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RAMAN
SURI
Economist and Consultant- business models, planning and
forecasting for leading Gulf corporations |
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The
need for demand forecasting in the Gulf
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July
- Aug 2002 |
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Due
to distanced factories and higher leadtimes in the Gulf, there
is a greater need for forecasting and planning. Higher
leadtimes lead to less reliable delivery schedules, which can
only be countered by careful planning of inventory and
purchases, which in turn can only be managed properly with
accurate forecasting. Inaccurate sales forecasts can lead to
(1) overstocking and high inventory carrying costs, or (2)
“stock outs” and business loss, which is even worse.
The
most careful supply chain management can be rendered entirely
useless if sales forecasts are inaccurate. All businesses make
implicit forecasts when making purchases and inventories
decisions. However, results would be considerably improved
with a sound forecasting
system. While no system can yield perfect forecasts,
nevertheless formal forecasting can reduce errors and improve
profits.
An easy and inexpensive starting point for firms is to examine
the costs of their current forecasting errors, for which a
sample may be adequate. It is important that this exercise
should be not to apportion blame as this would lead to obvious
resistance from the decision makers.
This
prelude exercise can then be followed by establishing a
forecasting system, using past data to arrive at the best
forecasting method(s). While businesses would prefer the most
accurate forecasting methods, costs too are a consideration,
and staggering them is recommended. There are two genre of
forecasting techniques, viz. time series (
projecting past patterns )and
causal methods (establishing forecasts from related events).
Time
series methods are more suitable for micro forecasting, as
they are not expensive, and their application has been made
very cheap by modern personal computers. Causal methods are
unwieldy, expensive and best suited to the larger business
decisions. Once a time series method is established, one may
graduate on to more sophisticated methods, or even to causal
methods, depending on the need. A good forecasting system is
also one that can be vetted, accepted or overruled and changed
by the decision makers. However, its suggestive nature can be
a great help in easing the burden of the decision maker, and
in some cases entirely relieve the latter of any effort.
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Logistics
Issues of the Gulf: The need for a properly defined Logistics
function |
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March -
Apr 2002 |
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High
leadtimes - Due to the high reliance on imports and distanced
factories for most Gulf businesses, the leadtimes in the Gulf are
considerably higher than in any other part of the world.
Consequently, logistical and inventory planning can play a
crucial role in profitability. Higher leadtime means a higher need
to hold stocks, and consequently a greater need for planning
deliveries.
Inventory
optimization - The first concern is to have enough inventory to
avoid stock outs.
However, this concern can get overstated and firms can build
up very high inventories, thereby increasing inventory-carrying
costs.
There is a natural tendency for stocks to rise, and nowhere
this is more manifest than in the Gulf where it is accepted that
companies carry too much stock (rather than too little).
Importance
of “Goods in Transit” - In order to reduce inventory, inventory
must be defined from its genesis, namely the raising of a purchase
order.
Ordered and transit goods must be treated as part of
inventory, and managers must attempt to sell from future deliveries
rather than arrived stocks alone.
The accounting concept of “goods in transit” needs to be
critically incorporated into inventory projections, as the
overwhelming majority of Gulf firms are of a ‘trading’ nature,
even if they have their own factories (e.g. multinationals), but
then halfway across the globe.
Planning
system with several definitions of inventory - An appropriate
planning system must carry physical inventory, projected inventory
based on arrivals (incorporating differing leadtimes if by air or
sea), stock-cover days, both by quantity and value. Goods have to be
treated as “inventory” till the outstanding payment for them has
been received from the buyers. While most companies are aware of
planning requirements, unfortunately such planning takes places in
information islands, rather in a comprehensive company wide manner.
Role
of the logistics manager - In the Gulf, the logistics function is
one of critical importance, viz. to support marketing/sales with
exact inventory projections (with marketing and sales driving
logistics with the sales forecasts and requirements respectively).
This can be done only with proper information and planning system,
properly managed by a logistics manager. However, such systems are
frequently lacking or carried out on spreadsheets, which are
woefully inadequate to handle such information. To make matters
worse, many companies in the Gulf do not even have a properly
defined logistics function, which can make an enormous contribution
to the bottom line.
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