Predicting the future

For many years, I worked in the salt industry. A significant part of the business was selling salt for the purpose of deicing winter streets and sidewalks. Every year about this (September or October), people would say in my presence that they just read that his coming winter would be worst ever. Yes, every year I heard that. Every once in a while, like last winter, the worst ever forecast would be right. Most times it was wrong, or only right for a small part of the country. There seems not be much of a market for a winter forecast that reads that winter will be moderately bad, or maybe moderately good.

In the supply chain and logistics field we live and die on the demand forecasts. Actually that is not quite right. More accurately, the amount of inventory we are comfortable with is based on how accurate we believe the demand forecast will be. The less we believe it, the higher the amount of inventory needed to cover demand variability.

So how do you plan for the unknowable. The further away from today we get the more the variability of demand planning grows. Lets take next winter and figure out how to handle our truckload demand. We know last winter, because of weather, trucks were scarce, and cost per mile skyrocketed on spot truckload market many times exceeding the $2.00 per mile mark. So how should we plan for next winter?

One approach is to expect the worst. Plan large amounts of inventory and high transportation costs. Your budget will be high, but unfavorable variances are less likely. It is easier to cut back if the worst does not happen.

Another approach is to plan for an average demand and cost for the winter. This approach will lower your future budget cost making management happy or at least less combative. However in the back of your mind, contingency plans need to be made particularly for a worst than expected winter.  Being prepared will cut the amount of money needed and those unfavorable budget lines.

The two approaches above will not cost a lot in data fees. A third option to look at a large group of studies on next year’s winter forecasts. It will cost a bundle in research fees to do this. But you are more likely to closer to actual demand and cost.  If you have very significant freight volume you are likely to be justified in covering the data costs because of the more accurate demand forecast.

Day to day business always take a lot of one’s daily time. But it will be less overall work if you take time to plan.

 

 

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