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Are stockouts and inventory pileups in Supply Chain caused by poor forecast accuracy?
Supply chain professionals rarely think about this question, as the answer seems so obvious to them. There are hard liners on either side.
A vast majority of them, close to 95% may be, believe that poor forecast accuracy is the single biggest reason for stockouts as well as inventory pileups. Many large US retailers are certainly suffering from it.
On the order hand, there are conventional TOC practitioners who firmly believe that forecasting should be done away with. The real reason for inventory mismatch is either the lack of a dynamic alignment between supplies and demand, or poorly designed buffers.
How do we resolve it? What’s truly behind such hard stances? Is it possible that both are right and we are missing an important element in the causality?
Let me explain. Inventory mismatch is caused by ‘Forecast Accuracy’ as well as ‘Forecast Dependence’. The first set of people depend a lot on the forecast for their supply chain execution. Their operations would come to a standstill if we do away with forecasting. Since the Forecast Dependence is so high, Forecast Accuracy will definitely matter to them.
Teams running a Demand Driven Supply Chain using TOC have a low or no Forecast Dependence. As a result, Forecast Accuracy doesn’t matter to them.
In my opinion, the crux of the issue is not Forecast Accuracy but ‘Forecast Dependence’. How should we tackle it? I will cover it in my next post.
Till then…