Optimizing Cash Flow with SKU-Level Forecasting
By Dan Raftery, president, Raftery Resource
Network, Inc. and Aaron Raftery, project manager,
Lime Energy, Inc.
Several supply chain
specialists at the recent IE Group CPG Forecasting and Planning Summit
in Chicago offered top-level peeks into their demand forecasting methods.
Paul McMorrow, senior supply planning manager
at H. J. Heinz Company, highlighted the new imperative for this discipline:
to free up internal cash flow in response to the tightening credit market
and other forces in the current economic climate. Mr. McMorrow and other speakers outlined strategies to reduce
inventory-related drains on cash flow by increasing SKU-level forecasting
accuracy through SKU fragmentation techniques.
Alan Fang, vice president,
business process re-engineering & applications, Easton-Bell Sports,
Inc., offered a matrix framework that crosses A-B-C SKU productivity against
X-Y-Z forecast accuracy, creating a grid of nine
"buckets." The AX bucket would contain SKUs with the highest sales
volume and greatest forecast accuracy. An example of how forecasters can
use this matrix: to reduce inventory levels of the C SKUs (lowest sales volume),
forecasters can focus on products in the CX bucket (slow-movers with the
most reliable forecasts).
Jan Steuber, demand planning, supply chain, MARS, presented a
similar SKU segmentation methodology. However, instead of fragmenting SKUs
using forecast accuracy, MARS crosses SKU productivity with X-Y-Z demand
variability. Mr. Steuber showed that demand variability
has a significant negative correlation to forecast accuracy, indicating
that these two variables capture similar information. An advantage to using
demand variability is that it also provides an entry point for reducing
forecast error. By adopting marketing strategies that incorporate demand
variability, Mr. Steuber suggests businesses
may be able to indirectly improve the accuracy of their forecasts.
What advantages do you see in using SKU segmentation in forecasting?
What are the "watch-outs?" Are CPG supply chain forecast experts
really being used for critical business strategies such as cash flow
optimization or is this a lightly tapped resource?