In today’s era of digital transformation, technology is imperative to mitigate the bullwhip effect within the supply chain. The bullwhip effect illustrates how minor shifts in consumer demand for a product magnify upstream in the supply chain. Thus, it can impact the efficiency of operations and increase inventory carrying costs.
The adoption of demand forecasting tools can help overcome the challenges of demand fluctuation in a timely manner. A reliable system should provide accurate forecasts and recommendations to optimize inventory management and prevent unnecessary costs. If these forecasts are incorrect, even by a small margin, they can lead to over- or under-ordering of raw materials and/or goods.
However, ensuring the quality of a forecast is not an easy task. It requires timely and accurate data. The way in which you test the quality of your prediction is to calculate its forecast accuracy.
But, what exactly is forecast accuracy? It’s the deviation, or margin of error, between the actual demand figures and the forecasted result in the demand plan. By finding out the forecast accuracy of your demand plan, you can factor this and make the relevant adjustments.
What do forecast stats help demand planners do? These stats help planners to:
- Mitigate future risks
- Prioritize forecasts according to business goals and refine
- Improve forecast accuracy
Let’s dig into some of the challenges and opportunities that demand forecasting can help with in managing your supply chain.
Factor in Risks with Accurate Forecasts
The quantitative result of calculating the forecast accuracy provides a good estimation of the quality of your past forecasts. This means you can factor in risks in your forecasts and determine how uncertain a forecast is for future business periods.
This visibility into the accuracy of your demand forecasts has a direct impact in your business decisions. You can proactively adjust inventories and labor management to cover the periods of uncertainty in your demand plan. The forecast is the starting point for almost all supply chain decisions. The production and procurement plan begins with the forecast. So when we talk about accurate forecasts, for every point the accuracy drops, it will have a ripple effect on the upstream actions of the supply chain.
Prioritize Actions
Making good supply chain management decisions is not an easy task. Demand forecasting helps in this decision-making process. Accurate forecasts give you the ability to make more realistic and well-founded decisions which lead to better results.
When the margin of forecast accuracy is high, you can identify the impact decisions have in the overall process. Thus, you can prioritize the different actions according to the business strategy and overall goals. This allows you to focus on monitoring future demand and stock levels, as well as to correct for smaller future deviations. This, in turn, enables the reduction of costs and the increase of cash flow.
At the end of the day, having a good margin of accuracy will clarify and set the right direction for your supply chain strategy.
Take Forecast Accuracy to New Heights
We have already stated how important it is for your supply chain to have good margins of accuracy in your demand forecasts. Therefore, if you continue to have high rates of deviation, it’s likely that you will have to correct your demand planning process . This may mean assessing the quality of your data. In addition, you may need to consider new technology.
One of the best ways to ensure accuracy is by leveraging automation technology. This functionality will automatically calculate the forecast errors through machine learning methodologies.
As Steve Banker of ARC Advisory Group states: “Demand management solutions that use machine learning perform better than solutions that don’t.… Machine learning is making it easier to explore whether new data sources lead to improved forecast accuracy.”
However, to implement an automated approach your business needs to ensure both the data and cross functional collaboration is in place. Effective demand planning driven by forecast accuracy will assist your business to foresee challenges and react accordingly… Its aim is to be as accurate as possible to minimize over- or under-production. This in turn, avoids unnecessary costs and reduces the risks to meet your customer demand.
Improving forecasts, which in turn helps to make your supply chain more efficient, doesn’t just start with a good demand planning system. It is the combination of the process, the system and the people that will improve efficiency, resilience and build agility into your supply chain.
Want to know more about Demand Planning? Check out other valuable resources:
- What is Demand Planning?
- The Demand Planning cycle
- Why is Demand Planning important?
- Roles and Responsibilities of Demand Planning
- Demand Planning Key Features
- What is a Collaboration and Demand Review?
- Responsibilities of a Demand Planner
- Sales Managers’ Role in Demand
- The Power of Real Time Planning
- Demand Planning Data Sources: ERP, CRM & PLM
- QAD Announces the Next Release of Digital Supply Chain Planning (DSCP)
- Harnessing Artificial Intelligence in New Era of Predictive Analytics, Demand Planning, Business Forecasting
- Extending Sales and Operations Planning Throughout the Supply Chain
