Get ROI From a Forecasting System Sooner Than You Think
by Jackie Biallas
You may be thinking you need a forecasting system, but are intimidated by the cost. The Institute of Business Forecasting & Planning, IBF, has stated that a 15% improvement in forecasting accuracy leads to a 3% or higher pre-tax dollar improvement. For a $100 million company, this is a savings of $3 million! In this article, we will explore the ROI of a forecasting system.
The realization that a forecasting system is necessary is often driven by:
Disjointed data/need for more efficiency – the process of collecting and organizing the data vital to making good demand forecasting decisions is time-consuming and inefficient. Due to the expansive size of spreadsheets used, it is difficult to glean insights quickly and accurately.
ERP is not meeting needs for forecasting and sales analysis – ERPs are excellent tools for bringing information together and forming a process for all areas of a company. However, ERP focus is often not on forecasting and sales analysis and many companies need a more robust tool for these purposes.
Forecasting accuracy challenges – some companies may find that their forecasts are not accurate, resulting in overstock or stock-out situations.
Inventory problems – the company may be in an overstock situation and needs to analyze their business and reassess their product assortment.
The costs of a forecasting system vary greatly from system to system. The need for a more expensive system is contingent on the size and/or complexity of the business data.
Here at [basic-code] ™, our clients typically see ROI within 18 months. These businesses realize both direct and indirect cost savings, as described below:
Direct Cost Savings
Optimized inventory levels that result in reduced carrying costs
Increased revenue due to fewer missed sales
Decreased shipping costs due to fewer rush shipments
Lower markdowns and obsolescence due to having fewer overstock issues
Increased inventory turnover
Increased efficiency in the planning process
Indirect Cost Savings
Better financial planning due to the visibility a forecasting system offers its users
Warehouse efficiency increases because a forecasting system can determine optimal product placement and provide guidance for personnel scheduling for shipments and receiving
Production efficiency increases due to prioritization and batching of job orders
Human resource costs may decrease due to efficiencies gained through use of a forecasting system in cross-functional areas of the company
Sales and Marketing Teams gain insights into sales trends quickly, giving them a competitive advantage
When you look at the ROI realized by companies who implement a forecasting system, as well as the increases in efficiency gained in this tight labor market, it only makes sense for companies to consider a robust forecasting system.
At [basic-code] ™, we help companies achieve improved KPI’s that deliver efficiency and positive results to their bottom line. For more information about how we can help you, visit www.basic-code.com.
Companies that achieve the holy grail of Inventory Optimization (IO) realize maximum profit by holding the least amount of inventory necessary, while still fulfilling consumer demands and achieving fill rate goals. By matching supply to expected demand, companies reduce the cost of carrying inventory and increase cash flow and operational efficiencies.
An excess of inventory can cause many problems for a company. The typical cost of carrying inventory is at least ten percent of the inventory value. Excess inventory takes up space and cash flow that could be used for profitable inventory. It can be damaged, expire, or become obsolete, forcing the company to write off the inventory.
There are many challenges to achieving inventory optimization. Increased globalization lengthens transit times, increasing mergers and acquisitions often result in compromised data integrity, stringent customer service level agreements pressure companies to carry more inventory than necessary, and multi-channel and omni-channel distribution can complicate the collection of data. In addition, brick and mortar are increasingly competing against online retailers, trying to manage inventory at hundreds (or thousands) of locations while their competition may have just one location.
How to Achieve IO:
First, products and inventory should be classified into ABC categories according to their priority. Different products will have differing profitability and seasonality, just as customers or sales channels may be of differing priorities. Sales usually follow the 80/20 Rule, where the top 20% of the products produce 80% of the sales. By categorizing products in this way, a company may realize that they are over-assorted and may move to liquidate excess inventory immediately, thus saving themselves the inventory carrying costs associated with that inventory.
Next, companies must determine what level of service they can afford and what level their customers are willing to pay for. The relationship between customer service levels and inventory cost is non-linear, meaning the amount of inventory needed increases much faster than the level of customer satisfaction once you hit a certain point. Because products have been categorized by priority, it is clear that not all products have the same service level goals.
A company can then use demand forecasting to determine future inventory needs, factoring in sales curves, lead times, velocity, and criticality. This process must meet the KPI’s of the company, and must be continually monitored for changes, so improvements can be made. Because of the increasing complexity of the marketplace, it is important to have tools, such as a forecasting system, that can gather the data from the multiple sources and provide visibility to the inventory.
As a product’s sales slow, it is not hitting its inventory turn goals, and the product becomes obsolete. It is imperative that a company takes action to liquidate slow selling or unprofitable items in a timelymanner. The faster slow-selling products are removed from inventory, the faster they can be replaced by more profitable, better-selling items.
An added benefit of inventory optimization is the efficiencies gained in the warehouse. Because the products are categorized by priority, they can be assigned locations in the warehouse to reflect that. Operational efficiencies are gained when faster-moving product is housed closer to the outbound stations. By not holding excess inventory, costs are saved because the product takes up less space and fewer footsteps are needed to fulfill orders.
Despite the challenges to achieving Inventory Optimization, it can be done, especially with the right tools in place. Companies can gain an edge over their competition by improving their efficiency and cash flow.