How Are Needs Forecasted

Many companies rely on the sales and marketing departments to provide the forecasts of the material needs for the next period. In my experience I have found both of these groups to be very optimistic in their projections. When this happens the extra materials have to be stored in inventoiy. 

One solution for this is to build the forecasts from demand data that is obtained from the consumer. Maity retail stores now have scanning devices that generate point-of-sale data. This produces actual sales figures for each piece of merchandise. This information needs to make it to the manufacturer so that it can be used to project production levels. This is the ideal 

As inventory is maintained at various warehouses as well as the manufacturer, a large amount of material can be sitting in inventory in the supply chain. As replacement orders pass down the supply chain, the orders are pulled from the inventory that is available. If we look at a simple example of a retail store to a warehouse to the manufacturer, the order quantities will be smaller from the retail store to the warehouse, which will try to cover the orders quickly with inventory. When the inventory reaches a low level at the warehouse, a larger replacement order is placed with the manufacturer. The retail store may order 10 items per week, and the warehouse has an inventory of 100 items. For nine weeks there are no orders placed to the manufacturer and in the tenth week an order for 100 items is placed. If the manufacturer had 100 items in inventory they would have been held for more than nine weeks before they could be shipped to the customer. This adds storage costs to the manufacturer and can disrupt the production schedule when the large order arrives. This reaction in the supply chain is called the bullwhip effect.  

In order to overcome the bullwhip effect in the supply chain, better forecasting techniques need to be used to predict the demand for the material for the next period as the produetion sehedules are produeed. 

There are a variety of forecasting techniques available. The technique that will work best for the organization is one that must be determined by the cost of the forecast preparation and the accuracy that is required. There needs to be a cost justification between these two areas so that the best results are obtained. 

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