fail when there are significant sales changes.
  • Level two: basic demand management, including collaboration
  • Level three +: sophisticated collaborative planning, forecasting and scheduling within the organisation and involving external partners as well.

Getting to Level 3 is a long project requiring ongoing effort and commitment from the top down. It is a cultural change program, as well as a major business process change exercise, but companies would find benefits if they just started to move towards Level 1 or 2. It’s quite straightforward from a financial view to prove that optimising and reducing inventory has beneficial results for the business’ income and balance sheet.

So why is it that many traditional manufacturers have not adopted more modern supply chain (SC) management and planning techniques, although they have no trouble buying new manufacturing machinery. Is it because change is too problematic, risky and complex? Has the executives’ education fallen behind, or are they  unwilling to learn?

Mid-size companies typically fall into the mid- to late-majority on the technology adoption life cycle, which is why so many of them took a long time before they got on to the ERP bandwagon. The same is probably true (I hope) for their adoption of new SC practices.

Is the slow adoption of new SC practices a general cultural issue, do some geographies lag behind or is it particular types of industries? What is going to be the tipping point for these organisations to start modernising demand forecasting and inventory optimisation?

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