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Logistics 101: Planning & Forecasting

Supply Chain Solutions

by Sonia Viramontes

In the midst of these tough economic times, companies both large and small are faced with numerous challenges to overcome, such as layoffs, salary freezes and a potential decrease in consumer demand. Businesses must defeat the odds in today's marketplace without losing focus on what's important to their bottom lines and their customers, or they run the risk of being forced to close their doors forever.

One way companies can increase cash flow or keep their operating expenses in line with current sales is through inventory planning and forecasting. By taking steps such as forecasting consumer demand, source supply and fulfilling demands on time, businesses can better manage their supply chains from the suppliers and warehouses to stores and e-commerce Web sites.

Understand What's Happening

Inventories are growing, yet the sales numbers don't reflect this increase. What's happening? The following questions need to be answered in order to get inventories back on track:

• How can we make sure the inventory planning and forecasting practices are in line with what we need to achieve?
• Are replenishment systems set up to help support sales and customers without adding excess or obsolete stock?

To get a better idea of what each business is faced with, it's crucial to identify any changes that have been experienced - such as lead time trends and/or buying habits by the purchasing staff -to determine the cause behind the increase in inventory dollars.

Two risks that are likely to be identified and need to be addressed are:

• Institutional knowledge lost to attrition; and
• Lack of replenishment tool upkeep.

In recent years, many companies have experienced growth and have been forced to reassign resources to handle the increase in demand and inventory. As a result of this reassignment, "knowledge gaps" are created because the staff doesn't always understand why particular best practices are followed or initially put in place, and as a result may not follow them.

To complicate matters, buying staffs can additionally lose sight of the upkeep needed to maintain the replenishment tools that support them.

For example, areas of concern can in­clude: the stocking of stock keeping units (SKUs) with seasonality, erratic or sporadic demand and/or increasing lead times due to global sourcing.

Corrective Actions

Once your areas of risk are determined, the next step is to eliminate the hazard they could cause your business so you can begin to better manage supply chains and ultimately positively impact your bottom line.

Institutional knowledge is extremely important as it helps identify the need to create and maintain formal standardized operating procedures (SOPs). By encouraging the staff performing these tasks to participate in the SOP creation and upkeep process, businesses can gain buy-in from these important players and possibly more importantly, a more competent team.

Often times, we gain more insight from outsiders looking in than from internally diagnosing problem areas. By bringing in an outside consultant to identify areas that need more effort and attention, like replenishment tools, organizations can put new procedures in place without interrupting day-to-day business.

Two ways in which replenishment tools can be repaired are through the re-establishment of seasonal indices for items that carry seasonality and by applying the proper exponential smoothing factors needed to help manage erratic and sporadic demands.

Think of your inventory replenishment tool as a family car. For every 2,500 to 3,000 miles the car requires an oil change, and for every 5,000 to 6,000 miles, a tire rotation. Scheduled maintenance for a car is required to prevent major problems that can be more costly in the long run. Inventory management, planning and forecasting also requires routine check-ups and maintenance from time to time to ensure optimal cash flow and reduced operating expenses.

It's no secret that businesses of all shapes and sizes are faced with tough economic times right now. However, now is the perfect opportunity to investigate and determine where inventory management processes are broken or breaking down. By simply reducing inventory, a company is cutting back its operating expenses and ultimately providing better services for suppliers and customers alike.

Sonia Viramontes is the director of supply chain management for Fidelitone Logistics, based in Wauconda, Ill. She can be reached at sviramontes@fidelitone.com