If there is one piece of information guaranteed to improve your chances of business success, it is knowing what your customers will want in the future, be it the next quarter, year or even decade. While a few business leaders still dream of a corporate crystal ball, or continue to trust in their speed of reaction, many manufacturers are now looking to demand planning and forecasting as a critical tool for the next two years.
I know this because my company recently commissioned research specialists IDC Manufacturing Insights to investigate the plans of over 720 discrete manufacturers in the largest survey of its type ever undertaken.
When asked “In which areas do you believe your company is excellent today?” and “In which areas do you believe your company needs to pursue improvements in operational excellence in the next two years?” the biggest gap between current performance and the standard expected in the next two years was demand planning and forecasting. It is the longest road most manufacturers realise they must travel.
The main drivers behind this focus are clear. When asked to rank current business concerns, manufacturers placed the specific issue of demand volatility seventh, alongside increasing changing customer requirements and global competitiveness. However, the top current issue of revenue is also grounded in a thorough understanding of customer demand.
Demand planning also feeds into the second major current concern – profitability. Poor demand visibility has plagued the discrete manufacturing industry for years – across many sectors. This places huge strain on manufacturers as they cannot plan production or operations and are forced to satisfy demand reactively.
This is often the most expensive way available, reducing the profitability. The research also showed that looking forward, the business strategy at the top of the discrete manufacturing agenda is the retention and growth of the existing customer base. Demand planning is critical to achieving this strategy.
As a result, although demand volatility was the seventh biggest concern, it is the fourth most important initiative set to be undertaken by manufacturers in the next two years.
However if you are looking to improve demand planning, proceed with caution. The traditional approach of demand planning is based on a retrospective analysis of goods sold: in many cases this is as dangerous as no demand planning at all. The approach does not suit the lower volumes of sales as typically found in specialised, discrete manufacturing and past performance is no guarantee of future trends.
The shift to next generation demand planning – known as sales and operational planning – is about understanding the implications of demand and actively managing it to ensure the objectives of revenue and profitability are met.
To truly exploit demand planning and forecasting, you must assess the revenue and profit expectations of the predicted demand and consider whether the forecast is enough for the business, and if it’s not, what you are going to do about it.
Demand planning not only enables you to handle demand volatility better and deliver improved demand visibility, it also sets you on the path to shaping that demand. JAE Europe, a leading manufacturer of automotive electronic connectors, has been able to move from expensive air freight to shipping, saving over £500,000 on transport costs whilst being able to accurately predict demand up to 24 months in advance, compared to three months ahead previously.
This kind of business improvement does not come from corporate crystal ball gazing or the fastest of reactions but from the insight borne of proactive demand forecasts and initiatives to shape customer demand rather than reactively accept market conditions.