How Does Flawed Demand Forecasting Lead to Supply Chain Volatility?

If you’re struggling with supply chain volatility, here are three critical questions to consider:

  1. Could volatility in your supply chain be traced to a flawed demand forecasting model?
  2. To what extent does stocking level accuracy impact your inventory costs? 
  3. How does your on-time delivery rate impact monthly revenue recognition?

Companies who partner with a contract manufacturer to refine their materials forecasting models can reduce the volatility in their supply chain, proactively address potential material shortages and maintain 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 resulting in material stocking levels that didn’t properly reflect demand for the client’s finished goods. The disconnect between the stock on hand and the actual demand often resulted in delays and additional expenses.

Three Steps to Assess Your Forecast Model:

  • Analyze the gap between forecast and actual over a significant period of time, such as 12 months.
  • Identify pain points, such as increased delivery times, within the current planning and stocking process.
  • Be sure to 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 early enough to allow for procurement and production is critical. If the materials supplier faces shortages, then the process must allow both the client and contract manufacturer adequate time to identify and implement alternatives. Yet, when the schedule relies on outdated forecasting methods, then the process is often plunged unnecessarily into a reactive and volatile situation.

On the other hand, with better demand forecasting in place, companies often lower operating costs by reducing both overstocks and last-minute substitutions. Additionally, accurate estimates of material requirements may allow for better price per unit and more reliable delivery timelines.

Nortech fulfillment solutions and demand forecasting for cable and wire assemblies

New Data-Driven Demand Forecasting Model Put in Place

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 that more accurately captures demand and signals proactively 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 of 12 months and is especially important for products which 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. Weekly reporting ensures continued good communication and a clear line of sight to future requirements.

Results

The results produced by right-sizing the stocking program to the demand-based forecasting were immediate.

The stocking level improved tremendously resulting in reduced material shortages, 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 to increased revenue performance. A properly-sized stocking program facilitates on-time shipments which in turn allows for recognition of revenue during the forecasted month. Good communication between the client and the contract manufacturer helps ensure that the monthly financial goals and impact associated with key components are factors in supply chain planning.

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.