How to Work with a Customer-Provided Forecast

Transcription

1 How to Work with a Customer-Provided Forecast By Mark Tomalonis May 2013 Do you receive a usage forecast from a high volume customer, such as an OEM? Managing your inventory to meet a specific customer s forecasted demand can elicit high risk (surplus inventory or customer service failures) or high reward (high inventory turns, for greater net profit). This article includes suggested guidelines on how to support a customer s forecasted demand and explains how to create an easy-to-use customer forecast analysis and inventory-planning tool, in Excel. Included are tips on how to mitigate the challenges associated with managing inventory to a customer's forecast, and on how to partner with your customer and with your supplier for stress-free, profitable results. Guidelines for Managing Inventory to a Customer Forecast The goal of managing to a customer s forecasted demand is to never run out of inventory ( stock-out or late delivery) without ever owning too much inventory. Rulesof-thumb for accomplishing this goal: Use an off-line forecast review tool (e.g., Excel workbook) to determine what, when and how much to purchase. Do not let your ERP system use historical usage to determine inventory replenishment of customer-forecasted usage items. Review the customer forecast weekly, with the option of placing an incremental replenishment purchase order every week. Be bold. Be willing to live on the edge. Anyone can meet a customer s needs with a six month supply on the shelf. Meeting a customer s needs with no more than a three week supply on the shelf improves cash flow and reduces the likelihood of ending up with future surplus inventory. Acquire from your customer a forecast that meets these two criteria: a) Forecasted usage is in weekly buckets. This gives you sufficient resolution to manage your stock levels and replenishment purchase orders. b) Forecasted visibility is beyond the longest lead-time for the items you provide, by at least two weeks. This will allow you respond to changes in forecasted usage, outside lead-time. WarehouseTWO, LLC PO Box 1567 Palo Alto CA

2 Tips for Successful Inventory Planning: Partner with Your Customer Cooperation by your customer is is crucial to successful inventory management in support of its forecast. Consider these practices to ensure such cooperation: 1. Explain to your customer your inventory management plan for items for which you intend to manage to its forecast. Clear communication about your intentions, and the process you have in place to manage your customer s demand for your products will build trust and confidence. 2. Ask your customer for advice. Your customer probably knows more about what works and what does not, in interpreting its forecast. Ask your customer what other suppliers do to successfully manage their inventories to a forecasted demand. 3. Communicate before, during and after a crisis (i.e., stock-out). A good forecast management tool should predict if/when you are going to run out of an item, before you actually run out of that item. Tell your customer about the pending stock-out. Chances are that the customer can accommodate the stock-out, if given enough notice. During the stock-out, inform your customer of the status of recovery, perhaps daily. After product has become available again, review what caused the stock-out and propose changes (by the supplier, by the customer and/or by you) to prevent a recurrence of such a stock-out. Tips for Successful Inventory Planning: Partner with Your Supplier(s) Cooperation by your supplier(s) is crucial to managing the flow of inventory to meet your customer s forecasted demand. Consider these practices to ensure such cooperation: 1. Explain to your supplier(s) your inventory management plan for the items for which you intend to manage your purchase orders in response to the customer s forecasted usage. The more each supplier knows, the more likely it is to cooperate and support your effort. 2. Share your customer s raw forecast with your supplier(s). By raw, I mean the original document, as provided by the customer. (At your discretion, edit the raw forecast document to show only those items sourced by each supplier.) Regularly and consistently shared knowledge helps build trust, and gives your supplier(s) an opportunity to plan its/their manufacturing capacity better, the better to support your inventory management effort. 3. Submit the status of your forecast management tool to your supplier(s), regularly and consistently. This is one more way to build trust in the eyes of your supplier(s). 4. Expedite judiciously. If you manage your purchase orders to the customer s forecast, and if the forecast is reasonably accurate, expedites should be few. Don t burden your supplier(s) with a manufacturing crisis simply because you were not doing your job well. If you find yourself in an availability crisis, log into WarehouseTWO and search for availability from peer distributors _WTWO_eNewsletter_Article_I_R1.pages page 2 of 8

