Risk. I'm not referring to the world domination-themed board game. Today, I'm referring to risk in the demand forecasting process and your supply chain. I know..."yawwwnnnn". Words like that at the beginning of any written material can make your eyelids heavy and elicit drool. Now read these words "Money, Money, Dollars, Bling, Rich, Poor, Win, Lose, Money". Now, I hope you are bright-eyed and chomping at the bit to know why the yawn words, demand forecasting and supply chain = the exciting words, money, dollars, and so forth.
Risk in product sales forecasting, or demand forecasting, result from a mismatch of projections and demand. If forecasts are too low, you leave money on the table by not having enough product to sell to hungry customers. If forecasts are too high, you are left with excess inventory and price markdowns. Scary concepts like "long lead times", "seasonal demand", "high product variety", and "short product life cycles" can make the savviest of forecasters lay wide-eyed and trembling in their beds at night. Too dramatic? Replace "trembling" with "definitely not sleeping and drinking excessive amounts of coffee the next day".
It can be difficult to accurately assess customer demand, let alone affect it. So smart company execs often turn to the next best place to control their risk: their supply chain. There is a whole science and consulting industry behind this area. But I'll give you some of the main points and keep it short and sweet. Think about these issues in terms of your product, company, risk, and money saved or lost:
- Information Distortion: In late 2003, product shortages in Western Europe led Nokia customers (distributors and retailers) to order more than was needed so they could meet demand if Nokia began rationing or allocations of product. The exaggerated figures confused Nokia's own reading of the market, and caused the company to make inaccuracies in sales forecasts. In general, the farther you get from the end consumer in the supply chain, the greater the chance for misinformation. It's just like the childhood telephone game, except it is referred to as the "bullwhip effect" in the industry. If you have a distributor and a retailer in between you and your end-customer, how accurate of demand information are you really getting? If your inventory is building up, you could be losing substantial amounts of money. How to control? Approach your partners in your supply chain and work to collaborate with them for greater information sharing. Increased communication between supply chain partners about inventory levels, demand, lead-times, problems, etc., help reduce the risk that your company will under or overestimate demand for your product. It will help your partners as well. Everyone wins.
Dollars, Money, Piles of Cash...
- Short Product Life Cycles: If your product is expensive to manufacture and/or the amount of time it will be valuable on the market is not that long, building up inventory can be a very expensive proposition. To address this, companies will weigh the tradeoff of carrying higher inventories of expensive products with the possibility of responsive delivery. Responsive delivery might mean air shipping certain quantities of your product to customers once they have placed an order. Air shipping can be expensive, but you might be surprised to find out that it could be cheaper to warehouse your inventory overseas and airship it to meet demand at the last second, rather than warehouse it here.
Bling, Greenbacks...
- Too Many of the Wrong Product: If you are developing a new product line, this can help. An unsavory situation can occur when your company has too many of a product that doesn't sell what was forecast, and too little of a product that sells more than you have to meet demand. This can often happen with SKUs that have just minor differences from each other. A solution to this can start with basic product design and architecture and involves designing a product line to use standard parts across the line and for product assembly to be uniform with all of the products as close to the finished stage as possible. The finishing touches, whereby the products are differentiated from each other, are postponed to the latest possible stage. Thus, your risk of having the wrong product is minimized as much as possible. HP did wonders with this strategy with their Laserjet printers in the 1990's. Imagine a line of 15 different printers designed to all be the same until late in the assembly process. They are then shipped to domestic warehouses and assembly is completed, and the product is differentiated into 15 different versions, when HP knows how many of each product they need. They have saved hundreds of millions of dollars using this method and it has become a model strategy for companies across the world.
Sales and demand forecasting, and supply chain risk are not the sexiest of subjects when a company is selling products on the market. Small companies often don't even have the time or resources to explore these parts of their business. But, alas, they are crucial issues and could cost or save you big $$$.
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