Thursday, November 10, 2011

Collaborative Forecasting

One interesting concept I found is called collaborative forecasting, a process in which trading partners work interactively to manage forecast requirements by sharing information affecting materials management decisions. Forecast exceptions are identified and revisions are exchanged electronically until they are resolved (confirmed). In ‘Collaborative’ Forecasting, trading partners work “interactively”. The forecast is not simply pushed from a customer to a supplier as was typical with EDI. Instead, the forecast information flow is two-way, creating a closed loop of communication.

Nowadays, companies suffer from inefficiencies created by inaccurate forecasts and the inaccuracy of the forecast is attributed to two main issues: data latency and strategic forecasting problems. Data latency occurs because each partner has his own cycle for planning. A customer may run his planning cycle on Sunday. A supplier may run his on Saturday. In this situation the supplier would always be planning on week-old data. The more partners in your supply chain, the worse this problem can be. Taking judgment against a forecast can also lead to data latency. Judgments are usually done manually, which also slows the flow of demand data. Strategic forecasting issues are apparent in today’s multi-tiered supply chains with multiple OEMs, CMs, distributors, and suppliers competing for the same business. This can lead to inflated demand to the supplier. For companies that are running both strategic and tactical forecasting processes, there are also issues with gap reconciliation between the two processes.

Then the value of collaborative forecasting comes from the following:

  • Better synchronization between supply and the latest demand throughout the supply chain.
  • Improved forecast quality through use of supply information to support forecast creation.
  • Improved capacity utilization and increased inventory turns as uncertainties decrease within the supply chain through better forecast quality and supply/demand match.
  • Increased customer satisfaction through assured supply, better on-time delivery and reduced effective lead-times.
I also found a video on youtube which elaborates this concept and how it helps from a more practical perspective:

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