My third tip will relate to forecast accuracy—always a hot topic of discussion.
You’re not going to make any lasting headway on inventory reduction unless you can get your sales forecasts under control. Most companies expect the forecast to run low from time to time and are prepared to deal with that. They maintain safety stock or safety time inventory (which we discussed in my previous article) to fill customer orders during these periods.
But then there are times when the forecast runs high. This can be the result of a host of causes, including:
• Unrealistic product sales growth projections.
• Inappropriate statistical forecasting techniques.
• Underwhelming new product introductions.
• Unsuccessful product promotions.
• The emergence of new competitors.
Whatever the causes, one thing is certain: your third step in reducing inventory should be to reduce your high-side forecast bias.
How to Keep an Eye on Forecast Variance
As I mentioned, we all expect a certain amount of variance between our forecast and our actual sales. When we review the forecast and find a month in which the forecast was more than 10% greater than actuals, that’s no reason to panic. But a second month hints at a trend—and a third month tells us that we need to dig deeper.
Don’t let these situations go unnoticed. Use your supply chain planning software to set up a tracking signal. A tracking signal is an alert in our software that identifies when the forecast is either consistently high or low. We are particularly interested in situations where the forecast is significantly high for three consecutive months.
Start with your “A” items, and use 10% forecast variance as your first trigger. From there, you can tweak that percentage to deliver more or fewer alerts. Obviously, if you set the threshold at 2% variance, you’re going to get a lot more alerts, whereas 20% variance will cut you much more slack—probably too much. But the important thing is to get started using tracking signals if you aren’t already using them.
What to Do About Those Tracking Signals
OK, so you’ve configured your supply chain planning solution with some tracking signals, and it’s delivering alerts when your forecast variance reaches certain triggers. Now, what do you do with this information?
When your forecast for certain items is consistently high, that’s your cue to single them out for a special forecast review. You may discover that in forecasting for these items, you’re relying on outdated assumptions or faulty formulas. Once you know the cause, you can easily change your formula—or at least enter an override—to generate lower replenishment plans for future periods.
Lower replenishment plans should lead to lower inventory levels. And lower inventory levels will eventually deliver a better bottom line.
To summarize: step three is to reduce your high-side forecast bias. For steps four and five, keep reading my articles—or download our free white paper, “Five Things You Can Do This Week to Reduce Inventory.”