Thursday, June 14, 2018

The incredible Power of a Material Forecast

What is a material forecast? This is not to confuse with sales forecasting or a master plan where finished good's demands are forecasted through product groups. A material forecast relates to the anticipation of future consumption of purchased parts. In SAP ECC, for example, you can assign a material forecast as a policy. In that case you would use the MRP type VV together with a lot size procedure and a buffering strategy (I suggest a dynamic safety stock through a Range of Coverage profile).
This would result in a de-coupling of the part from any dependent requirements coming through the Bill of Material and the only demand that triggers replenishment, is the material forecast itself. Let me be a little more descriptive… When using such a policy you are - for planning purposes - ignoring any demand coming from a master plan and simply fill up stock at the beginning of each period… irrespective of what that a finish goods or production planner thinks you need to put up, based on what they think they will need.
To not have visibility into the future scares the living daylight out of most buyers and materials planners! This is so, because most people are told that they must bring in exactly what we need, exactly when we need it (who the heck came up with that mantra?). The problem with this kind of thinking is, that you will never exactly need what you think you need when exactly you think you need it. But because you act this way (and order this way) your supplier is chasing your lead… and that "lead" pulls in and pushes out and pulls in and pushes out and orders less and orders more and…
Because your supplier never knows what you want and when you want it, they get frustrated and won't make stuff to stock anymore. They say "if you want 25 pieces on November 20 then place an order and I start the process the first week of July. You can then have it delivered on 11/20 because it takes me 3 months to get my raw materials, 2 months to manufacture the parts and 3 weeks for transportation to your facility." So you place the Purchase Order and after 2 weeks the master plan has changed and you need 22 --> order an additional 2! One week after that it turns out that we need the parts only in December ---> exception: push out the order. Then a rush order for the finished product comes in and we need some of these parts in September ---> exception: pull in.
Now, this game can be repeated (and will happen) over and over and over and you end up in exception message galore… and you'll experience a constant back and forth between stock-outs and excess inventory… and the supplier goes crazy!

Here is an idea! Ignore all this stuff because it is not going to happen anyway, and - if you have some sort of a consistent consumption pattern - just fill up your inventory at the beginning of the period, so that you can consume what you need without running out and with no excess stock. How do you do that? You forecast an approximate future consumption (which is easy if you have somewhat consistent consumption) and put an additional buffer on top (but it must be a buffer, not a static safety stock) and tell your supplier to deliver the same quantity at the beginning of every period (so you end up ordering the same quantity regularly). Provide the supplier with that forecast and give them a guarantee that you'll pick up that quantity at that time for at least the next [fill in blank here] months. You will be surprised how the supplier all of the sudden makes the parts to stock before you ask for them, how the lead time shrinks to the transportation time only and how you get your stuff on time and in full like clockwork…

I know, I know what you say… "I can't do this. What if I have an unusual demand? What if I don't have any demand anymore? What if Florida freezes over?" Let's compare what you do today and what a material forecast does.
  1. Today your suppliers experience an incredible amount of noise in your ordering. They insist to start the process ONLY when they know what you order. Tomorrow they would experience a leveled demand from you and make this stuff to stock and deliver regularly to fill your inventory at the beginning of every period.
  2. Today you receive your parts after a long lead time and sometimes you'll get what you ordered. The problem is that what you ordered a long time ago is not what you need anymore. Tomorrow you just consume what you have in stock and the supplier fills it back up. Should you need more than what you forecasted, you'll run out… BUT!... The next receipt from the supplier is near. (You will not run out at the beginning of the period and if you run out at the end your next, scheduled receipt is close)
  3. Today you are fire-fighting the hell out of your ordering process (exception messages are plentiful)… AND… nobody is able to help you. The suppliers can't keep up with your ordering patterns and will give up on you. Tomorrow, the supplier receives a leveled and consistent stream of orders which they are able to plan for on their side. Once the relationship has improved, engage with the supplier to have him take on part of the safety buffer your maintaining ion your side

The graphic shows the effects when you switch from a deterministic replenishment policy to a material forecast (we call the policy "Dynamic Buffer"). In this example the average inventory holding drops from 200 parts to 40 parts. The supplier is given a forecast to deliver 62 parts at the end of every months. This will ensure that there are 62 pieces plus 8 pieces buffer (5 days in the Range of Coverage profile) in inventory at the beginning of every month. With an average daily consumption in the past of 3 pieces per day, a stock-out - if it ever happens - can only occur towards the very end of the months and therefore, the worst that could happen is that a production order would have to wait for a few days until the next receipt comes in.

I strongly suggest that you explain this new situation to the supplier and give him a guarantee that you will pick up these exact quantities at exactly that time for at least the next 3 months. This should motivate them to make the parts into their own stock ahead of time so that they only need to pick the parts from their inventory and ship it on the 28th of every months. Can you see how now the lead time (Planned Delivery Time in MRP2) drops dramatically? In the above example the lead time was cut from a whopping 212 days down to 2 days transportation.

Let me be clear, this is not for every part… it has to have some sort of consistent consumption pattern and there must be some movement. But I am sure there are plenty of parts in your business that match that description… so why not improving your life as a planner at least to some extend?

Per my experience it is very difficult to get planners to not only dare to move to a "dynamic buffer" policy but to also leave it there. They feel an incredible amount of pressure coming at them when their managers, partners or colleagues do not agree with what they see now in MD04. The key to getting the change done is to communicate properly with all parties involved. You'll have to explain your intent and show the benefits this will bring along.
The switch is very hard to get done - not because it's not working - but it's hard to imagine that all of a sudden the system works for you, instead of you working for the system.