Seven reasons why you need to forecast in supply chain
The importance of demand forecasting has been topic of discussion in economics and some valuable books have been written on it over the years. However, within the supply chain context there are three types of forecasting, which are:
Demand forecasting: This is the investigation of the companies demand for an item or SKU, to include current and projected demand by industry and product end use.
Supply forecasting: Is a collection of data about the current producers and suppliers, as well as technological and political trends that might affect supply.
Price forecast: This is based on information gathered and analysed about demand and supply. Provides a prediction of short- and long-term prices and the underlying reasons for those ternds.
1. Increasing customer satisfaction
In order to keep your customers satisfied you need to provide them with the product they want when they want it. This advantage of forecasting in business will help predict product demand so that enough product is available to fulfil customer orders with short lead times, on-time.
The importance of Demand Forecasting is much higher in Made-to-Stock (MTO), Assemble-to-Order (ATO) or JIT Supply Business.
2. Reducing inventory stockouts
Businesses need realise the importance of demand forecasting, even if you are working in JIT System or with long lead time suppliers like India or China. If you are buying from long lead time suppliers then you need to send a demand forecast so that suppliers can arrange raw materials in anticipation of actual customer orders.
In the case of JIT Systems, demand forecasting helps you to time your purchases to correspond to when sales need to be fulfilled. The less time inventory spends in the warehouse, the less money you’re paying to let it just sit there waiting to be sold.
3. Scheduling production more effectively
Forecasting is often compared to driving a car while looking in the rear-view mirror. The past gives a few clues about the future, but not enough to stop you from driving off a cliff, but in my opinion this is the best view you’ve got! If you look into the 5 Levels of Planning Hierarches most business should need robust SIOP and Master Scheduling to schedule production more effectively.
But I must emphasise the solution is not complex analytical software. The answer is this: master the present before trying to predict the future. There are signals everywhere that point to how demand is changing. Adaptive manufacturers are watching and listening closely to the way customers consume their product. Respond and adapt to these changes, and you will depend less on prediction.
4. Lowering safety stock requirement
A good demand forecasting process will have a direct impact in the planning of inventory levels, Link:
Developing production requests to manufacturing operations
Planning for new product launches
Planning for promotional activity
Planning for seasonal variations in demand
If a business is using forecasting to plan any of the above scenarios then you don’t need to carry high safety stocks to manage those events.
5. Reducing product obsolescence costs
By identifying, repurposing or removing obsolete inventory the volume of inventory on hand will decrease. With this, both direct and indirect costs of keeping the obsolete inventory will be reduced. This closely links to reduced order sizes as a smaller volume of the inventory will be in stock and demand forecast accuracy. Having a standardised reliable way of forecasting demand will mean that excess stock is not ordered and this will reduce the chance of obsolete stock.
6. Managing shipping better
Nothing annoys me more than doing everything you can to make or buy a product so that it’s available to ship on-time yet the warehouse guys won’t ship, as they don’t have enough people. For that reason the logistics guys are now part of the SIOP process and they have to tell me how many people they need in the following three months to ensure we have enough capacity to ship material on time. This is one of the classic examples to demonstrate the importance of demand forecasting.
7. Improving pricing and promotion management
In some businesses, multiple promotions running concurrently may result in the cannibalisation of both promoted and non-promoted SKUs. Integrating distributor-level promotions and related forecasts will allow you to improve the flow of goods and achieve better results in terms of availability and stock fill rates. Similarly, improving the ability to forecast the impact price changes will have on both revenue and gross margin dollars, when timed well!
You don’t need any special software or super algorithms to start forecasting - a simple Excel Spreadsheet forecast will do to start with. But in my humble opinion no one can deny the importance of demand forecasting qualifications to benefit whatever business you are in.
Forecasting should not be a knee-jerk reaction of complaining to the supplier or shouting at the VP, there are plenty of more productive methods including gathering data, getting it into shape to analyse and creating a base demand forecast.
Dr Muddassir Ahmed is a Manufacturing Operations, Procurement and Supply Chain leader with experience in international multi-site manufacturing in the electrical, hydraulics and internet industries. With considerable experience in deploying continuous Improvement best practices in Europe, the Middle East and Africa.
Top 10 air freight carriers
10. Cargolux Group
The Luxembourgish freight carrier Cargolux Group (comprised of Cargolux Airlines and Cargolux Italia, established in 2008) remained in the number 10 spot, with a total reported FTK (Freight Tonne Kilometer) equaling 7.45 bn, which represents a 7.7% expansion year-over-year. The carrier group currently operates a fleet of 30 aircraft (26 through Cargolux Airlines and an addition four through Cargolux Italia), primarily variants of the Boeing 747.
