{"id":1150,"date":"2011-04-11T12:18:48","date_gmt":"2011-04-11T16:18:48","guid":{"rendered":"https:\/\/demand-planning.com\/?p=1150"},"modified":"2011-04-11T12:18:48","modified_gmt":"2011-04-11T16:18:48","slug":"the-perfect-forecast-and-the-cost-of-error-radio-shacks-experience","status":"publish","type":"post","link":"https:\/\/demand-planning.com\/2011\/04\/11\/the-perfect-forecast-and-the-cost-of-error-radio-shacks-experience\/","title":{"rendered":"The Perfect Forecast and the Cost of Error: Radio Shack's Experience"},"content":{"rendered":"
\"Jack<\/a>

Jack Harwell- Radio Shack<\/p><\/div>\n

Forecasting & Planning Professionals<\/a> strive to reduce error in their work.\u00a0 For all this effort, what is the reward? When asked what the cost of forecast error is<\/a>, most discussions turn to the consequential impact of inaccurate forecasts.\u00a0 Consequential impacts include lost sales and profits, expedited freight, excess and obsolete inventory, and unhappy customers. There are also defensive measures that companies take, which are meant to reduce the impact of forecast error<\/a>.\u00a0 One commonly used measure that immediately comes to mind is the use of safety stock.\u00a0 Carrying additional inventory to compensate for unexpected customer demand places a heavy burden on companies, but is considered essential to serving the customer and avoiding lost sales. There are other defensive measures<\/a> that aren\u2019t typically identified as a cost of forecast error, but have a significant impact to the bottom line.\u00a0 Consider the activities and infrastructure that we have in place to manage the consequences of forecast error.\u00a0 These defensive measures<\/a> easily come to light if you imagine an alternative reality:\u00a0 The Perfect Forecast.\u00a0 How much that we do on a daily basis would not be needed if we could predict customer demand with certainty? One of these activities is rescheduling vendor deliveries and production.\u00a0 The tasks that come along with this such as adjusting requirements, communicating with suppliers or production planners, calculating schedules and confirming new commit dates<\/a>, in addition to the need for \u00a0updating systems takes a tremendous amount of work.\u00a0\u00a0 Then there are the systems that support rescheduling which also need attention.\u00a0 Master scheduling, MRP, capacity planning, and shop floor control all have a significant amount of source code dedicated to the rescheduling of orders. If forecasts were perfect, there wouldn\u2019t be a need to reschedule.\u00a0 Production schedules, once set, would not require any changes.\u00a0 Vendor deliveries would be allowed to come in as originally planned.\u00a0 Imagine if there were no rescheduling activities required.\u00a0\u00a0 How much of your employees\u2019 time would become available, what routine activities would no longer be required, and how much of your ERP systems would be idled? For example, at one manufacturing company a very robust Purchase Order (PO) rescheduling process has been developed over the years.\u00a0 Initially, the process was manual, requiring approximately 12 hours per person each week.\u00a0 The process was as follows:<\/p>\n

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  1. Run a report that identifies which POs need rescheduling<\/li>\n
  2. Buyers\/Planners manually review reports and mark adjustments<\/li>\n
  3. Reports are faxed to suppliers for response<\/li>\n
  4. Suppliers write responses on report and fax back<\/li>\n
  5. Buyers\/Planners manually review responses and change POs<\/li>\n<\/ol>\n

    With 8 Buyers\/Planners on staff, the annual time spent on this process was about 3800 man-hours or almost 2 FTEs (full time equivalents). After a considerable amount of system development, this process has been automated.\u00a0 In the new upgraded system, the report could be reviewed online before being released by the buyers\/planners.\u00a0 The vendor would review the reports online or received the data via Electronic Data Interchange or EDI.\u00a0 Suppliers would respond online or via EDI.\u00a0 These responses would then be routed back into the ERP system. This new process reduced the staff\u2019s work load by about half.\u00a0 Even though this was a significant improvement, the process still takes about 2000 man-hours per year, or one FTE.\u00a0 This manufacturer succeeded in reducing the effort required to deal with imperfect forecasts<\/a>, but did not eliminate it altogether. As you know, there is no such thing as the perfect forecast.\u00a0 Forecast error is a necessary part of doing business.\u00a0 However, there are steps we can take to reduce forecast error and its associated costs<\/a>.\u00a0 These are:<\/p>\n