Logistics and Supply Chain Management, 4th Edition

MATC H I N G SUP P LY AND DEMAND

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Forecast for capacity, execute against demand

We have already made the point that in today’s volatile business environment it is

much harder to achieve high levels of forecast accuracy for individual items. Whilst

managers will always be seeking better forecasts, the fact is that as uncertainty

increases it gets harder to run a business on the basis of forecast demand at the

stock keeping unit (SKU) level. Instead the focus has to be on how the company

can move from a forecast-driven to a demand-driven mentality. Basically what this

means is that ways have to be found to make it possible to react to demand within

the customer’s order cycle. Thus if the customer’s expectation is for a five-day lead

time from order to delivery, the goal is to be able to respond within that lead time.

Whilst forecasts will always be required, the argument is that what we should

be forecasting is not at the individual item level but rather for aggregate volume

to enable the company to plan for the capacity and the resources that will be

required to produce that volume.

To enable this goal to be achieved will require a radical re-think of conventional

ways of balancing supply and demand. In particular it highlights the importance

of the ‘de-coupling point’ idea introduced earlier in this chapter. If it is possible

to add ‘generic’ inventory at that point (which we might term ‘strategic inventory’),

this will facilitate the late configuration or even manufacture of the product against

a customer’s specific requirements. Thus at Zara, for example, the generic stra-

tegic inventory is the un-dyed fabric. When the market requirement is known, that

is when the final garment is manufactured – making use of Zara’s flexible sewing

capacity provided by their network of small, independent workshops. So at Zara

the forecast is for the resources and the materials, not for the final garment. In

many ways Zara is an exemplar of the concept of ‘forecast for capacity, execute

against demand’.

Demand management and planning

In the past ‘demand’ was often seen as a given and the business must react to it

as best it could with only a less-than-accurate sales forecast to help it do so. Today

the best run companies are taking a more proactive stance. They recognise that not

only do the actions of the business impact demand (e.g. new product launches,

sales promotions, advertising campaigns, etc.), but also that even market volatility

can be coped with if the appropriate supply chain planning processes are in place.

Demand management is the term that has come to be used to describe the various

tools and procedures that enable a more effective balancing of supply and demand

to be achieved through a deeper understanding of the causes of demand volatility.

Demand planning is the translation of our understanding of what the real require-

ment of the market is into a fulfilment programme, i.e. making sure that products

can be made available at the right times and place. Many companies today have put

in place a formalised approach to demand management and planning that is often

referred to as sales and operations planning

(S&OP).

LOGISTIC S & SUPPLY CHAIN MANAGEMENT

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S&OP seeks to ensure that the organisation is able to anticipate the real

requirement of the market and to react in the most cost-effective way. The aim is to

ensure the highest level of customer satisfaction through on-time, in-full deliveries

with minimum inventory.

There are a number of pre-requisites for successful S&OP and these are sum-

marised in Figure 4.8.

1 Generate aggregate demand forecast

Part of the reason that so many forecasts have so little accuracy is that they try

to achieve the impossible, i.e. to forecast at the individual item level (SKU) too far

ahead. Clearly every business needs to plan ahead in order to ensure that they

have access to enough capacity and materials. However, wherever possible these

plans should be made on the basis of high-level aggregate volume forecasts at the

product family level. As we get closer to the point of demand fulfilment then we can

start to think about product mix requirements.

Generate aggregate

demand forecast

Modify forecast

with demand

intelligence

Create a

consensus forecast

Create ‘rough cut’

capacity plan

Execute at individual

item (SKU)

level against demand

Measure

performance

Figure 4.8 The sales and operations planning process