The majority of companies establish a supply/demand match in their S&OP process, beginning with the demand statement created by the “front end” of the business, which drives requirements for the products or services to be provided. There are some industries that operate on the premise of a “build it and they will come” mentality, but even they have to be concerned with setting the operating level at a point that won’t result in inventory sitting idle with no demand.
Providing the highest level of forecast accuracy possible to the organization is the goal, but the reason why is not always clearly understood. The actual impact of poor forecast accuracy is more easily understood by evaluating from the forecast error perspective, as shown in Figure 1.
The product group level forecast is important for setting operating levels or run rates for a given product line or segment. At the product group level, All Others have twice the error rate of the Best-in-Class (37% vs. 18%), which means they are correcting/adjusting the operating levels for twice the volume as the Best-in-Class and the level of disruption is twice as great, with the cost of change arguably twice as much.
Figure 1: Forecast Error for Best-in-Class vs. All Other
At the SKU level, the error rate is 72% higher which means that there are 72% more specific items that must be changed in the schedule if the organization intends to meet the demand. Change may mean setting aside the unneeded product/service and expediting the unanticipated product/service through the process. The set-aside product increases the inventory, and the expedited products increase the costs due to more changeovers, setups, and premium freight, not to mention the time spent performing the rescheduling effort itself. These internal rescheduling costs are fairly visible and quantifiable, so the impetus to improve forecast accuracy is very tangible when viewed in this light.
There is also a hidden cost of forecast error that is not always apparent, which is the impact on the suppliers and partners who rely on the schedule as their forecast to execute against. The purchasing organization must reschedule and course correct affected items, or suffer the consequences of unwanted inventory and the expediting costs required to pull in the correct items/services. There are definite consequences when suppliers are routinely whipped around as a result of rescheduling. Credibility drops like a stone and it’s one of the toughest things to recover. It’s difficult enough to regain credibility internally, but when suppliers/partners experience a higher reschedule rate compared to their other customers, it’s very tough to get their attention focused on cost reduction.
When the error is not addressed, the negative ripple effect can be devastating and goes beyond the inability to meet a schedule. Conversely, taking a proactive approach to improving forecast accuracy for an organization will have a positive ripple effect throughout the business at all levels, and suppliers as well, which makes starting with the front end of the business for improvement an extremely good choice.