Is it no longer necessary to forecast?

With the evolution of tighter supply chains, shorter product cycles, and shorter lead times, along with dramatic reductions in inventory throughout the supply chain, one might be tempted to conclude that planning and forecasting they are much less important today than in the past. internet world. Do not believe it!

In days of yore, mass production ruled the hearts and minds of manufacturers and distributors of any product produced and sold in significant numbers. The mass production mentality says that the key to reducing costs is to increase quantity. Whether manufacturing a product or purchasing parts and materials, a larger quantity spreads fixed costs over a larger population and reduces the unit cost of each member of the group. Therefore, we require and expect volume discounts from suppliers and price our products accordingly, emphasizing and perpetuating economies of scale in doing business.

The relationship is valid, as far as it goes. By looking strictly at production costs, spreading fixed costs over a larger population will, in fact, result in a smaller unit cost. But we cannot look at anything in isolation; only in context do the true costs and considerations reveal themselves.

Let’s say you’re a relatively high-volume producer of a consumer product. You expect to buy half a million of a certain component, let’s call it X, from your supplier this year (based on a forecast, no matter how informal). You approach the supplier, tempt them with the high volume, and negotiate a price that’s 30 percent less per unit than you would have charged for an order of, say, a couple dozen. They can live with that price because their fixed costs can be divided by 500,000 instead of 24. You, the customer, are very pleased with yourself; got a great price from a trusted supplier.

Reality hits. Today is the era of customization. Customers no longer settle for a one-size-fits-all product. The Internet and e-commerce have shifted power from the provider to the consumer. High volume mass production is a thing of the past. Today’s market demands mass customization – the creation and sale of custom products and variations in any quantity at mass production prices.

Success in this high-volume, high-mix environment requires flexibility, not just in your own plant but throughout your supply chain. Suppliers must be willing and able to provide materials and components very quickly, in any quantity. The cost/price structure, and the very real risk of obsolescence, prohibits bulk purchases and large inventories of parts.

Under these conditions, then, the supply chain is a short-reacting system. As soon as the demand is recognized, the information is passed through the entire supply chain and all the links in the chain react immediately to deliver the product very quickly.

In an ideal world, each link in the chain could react immediately to demand, produce what is needed immediately at an affordable cost, and pass it on to the next step in the process. We do not live in an ideal world. Very few manufacturers have successfully achieved an economical lot size of one. And even if that were the case, transportation considerations and the practicality of producing and shipping one at a time would interfere with customer service goals. In addition, delivery times (both for production and for transport) are not zero. Lead times through the product structure are likely to add up to something in excess of the customer’s desired shipping time. Face it: zero-zero (zero inventory, zero lead time) is just not going to happen.

E-commerce, especially through collaboration, can help reduce delivery times considerably. Production techniques such as flow manufacturing reduce plant lead times and make production practical in any quantity at any time. But meeting customer demands for near-instant gratification will still require some inventory somewhere in the supply chain, and it will certainly require preparation that can only be based on solid predictions of demand levels, product variety, and market changes.

Fortunately, the same collaboration that reduces lead time and increases flexibility also goes a long way toward developing more accurate forecasts. Additionally, the fast-response nature of the market means that forecasts are for shorter horizons, making them inherently more accurate.

The nature of planning and forecasting is changing, but the need remains. Fast, cheap and ubiquitous collaboration and communication links with trading partners make this a whole new world, where all members of the supply chain work together to satisfy the end customer.