Traditionally, much of the responsibility for forecasting in corporations resided with Sales Forecasters and Demand Planners. After all, the sales forecasters are closest to knowing what customer needs are. However, that role prescribed a process of determining what the business is expected to sell, based on what it could produce. The function of the sales forecaster represents an internally driven, traditional ‘push’ model of the supply chain.

In a traditional supply chain, product flows sequentially through a system from one level to another (Exhibit 1) in a linear fashion. Driven by manufacturers and suppliers, the traditional supply chain is the furthest away from the ultimate consumer or end user. Traditionally, each operation tended to maintain its own information system and communication flows that occurred between individual departments. Nowadays, in a world dominated by global economics, the term supply chain has taken on a broader meaning. The Council of Logistics Management (http://cscmp.org) defines a supply chain as the ‘material and informational interchanges in the logistical process stretching from acquisition of raw materials to delivery of finished products to the end user.  All vendors, service providers and customers are links in the supply chain.’ This definition is still a mouthful, but it underlies the recognition that competition is no longer limited to individual companies vying against each other.

Exhibit 1 Traditional Supply Chain: Sell What You Can Make

In a demand-driven supply chain (which arose in recent decades), information in the form of orders also flows back in the opposite direction, so that all operations have complete visibility to the whole supply process (Exhibit 2). Instead of being driven or supplied by the manufacturer, consumers are the drivers of demand, demanding cheaper, faster and higher quality products. A firm’s success is a combination of an integrated supply chain, a sound infrastructure and a focus on consumers.

Exhibit 2 Traditional vs Demand-driven Supply Chains: “Make What You Can Sell” versus “Sell What You Can Make”

In the context of a modern, externally driven or  ‘pull’ model of a supply chain, a demand forecaster is in the business of making detailed statements about future demand for products and services in the face of uncertainty. Demand forecasting and planning is the process that drives inventory levels to improve a company’s ability to replenish or fulfill product to meet customer (and ultimate consumer) needs in a timely and cost-effective way. If forecasting does not have a good link to drive inventory stocks, improving it won’t necessarily improve customer service levels or reduce costs. A forecast is not just a number, outcome or task. It is part of an ongoing process directly affecting sales, marketing, inventory, production and all other aspects of the modern supply chain (Exhibit 3)

Demand Planners manage item-level (disaggregated) data from a number of sources to derive a clear view of what product demand is likely to be, and then link inventory and replenishment processes to that future view. This bottom up Demand Forecast incorporates a logical and coherent series of steps that, if performed in an organized, management-supported fashion, can improve forecasting effectiveness, reliability and accuracy throughout the supply chain.

Exhibit 3 Operational Impacts of Poor Forecasts in the Supply Chain

In the ‘pull’ supply chain model, demand planners and managers should start by reviewing an independently derived, unbiased baseline demand forecast (Exhibit 5b), instead of first focusing on the targets that planners hope will result from a sales forecast, as in the “push” model (Exhibit 4a).  Demand managers must then reconcile their planning approaches with the assumptions for the future so that the most credible methodology will produce accurate and reliable forecasts. The Demand Management (DM) process makes use of computerized intelligence to synchronize and optimize essential elements of manufacture and distribution.

Exhibit 4 (b) ´Make What You Can Sell”, not (a) “Sell What You Can Make”

Hans Levenbach, PhD is Executive Director, CPDF Training and Certification Programs. He conducts hands-on Professional Development Workshops on Demand Forecasting for multi-national supply chain companies worldwide. Hans is a Past President, Treasurer and Member of the Board of Directors of the IIF. He is group manager of the LinkedIn groups (1) Demand Forecaster Training and Certification, Blended Learning, Predictive Visualization, and (2) New Product Forecasting and Innovation Planning, Cognitive Modeling, Predictive Visualization.

He invites you to join if you have interest in sharing conversations on these topics.