Forecasting … Not Buying It!
posted in Inventory Management by Shane Bredoff
If yours is one of the many companies that purchases the forecast each month, I would bet that you have too much inventory and customer service issues. This is a common practice that highlights the lack of focus and understanding of Operations that many companies have.
One thing needs to be established up front; the forecast is NOT the correct amount of inventory to purchase. I cannot count the number of companies that purchase the expected forecast plus or minus the shortfall or excess inventory they expect to have when the previous period ends. The only thing that I have ever witnessed this accomplishing is poor customer service and excess inventory.
By definition, forecasts are wrong. A good forecasting process will be too low 50% of the time and too high 50% of the time. To re-emphasize my point above, if you purchase based on something that is, by definition, wrong, it will, also, be wrong. That is not to say that it will never be correct, a broken clock is right twice a day, but it cannot be consistent. This leads to too little inventory for some items and too much for others.
Because the inventory will be wrong, companies compensate in other, less process oriented, ways. Sales will increase the forecast so that the customers get their product. Planning will plan to end each period with half of the next period’s demand. Management will mention adding “safety stock”, but will not know how much or what that is. And, of course, everyone will be yelling at the forecasting group to get the forecast right.
Understand, I do think that companies should forecast. The forecast, though, should be used as the basis for establishing inventory levels. Inventory levels should be established based on forecast, forecast error, and lead time. Purchases, then, are based on the inventory level and shipments. Purchase based on something that can be known, i.e. orders or shipments, not on something that is, by definition, wrong.
Best regards, Shane.
