Improving Demand Forecast Accuracy Series: Categorizing and Managing Forecast Accuracy Objectives

By Jeff VanDeursen, Sr. Solution Architect

CHALLENGE

Many organizations assign a product to a category or group, either at product introduction or solution Go-Live, depending on the age of the solution. As items move through the product lifecycle, they can encounter a change in characterization of sales volume and inventory movements. If an organizations neglects to identify and update the categorization of these items, it can lead to negative impacts in Procurement, Manufacturing, Warehousing, and Transportation. The change can be incremental over time and leads up to an unexpected excess in materials and/or inventory. Timing for this activity is especially critical with new items, item change overs, and discontinuations.

The question is: “When should you review and update product categorizations in the planning application?”

Everyone would love to have a standard answer to this question, but none exists. The timing for these activities is unique to an organization and its product portfolio.

APPROACH

Organizations should put processes and technology in place to analyze and identify material changes in near-term historical volume movements that may signal a change in the characteristics of that product.  This can be accomplished through custom scripting, created either internally or with the help of a consulting partner.  Once the potential change is identified, the planning organization can collaborate with internal partners via an existing S&OP process and determine if this is truly a change in the product characteristic or a change based on some other external factor (competition, cannibalization, etc.)

Some of the key characterizations are outlined below:

  1. New Product Introduction:  This is a similar activity for CPG and Retail.  The activity requires more focus and resource time than any of the others listed below.  It is normally characterized by an initial inventory push to fill the pipeline, followed by a surge in inventory movement as consumers/customers try the product for the first time.  A common error is to not discount these initial volume spikes; this will lead to a non-required inventory build annually over the organization’s forecast horizon.
  2. Volume Stability:  This usually occurs towards the end of the growth portion of the product lifecycle. Since this usually covers a majority of the product portfolio of an organization, a lack of attention during this period can drive a negligible increase in inventory by product, but the cumulative effect can dramatically inflate the inventory levels across the network.
  3. Key Manufacturing Cutover:  This is one of the more difficult categorizations to manage. The key is to start planning well ahead of when the cutover is to occur and to involve all stakeholders in cutover planning and execution. Many organizations will wait until the replacement item has been created in the ERP system and will then plan the cutover. In most scenarios, this creates issues with planning and production of both items impacted by the cutover.
  4. End of Product Lifecycle: This is a broader issue in the retail markets. Many retailers operate from a sales policy that requires them to chase every potential sale for the item through the end of the lifecycle. This policy for end of life products almost guarantees that some inventory will have to be sold below margin and/or written off as excess or obsolete. Like manufacturing cutovers, planning for end of life of a product needs to begin much earlier than most organizations believe.
RESULTS

If organizations take a proactive approach to product categorization review and management, they can increase the confidence level in the manufacturing and replenishment plans for new products, product change overs, and end of life products.

At Vaco Supply Chain Solutions, our expertise is creating supply chain value for retailers and consumer goods manufacturers. We understand the connection between retailers and suppliers in business processes and technologies and we know how to make those connections effective. We have deep experience across the entire supply and demand chain, including merchandise planning, demand forecasting, replenishment, assortment and space planning, and supply chain optimization.  Call 804-282-2033 for more information. 

Save

Save