Forecasting - Supply chain management (Part I)

I have been recently studying Production and Operations Analysis at Stanford University. Also, since forecasting was the first module implemented at my workplace. I would like to share some key insights gleaned from the class and the implementation of the system.

The description below will give you a 50000 ft view of the various business topics related to forecasts that you need to consider before implementing forecasting module (of any supply chain system).

(1) Forecasts are always going to be wrong (are you surpised ?)
(2) Forecasting aggregate units is generally easier than forecasting individual units, so spend your time wisely.
(3) Forecasts made further out into the future are less accurate. (common sense, duh)
(4) Forecasting technique should not be used to the exclusion of known (means human are still needed in addition to machines)
(5) A good forecast also gives some measure of error (see below for various metrics used)
(6) Better forecasts will result in lower inventory costs (for same service levels), so why wouldn't you want to improve forecasting accuracy.

Forecasts can be subjective or objective. Subjective forecasts are developed using customer surveys, sales force composites and Delphi methods etc.

Objective forecasting is generally done using Causal, Time series based methods. One needs to considers trends, seasonalities, cycles & randomness in the time-series forecasts.

Following metrics are generally used to evaluate forecasts:

(1) MAD: Mean absolute deviation

(2) MSE: Mean Squared Error

(3) MAPE: Mean Absolute Percent Error


There are two widely used methods for forecasting stationary series:

(1) Moving averages
(2) Exponential Smoothing

So, following questions naturally come to mind:

- At what level of the product hierarchy should you evaluate forecasts and for what horizon?
- What is the recommended statistical forecasting model?
- What is the big deal about S&OP process?


To be continued...

Agile Supply Chain Systems

How agile is your supply chain management system?

Dr. Hau L. Lee* describes objective of an agile system to be able to "handle short-term changes in demand or supply quickly;handle external disruptions smoothly". You can get Dr. Lee's paper (Triple-A Supply Chain as published in Harvard Business Review) at the following link:

http://harvardbusiness.org/product/triple-a-supply-chain/an/R0410F-PDF-ENG

Why do we need Supply chain system to be agile?

SCP (supply chain planning) engine should be able to reflect changes in supply picture as soon as possible. If engine can't reflect supply changes quickly enough, your planners will schedule orders manually leaving you to figure out : why no one is using the system?

There are many factors that can result in supply changes, for example,

- Yield rates
- Procurement of additional capacity
- Unscheduled disruptions at your suppliers' sites
- Delays in shipments
- etc.

Dr. Lee advises following six rules of thumb to improve supply chain agility:

1. Provide demand data to your suppliers so that they can respond quickly.
2. Develop collaborative relationships with suppliers. so that any changes in supply are received quickly and electronically.
3. Use inventory postponement concept effectively.
4. Keep an inventory of small and bulky components that are often the cause of bottlenecks.
5. Build a dependable logistics system that can enable the company to regroup quickly in response to unexpected needs.
6. Put together a team that knows how to invoke backup plans.


Agility is a key attribute of any supply chain system. Here is what i2 has to say about it.

http://www.i2.com/supplychainleader/issue1/html/SCL1_7princ_suppchainagility.cfm

i2 promotes 7 Principles of Supply Chain Agility": agile organization, closed-loop plan management, demand management, supply management, fulfillment management, rapid business reconfiguration and agile IT systems. A common theme across these principles is closed-loop management with speed.


Your supply chain system may be best of the breed, cost-effective, scalable etc., but if it is not agile (supply and demand is not reflected quickly), then you better watch out!


* Dr. Hau Lee is the Thoma Professor of Operations, Information, and Technology at the Graduate School of Business, Stanford University.

Business value of IT

What is the value of IT in a business. Does IT matter as someone had asked sometime back?

My theory is that IT has been a greatly misunderstood and mismanaged function. Functions like manufacturing/supply chain, finance etc. are taught in schools, people receive some level of training and are expected to learn some frameworks/principals before they start work. Whereas in IT, any Tom/Dick/Harry with whatever background can jump in, learn how to manage a server or write few lines of code and become an IT expert.

The picture is not that bad everywhere, of course, there are some very good IT groups. Some CIOs have done exceptionally well in using IT to enable business etc. but I think that is only about 10%. The rest struggle....

Some schools do offer courses in MIS but the focus is more on technology. How would you expect them to become business savvy? How can they bring change using technology?

I strongly think there should be formal education on Information Management, not from technology but from business standpoint. What we have seen in IT is only tip of the ice-berg. There is a great potential in what IT can do for a business but for that IT needs to learn the business...

New Age of Innovation

Today I got my copy of the book titled "the new age of innovation" by Prahalad and Krishnan. I was quite excited to read the first chapter. Authors talk about how legacy business models have changed, battle-fields for competitive differentiation have been altered by technology, globalization, Web 2.0 etc.

Using the N(user experience)=1(unique) and R(resources)=G(global) model, authors argue that companies need to use global resources and co-create (with users) value for personalized user experience to survive in this new age of innovation. IT leaders and strategists can find this concept very compelling and even base their future IT frameworks (architectures) to support growth and innovation on this model. I am looking forward to read the chapter on "IT matters".

I will post my analysis and insights after I finish reading the book...so stay tuned.