Forecast Challenge

Whenever you kick off a demand planning cycle, you may get the feeling that it’s an exercise in futility. Honestly, it is difficult to reliably predict future business, and it probably feels like consulting a crystal ball would be just as useful. Odds are variances to plan will grow wider and wider as your business progresses through the planning window.  

So what’s the purpose of forecasting if it’s always going to be wrong? To put it simply, the purpose is to determine a set of numbers to align different business units, basically saying ‘hey, this is what we are going to do.’  Having a common plan and goal creates the opportunity for people to execute on what they do well: serving your business.  To handle the demand variances along the way,  please refer to this previous post, Forecasting vs. Flexibility, to develop the operational labor capacity required to compete in today’s market.  

To hone in on the “right” number, independent parties within your business should take two different approaches to projecting out the next demand period: 1) roll-up from a bottom’s up perspective and 2) take a top-down approach.    

Roll-it-up demand planning

From a finite product family level, your demand planner should assemble a view to the next period(s) for what will be produced over the timeframe, then assemble a ‘unit and dollars’ view.  Even with a roll-up approach, you shouldn’t start your forecast with the finite parts of a component. Rather, your prediction should remain at a product family level.  Forecasting at a component level is a low-value exercise because uncertainty is not pooled at a high enough level.  To gain a better understanding of managing inventories, please read the inventory management blog post. 

Top-down Forecast Approach

At the same time, have another planner take a top-down approach and develop a demand plan from an external point-of-view, independent of your roll-up plan.  This plan should be reflective of the following drivers: company performance across the previous period(s), industry trends, economic factors, and changes in product mix.  By using external data to drive the forecast, this will reduce the company bias present in the numbers.

Combining the two approaches

Bringing these two forecasts together is the last critical step to developing a coherent, feasible forecast for your business to execute over the coming period.  Absolute precision in the forecast is not as important as accuracy, so you should follow all steps mentioned previously to ensure the forecast is not biased.  Overall, your primary goal is to have a believable forecast that the business can execute against.  

When flexible labor capacity is required to manage a demand variance, Veryable is here to help you capture peak revenue opportunities while maintaining low lead times by tapping into a reliable pool of workers you can use exactly as needed.  

Right materials on-hand?

Inventory Management

Within the walls of a manufacturing or distribution facility, lots of things can change that will drive productivity down.  It’s a constant battle to maintain throughput standards.  A big factor that influences warehouse productivity is inventory management, particularly classification and storage profile.  Our take on improving your warehouse workforce is in a previous blog post – Building a Better Workforce.

Inventory Classification

When it comes to maintaining inventory – whether input materials or finished goods – do you know if you have the right quantity in the right place?  To work towards an answer, one needs to have an understanding of how vital each item or material is to the operation.  Generally, inventory is classified into four buckets based on service level:

A – 99% service level (critical items that will shut down your facility or the customers):  always have on-hand, no more than 2% of items

B – 90% service level (high volume materials or items): 18-20% of the materials that comprise the remainder of items up to 80% of demand

C – 70% service level (medium volume materials): next 30% items or materials that comprise the next 15% of demand

D – less than 70% (low volume materials):  next 50% of items or materials that comprise the next 5% of demand

A Pareto analysis is the proper approach to classify inventory into the above buckets.  Once the items are classified, the inventory manager now knows where to focus his attention:  the critical and high volume items that are 80% of the demand.  This inventory classification will drive decision making on amount of material items on hand, cycle counting, and storage position within the facility.

Storage Profile

The last people to know product changes are coming are usually the warehouse operations team.  This information is critical for the team to keep the warehouse at performance standards.  As the product mix changes, the impact will affect storage density and layout – two key factors of inventory management.  Storage density will decrease if the new products do not stack well on the floor.  If a new product only stacks two pallets high instead of three on the floor, then the facility lost 33% of its floor storage capacity.

As the floor stack height decreases for the pallets, the warehouse will need more storage positions in racking, which is a big investment in capital and time to reorganize the warehouse.  An average stack height approaching three usually means that floor storage will be an effective solution; however, an average of two or less means that racking will be required to efficiently utilize the space.

In terms of warehouse productivity, the wrong storage profile will mean the product sits on the inbound dock longer because no locations are available for putaway.  This will tie up inbound dock and back up yard as trucks cannot be unloaded.  Additionally, the wrong storage profile could be increasing travel time for the high volume items by 20% or more.

Recommended Approach

First step is to tackle the inventory analysis, and the second is to implement the identified changes.  The Pareto demand analysis could really be eye-opening to see what items are driving demand.  The information will lead to better inventory management and application of effort.

Veryable is the on-demand platform to find flexible labor to perform cycle counts or backfill your people to perform the counts.  In this labor market, getting the most out of your workforce is a key driver to success.