3 Create Your Own Forecast Analysis and Inventory Planning Tool An easy-to use forecast analysis and inventory planning tool can be created using Microsoft s Excel spreadsheet application. Figure 1 below illustrates a basic template for an Excel-based forecast review tool. This example is based on the premise that the customer provides eight weeks of weekly forecasted usage, and the lead-time for each item is four-to-six weeks. Explanations of each worksheet of the workbook and of each column in the forecast analyzer worksheet are below. Figure 1: Example of an Excel-based forecast analysis and inventory planning tool. The purpose of this tool is to direct you to place small, incremental purchase orders to your supplier(s) every week. The benefit is that you will never have much inventory on hand, but you will always have sufficient quantities on a string of open purchase orders, with incremental quantities arriving every week. Worksheets in a Forecast Analysis and Inventory Planning Tool Along the bottom of Figure 1, from left to right, are tabs identifying these worksheets: Instructions: This optional worksheet might include step-by-step instructions on how to use the tool, a tool revision log, and/or macro buttons to import data from other sources (such as stock status data from your ERP system). Customer RAW Forecast: Your customer s unfiltered forecast data is to be pasted into this worksheet. This worksheet might contain additional columns, such as ones used to translate or re-configure the raw data into weekly forecast data that can be displayed on the Forecast Analysis worksheet. The format, content and functionality of this worksheet depends on the nature and formatting of the customer s forecast data. BOM ( Bill-of-Materials ) Analyzer: This optional worksheet may be needed if the customer s forecast is for higher level assemblies, not for individual components or subassemblies provided by you. If so, this worksheet might contain a table with the first column listing the components/sub-assemblies that you provide, the first row containing higher level assembly names/numbers, and the cells of the grid showing the quantity of each component/sub-assembly used in each higher level assembly. The format, content and functionality of this worksheet depends on the nature and formatting of the customer s BOM data. Current Stock Status: This worksheet should contain a list of items that might be sold to the customer, along with total quantity on hand, total quantity allocated to existing open orders, total quantity backordered on existing sales orders and total quantity on _WTWO_eNewsletter_Article_I_R1.pages page 3 of 8

4 open purchase order. This data should be pasted in from a custom report, or automatically populated by a triggered script ( Macro ) and ODBC ( Open DataBase Connectivity ) links to your ERP database. Forecast Analyzer: This worksheet is where all forecasted items will be displayed, along with current stock status, forecasted usage, forecasted stock status and a column in which to enter quantities needed to purchase this week. Columns in the Forecast Analyzer Worksheet Column A: Row number indicator only; this column is optional. Column B, Part Number- Cust s : The customer s part number, as shown on its forecast document/file. The values in this column are to be manually entered, and should include every item that might appear on the customer s forecast document. The values in this column remain static, unless an item is added to, or removed from the customer s forecast document. Review the contents of this column periodically, such as when there is a change to your contract/agreement with the customer, or when there is a change in assembly BOM s ( Bills-of-Material ). Column C, Part Number- Yours : Your part number, preferably the manufacturer s exact part number. The values in this column are to be manually entered. The values in this column remain static, unless an item is added to, or removed from the customer s forecast document. Review the contents of this column periodically, such as when you review the contents of column B. Column D, Current Status- OH : This column contains the total on-hand ( OH ) quantity of the item displayed in column C. The values in this column should be determined via look-up formulae pointing to the contents in the worksheet Current Stock Status. Column E, Current Status- A d : This column contains the total allocated ( A d ) quantity of the item displayed in column C. The values in this column should be determined via look-up formulae pointing to the contents in the worksheet Current Stock Status (see page 3). Column F, Current Status- BO : This column contains the total backordered on open sales orders ( BO ) quantity of the item displayed in column C. The values in this column should be determined via look-up formulae pointing to the contents in the worksheet Current Stock Status. Column G, Current Status- PO : This column contains the total on open purchase order ( PO ) quantity of the item displayed in column C. The values in this column should be determined via look-up formulae pointing to the contents in the worksheet Current Stock Status. Column H, Wkly UBO : This column contains static, manually entered, values equal to average weekly usage by other customers ( Wkly UBO ). If the forecasting customer is the only user of a particular item, then cell in this column pertaining to that item may be left blank, or populated with the value 0 (zero). The values in this column should be reviewed/revised at least quarterly. Columns I-P, Forecasted Usage : The values in these columns represent the forecasting customer s forecasted weekly usage, plus the average weekly usage by _WTWO_eNewsletter_Article_I_R1.pages page 4 of 8

