Supply Chain

Three Tips for Creating a Reliable Demand Forecast

And what to do in the not-so-unlikely event that it fails.
Shawn CasemoreOctober 26, 2011

The devastating events in Fukushima earlier this year demonstrated once again the powerful impact of supply-chain disruptions. Couple these types of unplanned disruptions with fluctuating customer demand, and the ability to effectively manage becomes a seemingly futile pursuit. Regardless of the source of the volatility, however, the failure to properly predict and prepare for demand will result in lost revenue and a tarnished reputation.

There are numerous examples of highly successful organizations that have failed to meet consumer demand. The most recent publicized examples include Apple’s unexpected and prolonged shortage of the iPhone 3GS in 2009 and the iPhone 4 in 2010. In both circumstances, the impact on company revenue was significant.

To be successful, creating a reliable demand forecast must be a joint effort among the customer, supplier, and internal company stakeholders. It must be continuously monitored, modified, and aligned with both business strategy and customer preference. And it should be prominently displayed and discussed, not sheltered or hidden from view.

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Here are three key steps in developing a reliable demand forecast:

1. Understand really understand historic demand.
Don’t just review historic demand patterns, but look at the drivers that influence demand. For example, are spikes in demand the result of one-time events such as a price adjustment, a successful marketing campaign, or the acquisition of several new customers? What are the factors that influence these events and under what circumstances might they be replicated?

2. Monitor market trends.
Avoid the tendency to make decisions based simply on media information, and instead become intimately aware of the dynamics of your marketplace. This can be done through continuous communication with friendly competitors, customers, bankers, and other individuals who are attuned to your marketplace.

One of our most successful clients operates a distribution business and maintains close contact with customers, consistently obtaining feedback. This habit, although time-consuming, has been the backbone of its success in forecasting demand. The client has collected information in several ways, including simple telephone or e-mail communications and customer surveys, as well as more-complex statistical reviews of customer order history and market trends.

The results have supported its preparation for growth. And, interestingly enough, a side effect of this process has been the positive customer relationships it has developed.

3. Identify and track key indicators.
What are the leading indicators of fluctuation in your customers’ demand patterns? For example, if you are selling fishing poles, your key indicators of demand might include the obvious, such as water levels, fish population, and weather patterns across your sales regions. More importantly, however, you will want to consider demographics. Why demographics? Consider for a moment that as the baby-boomer generation transitions into retirement, it will have more time available for hobbies such as fishing, possibly increasing your sales. Maintaining a view of the changing demographics in your sales regions can create a good window into your future demand.

Manage, but Mitigate
Of course, there are times when even the most well-thought-out plans fail to meet customer demand. Consider the inability of LG to provide screens fast enough to meet rapid demand during the launch of Apple’s iPad. Although this is a good problem to have, it reinforces the need to develop sound mitigation plans to prepare for unpredictability in customer demand.

Applying the following strategies to mitigate demand-fluctuation risk will assist in preparing for the unexpected while minimizing financial impact.

1. Consign inventory.
Seek opportunities to consign inventory with suppliers under a pay-for-use agreement. This is a particularly attractive option relative to high-value or high-cost equipment or materials. It provides a means of reducing inventory investment while ensuring safety stock is still readily available in the unforeseen event it is required.

2. Standardize.
Continuously identify means to standardize materials and processes and avoid the customization trap. One of our clients was forced to deal with the welcome, but very untimely, issue of a one-time buy that virtually eliminated its stock of clothing. Lead times for replacement product from overseas extended well past predicted demand. However, as a result of its mitigation plans to maintain standardization of garments, the client retained a small in-house garment shop. With this, it was able to quickly convert inventory of slow-moving garments into replacement products, providing sufficient cushion to meet demand until replacement stock arrived from overseas.

3. Put your eggs in two baskets.
As the events in Japan suggested to many companies, avoid sole sourcing at all costs. Always seek to qualify more than one potential source, even if you provide business to the secondary source only on a periodic basis in order to maintain a relationship. Developing alternate sources of supply is a sure means to maintain a consistent source of supply when unpredictable demand occurs.

Managing supply during times of fluctuating consumer demand or unforeseen circumstances can create challenges that can have a significant impact on a company’s financial sustainability. Developing and continuously revisiting demand forecasts in conjunction with the development of sound mitigation strategies will reduce not only the risk to business but also the investment required to manage the risk.

Shawn Casemore is the president of Casemore & Co., a consulting firm specializing in supply-chain management.