9. Korean Air
Headquartered in Seoul, Korean Air provides cargo and passenger services to over 100 destinations in 44 countries. The carrier fell from eighth place in the previous year’s rankings, with a total FTK of 7.66 bn, representing a 7.1% decrease year-over-year. Korean Air reported a net revenue of $10.7bn in 2017, also reporting a return to profitability for the first time in five years, according to Forbes.
8. Air France-KLM
The Air France-KLM freight carrier group was founded in 1947. The group is comprised of Air France, KLM, and Martinair, and is based in Paris, France. Falling from seventh place in the Freight 50 rankings, the carrier reported a total FTK of 8.13 bn, which represents a 9.2% decrease in traffic year-over-year. The group reported a net revenue of $29.08bn at the end of 2017 and is ranked #28 on Forbes Magazine’s list of Best Employers.
7. Qatar Airways
Qatar Airways, the nationally owned airline of the Kingdom of Qatar is based in Doha, and ascended two places in the Freight 50 rankings, with a total FTK of 9.22 bn, representing a 19.6% increase in comparison to the previous financial year. The carrier’s Cargo division recently launched facilities at its hub in Doha to provide a “Seamless Cool Chain”, comprised of a “2,470 square metres Climate Control Centre situated at the airside… equipped with segregated temperature-controlled sections for storing pharmaceuticals and perishables.” This end-to-end supply chain control is expected to further improve Qatar’s standing as a leader of Middle Eastern air freight.
6. Lufthansa Group
Based in Cologne, Germany, the Lufthansa Group (comprised of Lufthansa, Swiss, Austrian, and Brussels Airlines) fell from the fourth position in the Freight 50, with a combined FTK of 9.46 bn. While this represents a 1.6% increase in traffic, year-over-year, the carrier was forced down the list by drastic growth from other German freight company, DHL. According to Forbes, Lufthansa’s revenue and net profits ($41.5 bn and $2.78 bn, respectively) in 2017 are both the highest reported by the company over a ten-year period.
5. Cathay Group
The Cathay Group (composed of Cathay Pacific Airlines and Dragonair) is headquartered in Hong Kong and its Cargo division accounts for 21% of the airline’s total revenue. The company’s first dedicated cargo flight between Hong Kong, Frankfurt, and London, was established in 1981, according to the official site. Now, Cathay Pacific’s Cargo Division services over 47 destinations worldwide. The carrier fell from the fourth position on the Freight 50 ranking, as its total FTK fell by 3.6%, to 10.21 bn. According to Forbes, Cathay Pacific experienced a second year of unprofitability, although the airline’s asset portfolio reached a record high in 2017, with a net value of $24.1bn.
4. DHL Express Group
Operating as the largest European carrier group, DHL Express Group (composed of DHL Air, DHL International, Air Hong Kong, Polar Air Cargo, ABX Air, Southern Air, Aerologic, and EAT Leipzig) rose two positions in the Freight 50 rankings. The carrier reported a total FTK of 10.56 bn, which represents an increase of 15.1% year-over-year. In 2018, at the Farnborough Air Show, DHL Express announced the purchase of 14 Boeing 777s, part of a new strategy to modernise its fleet.
3. UPS Airlines
Headquartered in Atlanta, Georgia, UPS Airlines is part of United Parcel Service, Inc. Founded in 1908, UPS is the oldest company in the Top Ten, and retained third place in the Freight 50 rankings, with a total FTK of 11.26 bn. This represents a 3.9% increase year-over-year. The Company as a whole reported a net revenue of $67.7 bn, according to Forbes, representing a continuation of a ten-year trend of continuous growth. Forbes also ranks UPS among the world’s top 100 most-innovative companies, and the world’s top 50 most-valuable brands.
2. Emirates Skycargo
The state-owned air freight carrier for the UAE, Emirates Skycargo remains in second place on the Freight 50, with a total FTK of 12.27 bn, representing a 0.4% decrease year-over-year. The carrier’s central hub in Dubai allows its 259-strong fleet to reach over 1.5 bn consumers in under eight hours. Current purchasing plans are underway for Emirates Skycargo to almost double its fleet size. According to Albawaba, “In response to increasing demand from its customers, Emirates SkyCargo introduced a range of air transport solutions specific to industry verticals including Emirates Pharma, Emirates Wheels and Emirates Fresh.” Emirates Wheels has transported close to 150 cars per month since the program’s inception.
1. FedEx Express
Founded in 1998, FedEx Express is both the youngest and largest air freight carrier worldwide, with a total FTK of 15.71 bn. Haulage decreased by 0.9% year-over-year, while revenue increased to $60.5 bn in 2016, and again to $63.8 bn in 2017, continuing an eight-year growth trend. FedEx employs 395,000 members of staff, with FedEx Express operating across twelve transport hubs globally. The carrier purchased an additional 24 Boeing 777 variants in 2018, maintaining their company’s position as the largest airline in terms of cargo haulage.