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1 -
The first Link of the Chain: the Sales Forecast
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 Said
a famous business executive: "Forecasting is
difficult, but forecasting the future... that's
impossible!".
He was joking, of course, but he joked to make a point:
knowing in advance what is going to happen in the future
is very, very difficult, and many times, impossible. So,
why bother to forecast the future sales of a business?
The answer is that it is possible to forecast future sales, while certainly not to
the exact figures, with reasonable approximation. We must
forecast with the maximum possible exactness, because
this is the basis of a good Supply Chain management. |
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2
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Who forecasts, and based on what?
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In
most companies, the sales forecast is the responsibility
of the Marketing people, with input from other
departments, especially from Sales. The key inputs they
use to reach the final figure are:
 The sales
history of the product line and particular SKUs, meaning
the sales figures for past periods.
A projection
of the tendencies observed in those periods.
Pricing, and
promotion and advertisement budgets for the period.
Estimate of
the competition actions for the same items as above.
Foreseen
changes in the purchasing habits of the consumers.
Indirect
competition estimate: some products are very different,
but one can be easily replaced by the other one (tea vs.
coffee, orange vs. apple juice, etc.)
The expected
changes in consumer spendable income; this may not be too
important for soap, but certainly for other products like
home appliances, TV sets, etc. |
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3-
Using math or software to help in forecasting
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As
we said, forecasting is not an exact science. A lot of
insight, educated guessing and a little bit of luck are
needed.
But we still can get useful help from specialized
software.
Not that the software has any mysterious intelligence; it
simply does the calculations which would be too slow and
cumbersome to do by hand, applying standard mathematical
formulas.
This applies basically to the analysis of past sales
history and tendencies and their projection into the
future. The results must be adjusted according to the
other non-mathematical elements listed above. |
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4
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The next step
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Once we know (or so we think!) how much
we will sell of each product during the period or periods
we are forecasting, we have the basic input for the
Supply Chain management. We will call these figures
"effective market demand".
"Effective" meaning that the customer would not
only "like" to purchase the product, but that
they are able to.
Once we have these figures, our first concern is finding
out if we can timely produce the required quantities. We
have to look at our production facilities, a procedure
called "capacity planning". |
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5
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Capacity Planning: adjusting our capacity to the sales
forecast... or the other way around
S/
Ch |
Sales
Forecast |
Capacity
Planning |
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The Production management has the
responsibility of planning its operations according to
the sales forecast. Here we see at once why it is so
important to have a good forecast in order to be
efficient. There are several actions that can be taken
based on a forecast:
increase
capacity
or to the
contrary, limit our sales forecast to our production
capacity (which in turn possibly means reducing our
promotion and advertising budget)
negotiate
contracts with other manufacturers (Toll packers) if our
capacity is insufficient.
if we have
excess capacity, we may increase our promotion and
advertisement budget to reach a higher level of sales; or
we may dis-invest and reduce capacity.
All these actions must be
initiated long before the actual forecasted period
begins, and mean expenditures and/or commitments which
may be difficult to cancel. Again; forecasting is
difficult, but essential. |
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6
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The Production Plan
S/
Ch |
Sales
Forecast |
Capacity
Planning |
Production
Planning |
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Once we have achieved a good forecast,
and are sure that we can produce the goods or get them
from a toll packer, it is time to prepare a detailed
Production Plan.
A forecast usually includes an extended range period and
is broken down into shorter ones. As an example, we may
estimate the total sales for the next 3 years broken down
as follows:
Yearly
figure for year 1, 2 and 3
Quarterly
figures for Year 2
Montly
figures for Year 1
Year one's
first quarter, broken down into weeks
Obviously, me may expect
higher accuracy in the more immediate periods than in the
ones farther away in time. But the long range forecast is
needed for projects that take time to implement (say,
building a new production line).
For the shorter run, the forecast is needed to prepare a
detailed production plan: how much to produce in each
period, with which machines or production lines, length
of the production runs for each SKU, etc. |
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7
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The ubiquitous computer, with specialized software
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Yes, we can use computers for this, too.
We can feed the machine a model of our plant, and let it
work with our forecast to help us achieve the best
possible production plan.