Lean vs. Six Sigma

Many people today tout Lean Six Sigma as a common tool to drive process improvement across industries and functions.  You may think that the two are one in the same, but Lean methodology and Six Sigma are two distinct tools to achieve performance improvement smashed together under one banner: LSS

Six Sigma

Six Sigma is oriented towards identifying and removing causes of defects and minimizing process variability.  The six sigma name references 3.94 defects per million, which is six standard deviations between the mean and control limits. Conducting a Six Sigma improvement project involves collecting data on the process, inputs, and outputs.  The practitioner then statistically analyzes the process data to understand capability and improvement opportunities.

This approach makes sense for a stable and repeatable process that serves customer needs and is not anticipated to change.  Six Sigma is not well suited for updating a process for changing customer demands or a technological disruption.

Lean Methodology

Lean is a method and tool set focused on creating or re-defining a process, so it’s more capable to respond to changing customer demand and to eliminate waste.  While executing a lean process design, the project leader will lead the team through process mapping analysis to define the future state and then compare this against the current state to identify and quantify areas of waste and barriers to change.  

In lean, waste definition extends beyond the obvious material consumption or wait times and into reducing handling and touches, ahead of schedule production, and wasted effort such as re-work.  The lean framework will cause a critical look at the entire process and certainly question the time and effort tied up in quality control processes.

In a manufacturing environment, the lean process is setup to accommodate the needs of the customer as reducing their waste is a logical focus and result of the lean project.  A lean process methodology grounded in serving the customer what they want and when they need it will win that customer for the long term.

Future Vision

As a first step, companies need to think of their desired outcome of the project.  Lean and Six Sigma are both means to performance improvement. However, they both lead to different types of results and continuous improvement mindsets.  Six Sigma will deliver the process improvement, and Lean will create a process toward satisfying the customer needs.

With Industry 4.0, the real possibility of LSS methodology is here.  The automation of real time data acquisition and analytics to identify the appropriate process sequence, to schedule preventive maintenance, and to drive out bad lots of raw materials.  The Internet of Things is the piece that will truly allow the convergence of Six Sigma and lean into a unified tool for performance improvement.

At Veryable, we have a flexible, on-demand labor solution to capture the operating gains and incremental revenue identified by a rigorous process improvement project.  Check out how you can use on-demand, flexible staffing to improve your performance at www.veryableops.com or let us know if you are interested in Veryable Operation Services (VOS) to drive performance improvement.

Forecasting versus Flexibility

Forecasts, by definition, will always be wrong. The degree to which they are wrong varies widely – the magnitude of the gap is often a factor of demand planning techniques and tools, market factors, changing customer preferences, and operational strategy. In terms of strategy, many businesses seek to find the “sweet spot” between forecasting and operational flexibility; they ebb and flow across the forecasting-flexibility spectrum with changes in leadership preferences, business models, and enabling technology.

How does demand planning work?

Understanding where the sweet spot lies starts with understanding how demand planning typically works in practice. For most manufacturers, demand planning is a labor-intensive process that often requires full-time dedicated resources. Demand planners tend to rely on a number of factors: firm order book, sales forecasts, market intelligence, industry trends, historical data, and seasonality. These factors are then loaded into statistical models – many of which are very sophisticated – and the results form the basis of the demand plan. The demand plan is then scrutinized by a cross-functional set of stakeholders and will often undergo a number of iterations before being finalized by leadership. The demand plan is often a major driver of the financial budget and guidance.

Despite the level of sophistication, demand planning is always an imperfect exercise and requires a significant amount of judgement and assumption. The process and results are analogous to traders trying to anticipate the financial markets – the projections may be directionally correct but the market is ultimately a random walk.

Finding the Sweet Spot

A robust Sales and Operations Planning (S&OP) should be the primary mechanism by which companies begin to converge toward the sweet spot. It is not feasible for operations leaders to develop a supply plan exactly aligned with the demand plan due to potential implications on inventory, supply chain shocks, capex, and labor costs. In addition, demand plans are typically applicable over one fiscal quarter; given that demand is never constant over a 3-month period, operations leaders have to be prepared to adapt to daily variation across that time period.

Leading companies find the sweet spot by developing capabilities to increase flexibility and agility. Good examples of these capabilities include product platforming, design for manufacturability, supply chain redundancy, postponement, and temporary labor. These capabilities allow companies to neutralize the impact of product variation on operations. At Veryable, we believe that the right approach is a “flexibility first” mentality that then pulls in the demand plan to set the broader boundary conditions. Forecast accuracy tends to decrease as you traverse down to the product/component level so the key is finding the appropriate hinge point where forecasts are credible across a broader category and the remaining variation can be managed with operational flexibility.

