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