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Demand Forecasting
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This sounds easy, but it's actually easy to get wrong. Your chances for success improve dramatically by understand­ing two concepts—the difference between demand and a sale or shipment, and who the customer really is for the facility being forecast.


Your system should be loaded with demand, which is what the customer wanted when they wanted it, such as bookings or orders by due date. Do not load your system with sales or shipments, which is what you were able to provide, whether it was when they wanted it or not. The difference is backorders. Unless you have an IS program to read them as a due date, you will have created a self-fulfilling prophecy that sets you up for failure.


Consider a simple example in which you have an item for which demand is 100/month every month. Of course, if it were this easy in real life, you wouldn't need a fore­casting system, would you? Imagine that for three con­secutive years, you have backorders every March stemming from late vendors, machine breakdowns, and a strike, and you only ship 20. The system would fore­cast 100/month for January, February, and April-Decem­ber, and 20 for next March. Did the customers want 20? No, they wanted 100, but you've told the system to ex­pect an erroneous pattern of 20 in March. And you've almost guaranteed a backorder next March.


The problem gets even worse if you use sales and have extended delivery problems that last several months. The system will see a reduced number of shipments for sev­eral periods and think the item is actually trending down!


Don't build in problems and failures—use demand instead of sales!

Also understand if the customer at the facility being forecast is internal or external, because they require very different treatment. This sounds easy, but companies make terrible mistakes setting up the system that cause unexpected shortages for years to come.

If the customers at the facility are external only or direct sales, then the correct thing to do is use customer orders by due date for your demand history. But if the customer base includes replenishments to another fa­cility, such as distribution centers, remote warehouses, or retail stores, you've got another animal. You must decide whether to add your internal demand to the ex­ternal customer demand and forecast it as one, or fore­cast customer demand at each individual facility, run MRP, and pass the net requirements as an ADDITION to the main location forecast as independent demand. The latter is preferable, but you only have these two options! You cannot add external customer demand at the remote sites to the supply warehouse external cus­tomer demand and forecast it as one! This is particu­larly crucial where case lots intensify the whiplash effect. Envision an example of external customer demand of one/week at a main warehouse, and external customer demand of one/week at a remote site. The item ships to the remote site only in a case of 10, which is the on-hand inventory at the main warehouse. If you combine the customer demands, you will have a forecast of two per week and the master schedule will be set to build more in week 6, assuming no safety stock or lead time offset. However, if the satellite sells its last one and places an order immediately, you will have depleted your en­tire inventory today.

To Be Continued

For balance of this article, click on the below link:

Lean Manufacturing Articles and click on Series 15

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