Specialized software is available for this task, or a
business may develop a model of their unique plant
in-house. |
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8
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Material
Requirement
Planning
(MRP)
S/
Ch |
Sales
Forecast |
Capacity
Planning |
Production
Planning |
| MRP |
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Based on our production plan, we now can
find out which production materials we will need, when,
and how much of each. This includes all components (or
"ingredients") as well as packaging materials
and any other element we may need to produce the goods.
This process is called MRP, for Material Requirement
Planning.
Done properly and with a good forecast and production
plan as a basis, MRP will allow us to keep in stock all
needed components. But we will have on hand the quantity
we need, and no more. We will get delivery of the
components shortly before we use them. In short, we will
keep our materials inventory as low as possible without
affecting the production plan.
A caveat: the acronym MRP, originally meaning only Material Requirement Planning,
is now also used to mean Manufacturing Requirement Planning.
In the latter sense, it includes both the Plant Capacity
as well as the Materials required for a production plan. |
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9-
VROOM!
A very useful "Explosion"
M
R
P |
F=Formula |
Q=Quantity
to be
Produced |
"Formula
Explosion":
F times Q=
Gross Material Requirement |
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Formula Explosion is the name of a
procedure which consists in multiplying the
"formula" of a product by the quantity to be
produced in
a specific period. The result of the explosions of the
individual formulae is consolidated to obtain the total
"gross" need of components.
A simple example:
Our production plan for January calls for making:
100 T
(metric tons) of Crushed Garlic (CG), and
100 T of
Minced Onion (MO)
The formula for 1 T of CG
is
salt= 0.3 T
/ dehydrated garlic= 0.2 T /
water=0.5 T
"Exploding" this
formula (multiplying it by100) we get the gross
requirements for 100 T of product:
salt: 30
T, d/garlic: 20 T, water: 50T
The formula for 1 T of MO
is
salt= 0.3 T
/ dehydrated onion= 0.4 T /
water=0.3 T
Exploding this formula
times 100 we get the gross requirements for 100 T of
product:
salt: 30
T, d/onion: 40 T, water: 30 T
Consolidating, we need:
salt:
60 T, d/garlic 20 T, d/onion: 40 T,
water: 80 T
These
are the gross material requirements
for a specific period. |
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10
- The meaning of "gross"
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We call the calculated
requirements "gross" because they do not
necessarily coincide with the quantities we need to
purchase. This is because we may have in stock materials that are available to be used when the
January production plan is executed. Therefore, our next
step in managing the MRP part of the supply chain is
calculating the net material requirements.
These will be the quantities we have to order from our
suppliers. |
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11
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How much shall we purchase (order) for the period
planned?
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We will use the gross
requirements for onion (40 T) calculated above, as the
basis for our next example.
Our materials inventory has the following entries for
each material, in our example dehydrated onion:
The actual
physical quantity on hand (60 T)
The quantity
on
order
from our suppliers (20 T)
The quantity
already committed for specific production
plans (60 T)
For each material there
is an item called "security stock level". This is quantity
always reserved for "emergencies", like a
supplier failing to deliver on time, or a sudden change
in the production plan calling for higher quantities. In
our example, the security level of d/onion is 15 T. |
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12
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Calculating the net material requirements
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This is the calculation
of the net requirements:
On hand 60T
+
plus
On order 20T
= 80T
-
(less)
Committed 60T
= 20T
-
(less) Security
level
15T
=
5T Available
So, we have 5T available for use in our production plan
for January.
Since we had calculated a gross requirement of 40T, we
need to order 35T for delivery in time for the January
plan. |
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13
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The need for frequent revision of plans
Sales
Forecast |
R
e
p
e
a
t
e
 |
Capacity
Planning |
Production
Plan
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MRP
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Since we must accept
that forecasting is, if not impossible, certainly
difficult, and that actual sales will always deviate
somewhat from our production plan, we should be as flexible as possible in adapting to these
deviations.
Understanding the concept that the Supply Chain is an
entity of inter-related parts, and realizing that they
should be managed as such, is an important step in
achieving that flexibility at minimum cost.
If the process described is frequently repeated according
to changes in customer demand, we will be able to adjust
production and inventories accordingly.
A good Supply Chain management team, with an adequate
software as a tool,will certainly attain important
savings in capital costs and other expenses. |
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14-
The End |
This is the end of Supply Chain Management
II. If you care to
comment on this course, we'll appreciate it. Kindly email
us at comments@mbaii.org
When you are ready take your self-evaluation
test below. |
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