Tuesday, September 2, 2014
Demand Forecasting –The Walmart way !
Why is it important to forecast demand in any business?
If the demand is overestimated, it would result in a surplus of inventory which would result in increasing the labor and storage costs if workers have to physically move them to the storage facility. In addition to this, if the business deals with perishable goods, wastage would lead to further losses and decrease in profit margin.
On the other hand, if the demand is underestimated, there would be substantial loss of reputation if your business is unable to meet the customer demands.
Estimating or forecasting future demand is one of the most difficult challenges in supply chain optimization. It is not only enough to forecast demand but equally significant are the coordinating activities to meet the demand in the organization. If it was possible to by synchronize the supply and demand cycle through the use of real time data, would it help facilitate the process of forecasting? Yes, and one of the successful implementers of this approach is Walmart.
Walmart has been able to assume market supremacy due to its efficient and seamless integration of suppliers, manufacturing, warehousing and distribution components in its supply chain. Technology plays a key role in Walmart’s supply chain. They implemented the first companywide usage of Universal Product Bar Codes where store level information was immediately collected and analyzed. The data helped the store manager to determine what products were selling and at what quantity. Accordingly, the store manager would place orders to the manufacturing division. They then build the Retail Link Database System that supported inventory management. Through a satellite network, analysts can access the Real Link database and forecast supplier demands to the supplier network which displays real –time data from cash registers and to Walmart’s distribution centers. Hence by using an efficient Collaborative Planning , Forecasting and Replenishment(CPFR) scheme ,the suppliers and manufacturers within the supply chain synchronize their demand estimations. Walmart has also networked with its suppliers and gave rise to the Vendor Managed Inventory (VMI) where manufacturers would become responsible for managing the products in Walmart’s warehouses. The suppliers would deliver the items directly to the concerned stores or Walmart’s distribution centers.
Demand forecasting primarily deals with analyzing historical data, generating statistical forecast for old and new products and collaborating the data with suppliers and internal mangers. However it leaves out the problems related to uncertainty in the system, unexpected market or social conditions resulting in shift in demand. Given the unpredictability factor, would the use of state of the art technologies and processes like in Walmart be applicable to other industries where demand can’t be strictly based on historical data?