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Should we use monthly forecasts for finished goods deployment?
Many supply chain teams use the monthly sales forecast for their finished goods deployment. The practice is quite prevalent amongst leading FMCG and Pharma companies. Let’s have a relook at it.
Supply chain planning is done across multiple time horizons and the purpose of each horizon is different. Long term horizon helps in taking decisions requiring long lead times, such as setting up fresh capital intensive capacity. Medium horizon forecast helps in capacity loading, procurement of long lead time input materials, and need for outsourcing. Near term horizon forecast should be used for deployment actions.
While medium and long term forecasts can be done at an aggregate level, using certain additional demand drivers such as economic growth and inflation, these drivers aren’t suited for near term forecast, since the frequency of their update is either monthly or quarterly, and their granularity is at an aggregate level.
Near term demand prediction, on the other hand, requires more granular models considering impact of the relevant demand drivers at that granularity.
As we say, different horses for different courses! Marathon runners aren’t suited for sprints, and vice versa. Sprinters and marathon runners need to develop differential sets of capabilities to succeed.
If you are still using monthly forecasts for near term finished goods deployment, think again. You need to develop differential capabilities of demand sensing, flexibility and responsiveness to succeed at minimising stockouts and inventory pileups at the most granular level.