Forecasting in Supply Chain and Operations

Producing accurate estimates is the main purpose of business forecasting. Every day, operations managers need to make decisions with uncertain outcomes. No one can predict the future to know what sales will be, what the weather will be like, what new equipment will be needed, or what mix of labour skills will be required on a specific day.

Yet, those decisions still need to be made to meet customer demand and to keep the business operating. This is where business forecasting software can be of great use, with our team at ICit offering a track record in helping businesses to effectively implement financial forecasting software.

What is Forecasting?

Forecasting is the process of making predictions of the future based on past and present data, most commonly by analysis of trends. In practice, most businesses use a combination of mathematical methods alongside the intuition of the operations managers, demand planners and sales teams.

Forecasting is used extensively in supply chain management to ensure that the right product is at the right place at the right time. Accurate forecasting is essential to help with supply chain planning, reducing excess inventory and thus increasing profit margin. However, since resources are not infinite, and with lead times to consider, forecasting techniques must consider several time horizons.

Forecasting Time Horizons

Short range forecast.Medium range forecast. Long range forecast.
While it can be up to one year, this forecast is usually used for three months or less. It is used for planning purchases, hiring, job assignments, production levels, etc.This is usually three months to three years. Medium range forecasts are used for sales and production planning, budgeting, and analysis of different operating plans.Typically, three years or more in time span, it is used for new products, capital expenditures, facility expansion, relocation, and research and development.

Short term forecasts are usually more accurate than medium or long-range forecasts. Most short-term forecasts are quantitative in nature and use existing data in mathematical formulas to anticipate immediate future needs and impacts. Short term forecasts also need to be updated regularly to maintain their effectiveness, which is where supply chain software can be highly useful.

Medium and long-range forecasts are more comprehensive in nature. They support and guide supply chain management decisions in regards to the planning of products, processes, and physical capacity. For example, a new factory or warehouse can take several years to construct, so the financial forecasting must have a high degree of certainty to sanction the investment.

Types of Forecasts

There are three major types of forecasting, regardless of time horizon, that are used by organisations.

Economic forecastsTechnological forecastsDemand forecasts
address the business cycle. They predict housing starts, inflation rates, money supplies, and other macroeconomic indicatorsmonitor rates of technological progress. This keeps organisations abreast of trends and can result in innovative new products. New products may require new facilities and equipment, which must be planned for in the appropriate time frame.deal with the company's products and estimate consumer demand. These are also referred to as sales forecasts, and are used in scheduling, production, and capacity, they are also inputs to financial, personnel, and marketing forecasts.

Strategic Importance of Business Forecasts

Operations managers have two tools at their disposal by which to make decisions: actual data and forecasts. The importance of forecasting cannot be underestimated. For example, if we consider a product forecast and the functions of workforce, capacity, and supply chain management.

The workforce requirement is based on demand. This includes hiring, training, and the ability to flex the number and of staff with specific skills in the short term.

When the capacity cannot keep up to the demand, the result is undependable delivery, loss of customers, and maybe loss of market share. On the other hand, excess capacity can substantially increase operating costs.

Last minute shipping is high cost. Asking for parts last minute raises the cost. Most profit margins are tight, which means last minute decisions can wipe out the profit margin. Without the right budgeting software, all of these tasks can become far more complex and costly than they need to be.

These simple examples highlight why operational and financial forecasting is so important to an organisation. The best operations managers learn how to forecast, to trust the numbers, and to trust their instincts to make the right decisions for their business. The guidance of effective supply chain software can be a big part of that.

What are the Biggest Challenges for Business Forecasting?

Whilst no forecast is 100% accurate, the biggest challenge facing businesses is the time it takes them to generate a business forecast in the first place. The core issues are:

  • Data: multiple data sources (ERP, MRP, CRM, WMS, Etc) and data definitions
  • Processes: complex processes are difficult to replicate in a forecast
  • People: inconsistent forecasts based on human optimism and pessimism, input errors and lack of time to verify outputs
  • Scenarios: due to the time and effort involved, what-if scenarios are not possible leading to sub optimal decisions

What is a Good Business Forecasting Solution?

Implementing a financial forecasting solution to overcome the issues outlined above requires people who understand the business processes and a forecasting tool that can accommodate the scale and complexity of the organisation. Whilst many forecast models are spreadsheet based, these are prone to error, lack scalability, have little auditability and require constant maintenance.

The forecast system needs to be agile and flexible, easy to maintain and to produce forecasts in real-time. The people engaged in the forecast process need a system they can trust, spend minimal time on data collection (through automation) and most of their time on thinking about the assumptions and verifying the outputs – the more time spent on reviewing the forecast will increase the quality of decision making and increase profitability.

We have seen over and over again how this has become a key need for a company, particularly at a point of key growth or development. Here at ICit, we understand the transition involved with moving from a simple spreadsheet to a more sophisticated business forecasting software can seem daunting, but it can be hugely beneficial to your business success. Whether in terms of supply chain management, financial forecasting or many other business processes, finding the right forecasting process is a pivotal task.

How to Achieve Integrated Business Planning

The importance of integrating finance and supply chain management forecasts cannot be understated. There must be a common language, so that there is no disparity between data definitions and performance metrics. The logic and drivers used in the forecast models need to be clear and understood, so the outputs can be challenged objectively.

To achieve this, smart companies are moving away from disconnected point applications and spreadsheets and are adopting a centralised planning platform. It is worth noting that each business will need to find the right number of forecast models to make the appropriate resource decisions, as there is no one size fits all solution.

This is something that ICit is ideally equipped to help with, as our team are able to offer the business insight and financial forecasting expertise to ensure that your business receives the right financial forecasting solutions to continue your current success and aid future growth.

The diagram below depicts a complex ‘supply and demand’ forecasting solution. Whether your business needs some or all of the applications, the important point is to be sure to choose a business forecasting solution that is capable of handling complexity, as being able to integrate the various components is key.

How to Move Towards Effective Financial Forecasting

To discuss your financial and operational forecasting requirements, please contact ICit for a free consultation and to discover more about how we deliver solutions to companies just like yours every day. Whether you want to discuss supply chain planning, business forecasting software or any other feature of our service, we’re happy to talk.

T: 01565 831900 | info@icitbi.com | www.icitbi.com

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