5 other customers (from column H). Forecasted weekly usage comes from the information in the worksheet, Customer RAW Forecast. How the information from the forecast is translated and displayed in these columns depends on how the raw forecasted data is presented. Typically, VLOOKUP or SUMIF formulae are used to capture this data. The number of weekly forecasted usage columns in this section of the workbook depends on the length of time covered by the forecast, and the maximum lead-time for the items listed in this workbook. Figure 1 (page 3) shows a template based on typical item lead-times of four-to-six weeks and a forecast that covers eight weeks. Add or subtract columns to accommodate your situation. Columns Q-S, Ending On Hand : These three columns show quantities that will remain on hand in stock at the end of selected forecast periods. Recommended period and formula for each column, based on the layout shown in Figure 1: Q period: the first one or two forecast periods formula: =D-E-F-sum(I:J) R period: the first half of all forecast periods formula: =D-E-F-sum(I:L) S period: all forecast periods formula: =D-E-F-sum(I:P) Default cell shading is pale green. Conditional formatting changes the cell shading to red and the font to bold white when the value in the cell is less than 0 (zero). Negative numbers (and red cells) in column Q indicate possible stock-outs, and may warrant expediting with your supplier. Negative numbers (and red cells) in column R is a warning of possible expediting. Positive numbers in column S indicate an over-stock situation. (It is expected that you would never have sufficient quantities on hand to cover forecasted demand for the entire forecast period.) Columns T-V, Ending Net Stock : These three columns show net stock quantities (on hand plus on open purchase order, less allocated quantities and backordered quantities) at the end of selected forecast periods. Recommended period and formula for each column, based on the layout shown in Figure 1: T period: the first half of all forecast periods formula: =D-E-F+G+W-sum(I:L) U period: three-quarters of all forecast periods formula: =D-E-F+G+W-sum(I:N) V period: all forecast periods formula: =D-E-F+G+W-sum(I:P) Default cell shading is pale yellow. Conditional formatting changes the cell shading to red and the font to bold white when the value in the cell is less than 0 (zero). Negative numbers (and red cells) in column T indicate insufficient net stock quantities to handle near term forecasted demand. Negative numbers (and red cells) in column U indicate insufficient net stock quantities to handle mid-term forecasted demand. Positive numbers in column S indicate an over-stock situation. Negative numbers (and red cells) in column V indicate insufficient net stock quantities to handle all forecasted demand. Column W, Buy Now : Desired stock replenishment purchase order quantities are entered into this column. Values entered here affect the values in columns T, U and V. The goal is to purchase sufficient quantities to turn cells in columns T and U green (positive values). Item lead-time may determine whether sufficient quantities are _WTWO_eNewsletter_Article_I_R1.pages page 5 of 8

6 purchased to turn cells in column V greet. Values in columns X and Y may be considered when entering values into column W. Optional cell shading in this column is merely for emphasis. Column X, Pkg Qty : This optional column contains static, manually entered, values indicating suggested package quantities or minimum purchase quantities to earn a deeper discount. This information is for reference only, and may be used to determine the quantity entered into column W. The values in this column should be reviewed/ revised periodically. Column Y, Ave LT : This column contains static, manually entered, values indicating likely lead-times (in weeks) for each item. This information is for reference only, and may be used to determine the quantity entered into column W, as it affects the values in, and coloring of columns T, U and V. (The longer the lead-time, the more likely that all values in column V should be positive, after entering new purchase order quantities in column W.) How to Use the Forecast Analysis and Inventory Planning Tool On the same day of every week (preferably on a Monday), after the day s inbound stock replenishment shipments have been received into your ERP system, and upon receiving the customer s weekly forecast: Step #1: Copy and rename a master template file to be used for this week s analysis. Include a date code in the name of the renamed file in the format YYMMDD as a way to archive weekly analyses. Example file name: Deere_FCST_ xlsx. Step #2: Paste (or otherwise import) into the worksheet Customer RAW Forecast the customer s forecast data. Step #3: Paste (or otherwise import) into the worksheet Current Stock Status a snapshot of quantities on hand, allocated and on open purchase order for all items included in the customer forecast. Step #4: Review the data displayed in the worksheet Forecast Analyzer. Enter proposed purchase order quantities into column W, Buy Now. For each forecasted item, enter the minimum quantity need to turn the value in column T, U or V (depending on lead-time of the item, shown in column Y, Ave LT ) into a positive value, turning the cell color from red to pale yellow. Consider purchasing multiples of package quantities shown in column X, Pkg Qty. Step #5: Manually enter and process purchase orders for the items that have quantities in column W, Buy Now. Forecasting Gotchas and How to Mitigate Them It s not a perfect world. Life is unfair. My forecast is accurate. Purchases may vary. Here are some common challenges associated with managing inventory to a customer forecast, and how to deal with them. 1. Your customer s forecast is wildly inaccurate. Resolution: negotiate with your customer under what conditions you should not be expected to accommodate actual demand that grossly exceeds forecasted usage. Address long-term variance, not _WTWO_eNewsletter_Article_I_R1.pages page 6 of 8

