Suppliers Need Better Forecast and Demand Projections

A recent benchmarking survey of key consumer product metrics by Gartner and IDC Manufacturing Insights found SKU-level forecast error rates one month out had an average of 21.9%. For new products, the error rate grew to 48.3%. In that report, Gartner says consumer goods companies will continue to get better at using POS data and near-term demand signals to improve short term forecast accuracy and replenishment plans. Top performing companies showed forecasting error rates much lower than the averages, dropping to 11.7%, and 34.7% for new products.

Forecasts with high levels of error result in many supply chain issues, such as the wrong product mix – excess inventory of some products and not enough of others, higher overall inventory – excess cash tied up in inventory and poor cash flow, increased waste in production resources and customer service problems.

Gartner says performance leaders are not only working on their forecasting but also leveraging downstream data to better predict how much to replenish based on what is being consumed downstream.

Those leaders "are already working closely with their key retail accounts to manage vendor-managed inventory (VMI) replenishment based on retail warehouse inventory and movements, and some point of sale (POS) data reflecting consumer pull through the pipeline. They set inventory buffers based on product level, average daily demand, range of demand variation and supply reliability. These buffers are reviewed regularly to reflect recent patterns, rather than averaging two years of history to take out the highs and lows."

In addition, increased analysis of actual SKU-level demand to determine average daily usage, near-term demand patterns and range of variation will improve alignment of buffer inventory to cover demand volatility with less reactive disruption in the upstream supply chain than we see today.

As a result, overall inventory will be reduced because the mix is better aligned with what is selling. There will be less slow-moving and obsolete inventory for those products replenished based on downstream consumption. This will improve cash flow and cash conversion cycle time, and it will reduce write-offs.

Resource: Supply Chain Digest