In March 2020, we saw a dramatic shift in customer demand for household goods and home office products as people began working from home in an effort to stop the spread of the coronavirus pandemic. As community pools and recreational areas shut down, demand for backyard pools and other outdoor sporting items increased so that families could safely enjoy activities outside. The result? Shelves were bare in the household cleaning aisle for weeks, and other household items were either out of stock or priced exceedingly high to compensate for the lack of inventory.
At this time, the market experienced a significant shift to e-commerce as more individuals purchased items online to maintain social distancing. Systems and processes that could accurately track, manage and predict inventory levels for various new order fulfillment models became an overnight priority.
The Importance of Demand Planning and Forecasting
The demand planning function within the supply chain process is crucial to ensure that operations are timely, efficient, and profitable. Companies need to make certain that they can accurately forecast the quantity to prevent lost sales and upset customers. Conversely, holding excessive inventory ties up capital and takes up valuable warehouse space. Effective demand planning requires a variety of information to correctly forecast the products that companies sell. The end goal is to provide the most accurate demand forecast possible so that it can be used to manage inventory effectively.
The Effect of Unprecedented Events and Economic Disruptions
The concept of demand forecasting and planning is commonly seen as one of the most misunderstood and, many times, most frustrating aspects of the supply chain planning process.
This is primarily due to the unpredictability of the marketplace and events that can alter market demand and availability. These occurrences make forecasting demand extremely complicated, from small changes in customer demand that cause dramatic changes in inventory to major, unprecedented events.
The Bullwhip Effect
The bullwhip effect is a slight change in consumer demand which causes a significant change in the supply chain closer to the supplier. Companies lose millions of dollars due to excess inventory and lost sales opportunities due to the bullwhip effect each year. The bullwhip effect is the consequence of poor forecasts, lack of visibility into consumer demand, and unusual changes in consumers’ buying patterns, often triggered by natural phenomena or economic fluctuations.
Due to the pandemic, currently, there is a global shortage of semiconductor chips used in the production of automobiles that is expected to cause the loss of billions of dollars in earnings for automakers. According to an article published by CNBC.com:
“The global automotive industry is an extremely complex system of retailers, automakers, and suppliers. The last group includes larger suppliers such as Robert Bosch or Continental AG that source chips for their products from smaller, more-focused chip manufacturers such as NXP Semiconductors or Renesas.
A kink in the supply chain during any part of the process can have a tremendous ripple effect across production.
‘This is a classic example of the bullwhip effect,’ said Razat Gaurav, CEO of supply chain software and analytics firm Llamasoft. ‘Small changes in demand, as they propagate further upstream in the value chain, the variability and the volatility grows dramatically.’”
While there is no way to predict these demand fluctuations, increased collaboration and visibility across the supply chain can alleviate the bullwhip effect.
Black Swan Events
A black swan event is a rare and unusual disruption that is typically highly negative and impossibly difficult to predict. Despite this unpredictability, it is critical to know exactly where your product is in the supply chain during these instances. The effects of devastating weather events, wavering oil prices, political turmoil, and port disruptions can all be lessened by enhancing supply chain visibility to improve demand forecasting. At one point, it was thought that a black swan event would occur only once or twice in a lifetime, but recently, we've seen these events emerge far more frequently, increasing the need for more accurate demand forecasting tools.
Supply Chain Visibility and Automation Solutions
According to a research study conducted by Deloitte in 2020, the companies that were better prepared to respond to the pandemic disruption had strong relationships with their suppliers and systems in place to offer visibility into their extended supply networks. Those lacking supply chain visibility and the solutions necessary for reliable forecasts were left scrambling to implement procedures that should have been in place all along.
Visibility into the supply chain includes visibility into the data that goes into demand planning. There are four key components that should be considered when forming a demand forecast:
- Historical Data - what was sold in previous years
- Sales Data - current sales numbers
- Marketing Data - new contracts, partners, and promotions
- Business Intelligence - real-time analytics
Utilizing a combination of this data helps establish a preliminary demand forecast that can be refined and used to manage inventory more effectively.
Having the right tools for demand forecasting and inventory management is critical. Many companies are looking towards automation solutions because the technology can directly integrate with ERP and WMS while offering the ability to scale that manual processes cannot replicate. Inventory management, order management, and e-commerce technologies play a significant role in demand forecasting, so by implementing automated integration tools, you can improve productivity, quality, and output while decreasing costs and reducing delays and disruptions.
While there's no 100% accurate way to forecast demand, the best way to prepare yourself up for future disruptions is to make minor changes that aim to improve efficiency, supply chain visibility, and inventory management. Even if your current processes have been adequate so far, you might be overlooking areas of improvement that will create more precise and effective demand forecasting. You cannot avoid the bullwhip effect or unprecedented economic events, but by building a more resilient supply chain, you will be better able to adjust to the ever-changing demand climate.
Register now for our upcoming live webinar, ‘Forecasting Demand and Inventory Management,’ with Fernando Gonzalez and get first-hand insights into the tools and best practices for forecasting demand to ensure customer satisfaction.