What Are the Odds?

March 12, 2009
Predictions are difficult in an unstable economy, but there are still ways to turn your material forecast into more than an educated guess.

Even when business is booming, it can be tough to predict what twists and turns might affect key variables to your bottom line, such as product demand and commodities prices. The prospect seems even more unlikely in today's economy, evidenced by the numerous companies that have simply declined to provide sales or revenue guidance to investors in recent months. Surrounded by such uncertainty, attempts to make predictions about next week, much less the next quarter, can feel like efforts in futility. Along with sales figures, most companies have found that their ability to forecast demand, and subsequently much of their material needs, also has become severely diminished.

Nonetheless, manufacturers still need to figure out ways to make do. For example, simply refining and having a better understanding of their own business needs can help generate realistic forecasts that could provide just enough certainty to make it through these tough times, says Anne Omrod, CEO of John Galt Solutions, a provider of forecasting solutions.

"There's no doubt that manufacturers are having a difficult time forecasting their material needs in today's economic climate," Omrod says. "But because it's harder, it has become even more important to have good processes in place. Much of the emphasis focuses on finished goods, but we're also seeing a lot of companies who need to translate that finished goods forecast back toward how much material they are buying."

Often, the risks most companies face fall into two key categories. The first relates to demand planning, in terms of how well they understand their customers and how their needs are changing. Demand plans then feed into material needs, which should focus on having a good understanding of all of their product lifecycles. The challenging part, explains Omrod, is that both categories are currently being thrown for a loop.

"In most cases past product lifecycles are being altered significantly," she explains. "So what a company did a year ago probably won't help them determine what they're going to need a month from now. No one is sure what new customers they might get, or more importantly, which ones they might lose. It creates a lot of variability that wasn't there before."

Of course, dramatic cost-cutting measures have become one of the more popular responses. In terms of buying materials, cuts have moved to a "lower level" of forecasting which target not only typical inventory controls on finished goods, but goes deeper into the process to find areas in which the number of units purchased for a particular product can be reduced.

"Through this process companies often find they can get away with buying five units of something instead of 10," Omrod says. "Then once they have confidence in the forecast and can increase its accuracy, their inventory levels and safety stock can be fine-tuned. This offers more control over inventory and prevents some of the twists and turns that tend to frustrate buyers."

Understanding what level of safety stock is required for each item is a good place to start, notes Omrod. In many cases, software automation plays a large role in the process, better equipping companies to evaluate safety stock levels and planned inventory. It also introduces at least some element of stability to a process subject to market swings that are becoming more and more unpredictable.

"Sure, commodities have come down and prices might be much lower than they were six months ago, but that doesn't necessarily mean you should start stockpiling materials," she says. "Because even when prices do drop, most companies won't believe that anything is long term anymore. So the smart ones will pay more attention to their own demand pull than to the price of commodities."

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