Learn about Tom, white papers, and books and CDs relating to supply chain management. _____________    WORDS FROM WALLACE - NOV/DEC 2006 ARE YOUR FORECASTS REALLY SO BAD? Back in January, I promised you a newsletter on abnormal demand. Since the year is almost up, I decided I'd better get going and deliver. So here goes. How many of you have ever said: "Our forecasts are lousy!" or "Our forecasts stink!" or "If only we could get an accurate forecast, we wouldn't have any problems!"

This topic -- Managing Abnormal Demand -- is covered in our book: Sales Forecasting: A New  Approach.   Click here to view those pages. _________ Well, you may be attacking the symptom and not the disease. The symptom is that actual sales are far from the forecasts. But the fault may not lie in the forecasts themselves, but rather how the company manages incoming demand. Here's an example: I'm in the Customer Order department. A customer  asks, "We need 1,200 widgets, model number 2345. How soon can we have them?" I look at the Master Schedule for Widget 2345: there are 900 in stock with 800 more scheduled to be produced in Week 4. The forecast is 800 per month. So I say: "We can give you 900 now and 300 in week 4." That customer says fine, you book the order, and everybody's happy, right?   Hell no, that's not right. What about our continuing customers who will be ordering from us over the next month? They're the ones whose past orders are the basis for this forecast. Will they be happy? Once again, hell no. I've just ensured lousy customer service on this product for the next month or two.   Here's what happens. During the month, we get more orders: 180 in week 1, 120 in week 2, 330 in week 3, and 190 in week 4. But we can't ship hardly any of them because the stock of 900 was wiped out by that big order. Customers are yelling; expediting reaches new heights; fingers are being pointed; and no one is having fun.   The total demand for the month is 1200 + 180 + 120 + 330 + 190 = 2020. That's against a forecast of 800. And when the battle's over and the smoke clears, what gets blamed? The lousy forecast gets blamed, as in: "The forecast was 800 for the month and we got orders for 2000! When are we gonna get some decent forecasts around here?!" The failure here is not with the forecast. Take away the big order of 1,200 and the demand for the month was 820 against a forecast of 800. No, the failure is with the company's inability to manage abnormal demand. A loose definition: Abnormal demand is demand that typically has not been forecasted, is quite large, and is a surprise. Sometimes, not always, these are caused by a competitor going on strike or perhaps having a plant get flooded, as in Hurricane Katrina. Their customers scramble as they try to replace the lost volume from their primary supplier. So what should I have done before I accepted the order for 1,200 of Widget model 2345?  First, I should have asked myself a few questions: Isn't this unusual? This prospective customer is asking for a month and a half's supply right now.   Who is this person? Have we done business with her before?   A likely answer to this last question is no, she's a new customer. And here's the moment of truth: on the one hand, if we accept this order as is, we will virtually guarantee poor service to our existing customers, the ones who pay our salaries month in and month out.

Managing Abnormal Demand is also addressed in our book: Master Scheduling in the 21st Century.    Click here to view those pages. ___________ On the other hand, this is an opportunity: here's a prospective customer who wants to buy our product. If we can help her, there's a chance we might make a friend and convert her into a continuing customer. In most industries, new customers are hard to get. Thus, I should ask the caller a few questions: What do you really need? Her answer might be: "I need 100 by next Tuesday to avoid shutting down our line." And after that, what do you need? Answer: "100 per week for the next 10 to 12  weeks. At this point, you might say: Okay, I'll get back to you within an hour. Now 100 per week is 50% of the total forecast of 200 per week (800 per month). So one question is: Can the plant bump up the schedule to cover the extra 100 per week? If yes, you're okay. If not - perhaps because a key component is coming on a slow boat from China - you have another question to ask - this one for the Sales Department: How do you guys want to play this? If we give 'em 100 every week, we'll have periodic backorders for the next six weeks or so. But we'll make these people happy, and they're potentially a big customer.   Several last questions, which I'll ask of you: Whose decision is this? Clearly it's a Sales Department decision. They're the closest to the customer and the customers are primarily (not exclusively) their responsibility. Isn't this time consuming? Certainly. But it's not nearly as time consuming as expediting, fighting fires, and jumping through hoops when you're up to your backside in backorders and unhappy customers. How well do you in this area? Could your processes for managing abnormal demand be improved? Should you and your colleagues take a hard look at this? Think about it. And thanks for listening.

It's a different world out there compared to 20 years ago.  Back then, the conventional wisdom said to focus on one competitive variable - either cost or quality or delivery - and get very good at that.  That's not good enough any more.  Sustainable competitive advantage comes from having all three at the same time - instead of one or the other: Low cost, and High quality, and Great customer service The challenge is to be good at all three. But it can be done -- every day.  The last competitive variable, great customer service, comes in three parts: Reliability -- shipping on time all the time, and Responsiveness -- having short lead times and being able to turn on a dime, and Variety -- giving customers many choices, meeting their wants It can be an even greater challenge to get good at all three of these.  But it can, and is, being done.  Every day.  There's a label we put on this: Eliminating Trade-Offs.  More on this topic in a future newsletter.

Click to view our newest web page "What's New" which features periodic updates from the field. The current update is about the APICS International Conference.    One of the presentations at the conference was especially interesting  Executive S&OP:The Sanford/ Sharpie Journey by Dean Smetana. On the What's New page we offer a click through to view that PowerPoint presentation and also a presentation that Bob & I did, Executive S&OP: How to Make It Work.   Interested in viewing past newsletters, then visit our other new web page which gives you access to all our archived newsletters.   See our complete line of books and CDs, Visit Our Bookstore