Impact on Direct Labor

In a previous blog titled New Take on Temporary Staffing, we explored how temporary labor has traditionally been used to embed higher levels of flexibility and agility in the supply plan. This blog presented some of the challenges and limitations around the current paradigm, namely the fixed period costs, productivity challenges, and lack of choice and availability. These limitations are becoming more poignant by the day as customer preferences evolve faster, delivery expectations become more demanding, and cost pressures increase. Companies do not have the luxury of planning temporary labor 3 weeks out and retaining temporary workers in weekly installments. Direct labor planning ultimately has to give companies the ability to adapt in real time.

At Veryable, we believe the next paradigm shift is bringing labor flexibility down to a very finite level, aligned to daily, or even hourly, production schedules. The on-demand economy gives us the opportunity to introduce these higher capabilities, as well as usher in a whole new set of workforce participants into the equation. Leading companies are starting to think this way and are having much more success adapting to today’s market.

For more information about the on-demand labor for manufacturing and warehouse applications, please view our website: www.veryableops.com

Veryable for Small Businesses

On-demand labor gives small and medium sized businesses the flexibility needed to grow and manage costs.  No one feels the effects of capacity constraints more than small businesses.  Orders are often turned down or missed, costs are often inflated during lulls in demand, and administrative costs around hiring/firing put unnecessary burdens on an already challenging cost structure.  Veryable’s on-demand marketplace aims to address these core challenges for businesses.

Revenue Growth

The fact of the matter is that demand is always going to be unpredictable and volatile.  Advancements in technology and analytics allow companies to improve demand planning, but even the best forecasts are still imperfect.  As we discussed in a prior blog called Forecasting vs Flexibility, there is still a lot of opportunity for businesses to build in flexible capacity.  The flexible capacity is what will enable your business to respond to the full spectrum of revenue opportunities.

For an example, a Veryable client – 3rd Party Logistics company – realized it could grow revenue over 10% by bidding on small consumer product displays for a large retailer in the DFW area.  The company has approximately 20 full time employees, all of which are needed fully dedicated to the standard operational priorities: material handling, breaking bulk, loading and unloading trailers, etc.  In order to fulfill the incremental assembly work, the company used Veryable on-demand labor to come in on the day the materials arrived and build the assemblies.  Once the assemblies were built, the client inspected and signed off on the work, initiated payment, rated the workers, and bid them farewell.  Not only did the client just catch a significant revenue bump, but it was able to do so at essentially zero cost to scale.

Cost Containment

Another common challenge prohibiting small business growth, is the cash outlay involved in onboarding resources in advance and the subsequent labor efficiency issues with making them productive.  The investment always precedes value realization, often with a substantial lag.  Even managing productivity of full time labor against normal demand volatility can be a major challenge for small businesses.  With fewer employees, demand cycles are more profound since you have fewer options to flex internally, i.e., major order rate increases require external resources and decreases require a reduction in force.

Veryable helps small businesses deal with the challenges across multiple dimensions.  Many of our early clients have committed to using Veryable as the way to manage the +/- 20% order rate swings, maintaining a full-time headcount to achieve the 80% level (which typically represents the low point in any demand cycle).  This strategy has added stability among the full-time headcount, including stability in per unit labor costs, while giving these businesses the ability to always catch incremental volume.

Other strategies include the use of our piece work option where you pay a fixed price per unit produced or task performed.  The same 3rd Party Logistics company mentioned above used piece work for their assemblies.  What previously required a 5-person team over a full week from traditional temp staffing firms only took 3 Veryable operators 4 days to complete.  The company realized over 50% labor cost out using Veryable – the key driver being the ability to move the productivity burden on those doing the work.  People want to work efficiently when it is in their financial interest to do so.

Fewer Administrative Burdens

In addition to challenges around revenue growth and cost containment, small businesses typically do not have the infrastructure required to perform excess administrative tasks.  From hiring and firing to onboarding and training to payroll and benefits, small businesses need results today and need the ability to bypass the administrative burdens.

Veryable is set up to cut out all of these burdens.  All transactions are processed through the platform at the click of a button.  All costs are expensed at the time of completion with no further obligations.  All payroll costs, taxes, and benefits are invisible to you.  Your only obligation is to provide a safe place to perform the work and adequate resources.  Our process has been designed to maximize the value add to your business.

Explore Veryable

Please visit the website to learn more about the Veryable on-demand labor model and follow the link on the homepage titled “Businesses” to create a free portal for your business.

Homepage: www.veryableops.com

FAQ: veryableops.com/businesses-faq/

Business Support Line: (682) 325-9677

Email: howdy@veryableops.com