“We want to freeze the forecast”… is a comment that I am hearing more frequently, together with the balance of the sentence… “this ensures that the Sales & Marketing Team cannot make changes and destroy the production or purchasing plans”.
The Just In Time thinking of a decade ago, initiated the challenge to be more responsive and closer to the demands of the customers and the marketplace.
With the shift from Australian based manufacturing to off shore sourcing of product, many organisations have lost the luxury of changing next weeks production schedules and are faced with longer supply lead times for finished goods. A considered reaction has been the introduction of a forecasting time fence.
As sourcing lead times increase in months, there is greater emphasis on more accurate forecasts beyond the lead time horizon. However, this development should not encourage the imposition of a forecasting time fence for the period of the lead time. How will this help to balance supply and demand??
Forecast time fences can be a very restrictive practice; if this means no change to the forecast within the time fence. What is happening to the objective of being more responsive to the market place?
The implications are severe for the organisation. What if a competitor undertakes a price reduction program to attack your market? With a frozen forecast there is no opportunity to retaliate. There is also no opportunity for you to initiate a promotional program.
Forecasting time fences impose a constraint on potential change and probably on the thinking associated with the planning and reaction to the requirements of the market place. Forecasting is an attempt to predict the expected demand for a given product in a specified time frame.
Time fences can hide or mask the true impact of the changes in the underlying demand and delay the information from being understood by the supply side of the organisation. This may have the longer term consequence that the demand side of the organisation may never achieve the full potential available in the market place.
The benefit of the freely floating forecast, is the opportunity to recognize the changes in the demand from the marketplace and then endeavour to develop plans to manage such variances.
Avoid the time fence and introduce the resolution of the demand and supply balance, both within and beyond the lead times – the very practical application of the Sales and Operations Planning process. A forecasting time fence to match a 3 or 4 month lead time may act as a mechanism to flag the forecast change however it should not act as a restrictive barrier to prevent a forecast change.
If supply constraints are required they should be an outcome of the full process of translating an unconstrained forecast, through the subsequent calculation of the Master Production Schedule or the Purchasing Plan. In resolving the demand and supply balance, a major consideration is the availability of Safety inventory, which has the legitimate function of providing a response to forecasting fluctuations during the lead time. Safety inventory acts like a shock absorber to prevent each fluctuation in demand from translating into a variation in schedule or a change in the purchase order plan. The fundamental question throughout the S&OP process, “Should the safety inventory be used?” or “Should the supply plan be changed?” “If there is insufficient inventory should the sales plan be changed?”
The process which commences with the new forecast review includes a series of forecasting and pre S&OP reviews and culminates in the S&OP meeting – at every stage the process should focus on the resolution of Demand and Supply. Sales and Operations Planning is a process rather than the once-a-month meeting.
The Sales and Operations process has evolved for manufacturing organizations but should not be limited to manufacturing. There is realistic value for organisations involved in importing, wholesaling and distribution activities to develop and maintain a Sales & Operations Planning process. Wherever there is the need to address the equation of supply and demand, there is scope for the application of the S&OP process.