Demand Driven Inventory Management: Your Target in 2014
Demand Forecasting and Inventory Replenishment Methods were the top stories (blogs) downloaded and reviewed in 2013. Based on the number of readers and average time spent on a page (3min), these 5 stories stayed in front all year long. These stories are good indicators of where companies like yours see their opportunity to use better methodologies and new technology for higher supply chain profits in 2014.
Change is Good. Do You Know the Right Questions?
The marketplace changes faster today than anyone could have predicted 5 years ago. While many supply chain analysts have touted the need to be demand driven, the facts show that most retail, wholesale, and grocery businesses have done little to improve their processes. The good news is today hardware can run 3-5X faster than 5 years ago at 1/2 the cost. The bad news is that software systems cannot just be ‘upgraded’ to make use of the new hardware, forcing business to accept 3rd rate results or outlay large amounts of cash to write new software. Software companies have made it very difficult for buyers to understand what is old technology with a new wrapper and what is really new software technology. The following top stories of 2013 highlight the right questions to ask, why the questions are important and the answers you should expect.
“Don’t manage – lead change before you have to.” — Jack Welch
Review the Top 5 Blogs of 2013: Demand Forecasting and Inventory Replenishment Methods to Improve
There are two different forecast methods in use today: demand forecasting and Sales Forecasting. They each can use the same algorithms and both are ‘wrongly’ referred to as demand forecasting by users and software people. The difference is tied to what data is fed into the algorithms. Over 95% of forecasting systems today are not using a demand forecast method due to the way their code was designed for hardware in the 1990’s and early 2000’s. That is a large part of the reason why demand forecasting & demand planning systems that were designed and written before 2005 have an average forecast accuracy below 83%. Software that was marketed for S&OP process has overnight been renamed ‘demand forecasting’. Do you know the right questions to ask to cut through the sales rhetoric? Do you know why these simple differences can translate into millions of dollars on your bottom line?
Sales can be grouped into some combination of 5 ‘sales types’: regular, lost, promotion, event, and closeout. We are reminded every holiday that customers react differently to the different types of sales. If your inventory replenishment systems lump all sales together, your replenishment is only a measure of how customers responded in average. An average response is an expensive mistake, do you know your system?
Do you know the types of Demand and how each is managed in your supply chain? ‘Lost Sales’ are mis-used and not understood by many companies. Lost Sales are not rain checks and not the same as out of stock; sadly many retailers lose a fortune due to the lack of a lost sales strategy in their supply chain. This was the #1 summer story and ties to another top blog: Differences between Demand Forecasting and Sales Forecasting for Inventory Replenishment
Research today highlights how improving forecast accuracy delivers a high ROI. Improved forecast accuracy, when combined with software that translates the forecast into demand driven events, will decrease inventory and operating cost, increase service and sales, improve cash flow and GMROI, and increase pre-tax profitability.
Two Blogs had similar audience downloads and were tied for 5th place:
Inventory Replenishment uses a tops down ~push OR bottoms up ~pull methodology. While a top down push is easier to plan, it costs more to manage and isn’t customer centric. A bottom up pull methodology is driven by service, not plan. Bottom up is customer centric, reacting faster to market changes, and costing less to operate. Your software cannot run both; learn the differences and which method is best used in your business.
Replenishment Errors with slow demand products often deliver out of stocks that can be avoided with good demand forecasting and service level planning. You need the right demand forecasting software and the right plan to manage Slow Movers. Read and Compare how you measure to others.
Avoid Broken Links in Your Chain
The success of Demand Forecasting and Inventory Replenishment depends on a few key pieces linked and working together. We see in each of the 5 blogs that Demand Forecasting accuracy is central to the success of each process. Key industry analysts Gartner, IDC and AMR will increase their focus in 2014 on Demand Driven Retail, which requires accurate demand forecasting and inventory replenishment process and methods closely linked together. We see new opportunities opening for mid-tier retail and wholesale companies to improve their profits this year which is good for everyone.
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