Forecasting for the “New Normal” Post Covid-19 | CPO INNOVATION
With Covid-19, supply chains around the world had to adjust to a series of sudden disruptions. First, was the supply disruption, particularly in and from China and Asia in general, when factories were either closed or running at a lower capacity. This got compounded by the fact that global logistics got disrupted as well. For example, commercial airlines ceased to operate and resulted in reduced space for cargo which led to delays in getting products through the supply chain and more expensive cost of shipping.
Second, demand disruption impacted business operations around the globe. Here we are talking about consumer demand that changed drastically within weeks. Some categories moved into a high demand scenario: online purchases (as opposed to brick and mortar retail) as well as essential products (toilet paper, hand sanitizer) while some categories reduced considerably in demand (traditional retail demand, oil and gas…). Furthermore, some industries experienced a complete end to end disruption: sports, entertainment, travel, airlines, etc.
This article is focused on best practices that supply chain practitioners can take now given the uncertainty post COVID-19.
1. Historical forecasts. Be aware!
Traditionally, demand planners and demand managers have used historical forecasting as their main forecasting method. For example, 3 months average historical forecasts have been used for trending purposes, sometimes coupled with exponential smoothing. This can become a “dangerous” method, as it might not pick up enough of the trends that happened more recently such as in the last 30 days.
Particularly, it is recommended to look at the overall demand level (when did the demand pick up or dropped, and what was the context of the change) as well as product mix. It is probable that within a particular brand, the mixed product changed.
Recommendation: It is worth reviewing the changes in the historical forecasts and focus on a “lookout” view in the future to include future demand patterns as they develop.
2. Integrate the impact of Covid19 in your S&OP process
The Sales and Operations (S&OP) planning process is where the discussions on supply/demand balancing need to happen. First off, what is the view of Sales and Marketing functions on the demand changes and future view of the demand cycle? Also, what is the view of the Production/Manufacturing or outsourced capabilities (or suppliers) on what is the real capacity in the factories? What is the current production output and what is the context? Are the factories working under Shelter in Place (SIP) with the reduced output? Are there new factories or service providers coming into play? Demand might be limited to Production capabilities which would impact revenue and margins in both a Make to Stock and a Make to Order environment.
Recommendation: Review your S&OP process including participants, inputs /outputs and the criticality of the lead time as it compares to window horizons.
3. Vertical forecasts integration and visibility/sharing
It is more than ever needed to engage all the supply chain partners end-to-end in the supply chain network to understand overall demand and capabilities/capacity.
For example, it is recommended to engage with your suppliers to understand capacity in finished goods but also raw materials. This includes quantities, lead time and price. But don’t forget what might seem trivial but actually very important requirements such as MRO and Packaging. Sharing forecasts with sub-tiers partners is extremely critical as well as reviewing SLA (Service Level Agreements) commitments.
The same logic applies to the demand side: How does your customer’s demand look like throughout the entire chain?
It requires a full view forward and backward to understand opportunities and constraints along the chain. This is also the time to think about the “bullwhip effect” as forecasts errors tend to compound themselves over time.
Recommendation: Plan regular review of your downstream and upstream commitments in the supply chain to understand levers and manage appropriate expectations.
4. Business Continuity Planning
The pandemic highlighted the need for Business Continuity Planning (BCP) and Disaster Recovery Planning. This is a key element of forecasting as the environment might be subject to further changes. A business continuity plan needs to be documented, with appropriate owners, trigger points, recovery points as well as mitigation processes would sometime fail. It is also time to perform a risk management review of the supply chain and identify opportunities for backups, such as dual sourcing and additional shipping options.
Recommendation: Review (or create) a Business Continuity Plan and perform a risk analysis on your end to end supply chain. Then, mitigate the risks as you see fit.
Ultimately, those recommendations will help businesses improve on their forecasts post COVID-19. The common themes are communications and collaborations. This highlights the need to work as “one team” internally and externally.