7 week-to-week variance. In a future article, I will address how to protect yourself against actual usage that falls significantly short of forecasted usage. 2. Lead-Time from your supplier(s) for forecasted items varies widely from item to item, and for the same item, from purchase order to purchase order. Resolution: negotiate with your supplier(s) a stable lead-time. This can be done by placing scheduled purchase orders to your supplier, with a narrow (e.g., two week) window of acceptable delivery. For example, if unmanaged lead-times vary from one week to five weeks for items provided by the supplier, agree to a static lead-time of six weeks, plus or minus one week. Or, schedule all purchases orders for shipment in six weeks, plus or minus one week. 3. The forecast is not provided in a convenient digital format (such as an Excel file or delimited text file). Resolution: ask the customer what other formats are available, or how other suppliers capture data from the format that is provided (e.g., mailed/faxed print-out, PDF document). If the forecast is in PDF format, use optical character recognition (OCR) software to convert the data to something that can be pasted into an Excel workbook. Otherwise, manually transcribe the data into the workbook. 4. The forecast is provided in buckets of other than weekly. Resolution: If buckets are smaller than weekly (such as daily), consolidate them into weekly buckets. If buckets are larger than weekly (such as monthly), convert these buckets into weekly buckets, with the usage split among four weeks in these proportions: 40% in week #1, 20% in week #2, 20% in week #3, 20% in week #4. 5. The forecast is for top level assemblies, not for individual components/subassemblies that you provide. Resolution: acquire current bill-of-materials for each forecasted assembly, at least for the components/sub-assemblies that you provide. Use this information to translate the assembly forecast into a component/subassembly forecast. Also, understand how to interpret the forecast to know when your component/subassembly is needed by your customer to complete the assembly by the forecasted consumption date. For example, if an assembly appears on the forecast four weeks from now, that may mean that your components are needed two weeks from now. Build this time difference into your forecast management tool. 6. Your supplier(s) requires bulk purchases for quantities that extend past all forecasted usage, or offer a competitive cost only for bulk purchases for quantities that extend past all forecasted usage. Resolution: negotiate with your supplier to allow you to place small quantity purchases every week, at the bulk unit cost. See suggestions below under the title Partner with Your Supplier(s) for suggestions on how to gain cooperation from your supplier(s). 7. Usage by the forecasting customer does not represent the bulk of demand for the forecasted item. Resolution: the less impact that the forecasting customer has on total usage, the easier it is to let your ERP system automatically manage the total usage of the item. In this case, use your forecasting tool as an early warning (stockout) tool only, or include a base-line average usage by all other customers when calculating total forecasted demand for each item. 8. Your ERP system wants to manage inventory replenishment for forecasted items based on historical usage. Resolution: De-activate dynamic inventory planning functionality for items being managed to a customer forecast, perhaps by isolating the item from your ERP s automated replenishment functionality. Put into _WTWO_eNewsletter_Article_I_R1.pages page 7 of 8

8 place a static, safety net, stock plan, such as a min-max stock plan, where the minimum value is equal to historical usage during one quarter the length of average lead-time, and the maximum value is equal to historical usage during one half the length of average lead-time. Review this safety net stock plan at least quarterly. Who is Your Company s Excel Expert? Microsoft s Excel spreadsheet application (part of the Office suite of business applications, along with Word word-processing and PowerPoint presentation applications) is a powerful tool for small businesses. Regardless of your company s size, you ought to have at least one employee who is proficient in the use of these functions/features in Excel: VLOOKUP function COUNTIF function SUMIF function CONCATENATE function conditional formatting relative and absolute cell references recording of repetitive actions into MACRO buttons Excel training is available in many forms. Search for the phrase excel training in your favorite internet search tool (e.g., Google, Yahoo, Bing, AOL). Learn More About WarehouseTWO. WarehouseTWO, LLC is an independent inventory-sharing service created exclusively for durable goods manufacturers and their authorized distributors, and any group of durable goods peer wholesaler-distributors, such as members of a buying/marketing group or cooperative. To learn how inventory-sharing with WarehouseTWO can help your business, visit our web site at or us at info@warehousetwo.com _WTWO_eNewsletter_Article_I_R1.pages page 8 of 8