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?
References:
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