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Demand Forecasting
Part  9 of 9


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TURNING VARIANCE INTO OPPORTUNITIES FOR PROFIT

If you've done all your homework and followed the ad­vice in this paper, I want you to stop thinking of the difference between forecasts and demand as forecast variance. It is now demand variance. If demand didn't come in as forecast, the variance is just a symptom of a larger, greater issue, or an opportunity for greater profit.And that issue is more important to your company than the variance itself.

The variance now becomes the trigger for action to build profit. It is not a problem, but the starting point for an appropriate response or to extend or exploit success.

At the item level, for instance, the variances caused by repeated unusual high demands should be traced back to the account causing the volatility. Rather than continuing to cover these spikes with inventory and safety stocks, it is time to involve Sales to ask the cus­tomer for lead time or blanket orders. Another oppor­tunity would be to consider alternative manufacturing or supply sources for long lead time items with high variances.

At the group level, since you understand the demand drivers that were the basis for the forecast, it becomes simple to diagnose the cause of the demand variance and chart a clear course for the correct response. If the demand was low due to advertising being sent late, for instance, you can look at history during the same time period and assess whether or not the advertising will generate more or less volume than during the original planned period. Product promoted during a natural peak period will generate greater volume than if pro­moted during a down period. You should also adjust periods after the promotion correctly to higher or lower than the original plan based on the new timing and vol­umes. All of this will enable you to capture more sales at a lower cost as you will have plenty of product with less expensive expediting and overtime.

IN CLOSING

It is my hope that I've given you practical advice that has opened your eyes to greater opportunity, built your confidence, and will make an improvement for your quality of life and company profits starting today. By understanding that the system is just a tool, how to pick and use it correctly, understanding the demand drivers, the plusses and minuses of measurements, and how to turn variances into the first step in a solution, you can and will be a success!

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

Lean Manufacturing Articles and click on Series 15


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