If you’re struggling with supply chain management and volatility, here are three critical questions to consider:
- Could volatility in your supply chain be traced to a flawed demand forecasting model?
- To what extent does stocking level accuracy impact your inventory costs?
- How does your on-time delivery rate impact monthly revenue recognition?
Companies who partner with a contract manufacturer will benefit in many ways. This will lead to refining materials forecasting models and can reduce volatility in their supply chain. It proactively addresses potential material shortages and maintains higher on-time delivery rates.
Our client, a global technology and engineering company, struggled to maintain accuracy and consistency with their material stocking program. A root cause analysis revealed flaws in the client’s forecast model. It resulted in material stocking levels that didn’t properly reflect demand for the client’s finished goods. The disconnect between stock on hand and the actual demand often resulted in delays and additional expenses.
3 Steps to Assess Your Forecast Model
- Review the gap between forecast and actual over a period of 12 months or longer.
- Identify pain points like increased delivery times within the current planning and stocking process.
- Calculate the hidden costs of inaccurate stocking levels.
At a time when nearly every business is impacted by supply chain shortages and delays, the need to anticipate material requirements is critical. It needs to be early enough to allow for procurement and production. If the materials supplier faces shortages, then the process must allow both the client and contract manufacturer enough time to identify and implement alternatives. Yet, when the schedule relies on outdated forecasting methods, the process is often plunged into an unnecessarily reactive and volatile situation.
With better demand forecasting in place, companies often lower operating costs. They will do this by reducing both overstocks and last-minute substitutions. Additionally, accurate estimates of material requirements allow for better price per unit and more reliable delivery timelines.
New Data-Driven Demand Forecasting Model
By identifying the forecast model as the root cause, Nortech was able to partner with the client to design a new data-driven forecast model. This version more accurately captures demand and proactively signals when materials will be needed. The new model included an analysis of a long-tail selling history to neutralize the volatility and more accurately predict demand.
This long-tail approach looks at a minimum 12-month time period. It’s especially important for products that have cyclical variations in demand. By removing the short-term fluctuations from the stocking levels, both companies were better prepared to maintain a right-sized stocking program. Additionally, weekly reporting ensures continued good communication and a clear line of sight to future requirements.
Results of Supply Chain Management Testing
Requested Date Service Level
Positive results produced by right-sizing the stocking program to demand-based forecasting were immediate.
Our client’s stocking level improved tremendously resulting in reduced material shortages. This change also improved material flow from outside suppliers to contract manufacturing, reduced delivery time and an overall improved rate of on-time deliveries.
The improvement rate of on-time deliveries was a key driver of increased revenue performance. A properly sized stocking program facilitates on-time shipments that allowed for recognition of revenue during the forecasted month.
Good communication between clients and contract manufacturers helps ensure the monthly financial goals and impact associated with key components are factors in supply chain management. The turnaround in the stocking program was so successful, the client has expanded the new model to multiple categories.
Learn more about Nortech’s Supply Chain Management program here.