Gazing at the Crystal BallDisregarding demand forecasting technologies during tough economic times can be a costly mistakeBy Ram Reddy Continued from Page 1 There's been incredible pressure on executives of publicly traded companies to keep up stock prices. This pressure, among other reasons, may cause manufacturing company executives to make bold projections to external financial analysts (or Wall Street) about future sales without using the demand forecast generated from the bottom up. When the company realizes this disparity between the initial projection and the forecast, the forecast is changed to reflect the projections made by the company's officers, negating its accuracy. The company arbitrarily sets sales targets for various regions to meet Wall Street numbers that are totally out of sync with input provided by the regional sales managers for the DF process. Even though the regional sales managers' input may have a qualitative element (art), they tend to be more accurate, given their proximity to the customers in the region. Unfortunately, the arbitrary sales targets make their way back to the supply chain, and the result is often excessive inventory build-up starting at the distribution channels to the upstream suppliers. Seeing the inventory pile up, the manufacturing company may decide to shut down a production line. This action affects upstream suppliers who had procured raw materials and components to meet the executive-mandated production numbers, which may cause them to treat any future forecasted numbers with suspicion. Most cost efficiencies that could be obtained through planned procurement of raw materials and components go out the window. It's very likely that the companies try to blame DF and SCM technologies for failing to provide a responsive and efficient supply chain, even though the fault may lie in the company's misuse of the technologies and not the technologies themselves. Guarding Against the ExtremesEarlier in this column, I said that DF is part art or intuition and part science. The art/intuition part comes in when subject-matter experts (SMEs) make educated estimates about future sales. These SMEs could range from distribution outlet owners to sales and marketing gurus and economists. Their intuition is typically combined with data (such as historical sales figures) to generate the forecast for the next quarter or year. During a recession, the SMEs tend to get overly pessimistic. The demand forecasts generated from this mindset lead to inventory shortages when the economy recovers. Similarly, during an economic expansion, the SMEs tend to have an overly rosy picture of the future. This optimism leads to inventory gluts when the economy starts to slow down. In both instances, blaming and invalidating DF and SCM technologies is counterproductive in the long run. It's very rare that a demand forecast and the actual outcome match 100 percent. If it's close enough to avoid lost sales or create an excess inventory situation, it's deemed a success. DF and supporting SCM technologies are supposed to form a closed loop with actual sales at the cash register providing a feedback mechanism. This feedback is especially essential during economic upturns or downturns. It provides the necessary information to a company and its supply chain to react in a coordinated and efficient manner. Don't let the current disillusionment with DF and SCM technologies impede the decision-making process within your company. The intelligent enterprise needs these technologies to effectively utilize its capital resources and efficiently produce to meet its sales forecasts. Ram Reddy [ramreddy@tacticagroup.com] is the author of Supply Chains to Virtual Integration (McGraw-Hill, 2001). He is the president of Tactica Consulting Group (www.tacticagroup.com), a technology and business strategy consulting company.
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