What’s missing from your demand forecasting?

Businessman Consulting Financial Crystal Ball

‘We already have sophisticated demand forecasting. There’s a ton of potentially useful information. Now what?’

The supply chain director I was chatting with had a point. What was the use of all that expensively acquired information if it didn’t translate into a more agile supply chain?

In a recent video interview (‘Picking winning supply chain technologies’), McKinsey’s Alex Niemeyer suggested that one of the key technologies for improving supply chain agility is ‘advanced high-volatility analytics’:

Number one is around the theme of agility… Today’s supply chains need to be set up to deal with big volatility all the time. And that doesn’t just mean risk – that also means [the] opportunity to take advantage when a competitor is affected or when a new market opens up. So this opportunity for high-volatility analytics, if you want to call it that, or ‘fast pace of change’ analytics can be very substantial in certain industries.

While I agree that sophisticated demand forecasting and analytics are necessary, they aren’t sufficient. Many organizations have invested in powerful demand forecasting tools and centralized planning. They have some idea what the future will look like. What they lack is the ability to create plans based on those forecasts and act on them.

Forecasts – even those created with advanced tools – are only a means to an end. The real goal is vastly improved supply chain agility: the ability to adapt swiftly to changes or expected changes (demand sensing), and take advantage of what you believe is possible (demand shaping).

Supply chain directors who suspect that their forecasts lack traction are often right. To respond nimbly to changed circumstances, sophisticated demand forecasting needs to be integrated with sophisticated planning. For example, if your forecasts indicate that you’ll be selling a certain product in significantly higher quantities over the next few weeks, many things have to happen across the extended supply chain. Suppliers have to be informed. Production capacity needs to be reserved. Logistics must be planned.

Real agility is only possible when demand forecasting and planning are integrated at all planning levels – from  strategic decisions about product portfolios, down to operational decisions about assigning production capacity in the next 24 hours. Companies that embed this kind of responsiveness in their organizational DNA have a huge competitive advantage. To take just one example, integrating finance, supply chain planning and forecasting to create one version of the truth enables them to engage in real-time sales and operations planning. And as a recent PwC report noted ‘a lack of integration between financial planning and sales and operational planning (S&OP) processes can be a contributing factor to… [a] delayed response to changing business conditions.’

Companies that combine demand forecasting with effective planning and optimization are simply more aware of their environment. Knowing that you are equipped to take advantage of trends and tipping points is a powerful incentive to stay on top of changing market conditions – and profit from them.

Supply chain agility: How big is your gap?