Suppliers developing sales and operations plans without direct forecast information from key customers are missing an opportunity to have greater control over their business and provide better service to their customers.
Customer forecasts are essential for developing accurate sales and operations plans. Procurement professionals who do not share forecasts with key suppliers are creating a layer of risk in the supply chain that could result in supply interruptions and higher prices.
Some buyers may be reticent to share forecasting information, thinking it may create an obligation with the supplier. Others many not have access to good forecast data, or may work for companies that prohibit sharing sensitive information with suppliers.
Procurement professionals who do not share forecasts with key suppliers are creating a layer of risk in the supply chain that could result in supply interruptions and higher prices.
It is often the supplier who is the strongest advocate for gaining forecasting information from the buyer. Forecasts allow the supplier to shorten lead times, identify delivery constraints, leverage economies of scale, and manage costs. Buyers under pressure to meet individual and organizational KPIs may find that sharing forecasts will help them achieve their goals as well. They can convince management to support forecast sharing by stressing the impact of supplier performance on manufacturing operations and its influence on customer satisfaction.
Forecasts are predictions of future business requirements and suppliers treat them differently than hard purchase orders because they are not a contractual commitment. Suppliers who have a high confidence in future business prospects will use the data to validate their capacity requirements plan. Others may add the information into their aggregate manufacturing plan, or they may begin to add planned orders into their production schedule in support of future orders.
While suppliers may be willing to take on risk and base production commitments on forecasts, buyers should also be prepared to share that risk, perhaps with financial commitments to protect the supplier by acquiring long lead time components or making a commitment through a letter of intent.
While suppliers may be willing to take on risk and base production commitments on forecasts, buyers should also be prepared to share that risk.
Communicating forecasts to suppliers is a strategic decision that may help to shorten delivery times, manage purchase costs, and reduce downstream supply chain risk by extending forecasts to sub-tier suppliers. Procurement professionals need to weigh the need to communicate confidential information, the strength of the supplier relationship, confidentiality, and exposure when making a decision to share forecasts.
Strength of relationships
Buyers may be more comfortable and willing to share forecasting information with suppliers that have a strong track record of performance and trust. Relationships with single source or sole source suppliers, especially ones that supply products with long lead times or complex manufacturing processes, may require regular forecasts to help mitigate potential supply interruptions.
As business planning winds its way through the supply chain, forecasts provided to tier one suppliers might also impact those in lower tiers. Buyers should be prepared to have forecasting discussions with important downstream links in their supply chain, including those critical path suppliers that often go unidentified until problems arise.
All suppliers should have a current confidentiality agreement on file. Key downstream suppliers should also be under confidentiality agreements. Once these are established, forecasting information can be provided with a greater level of security.
Procurement leaders should reinforce internal confidentiality protocols as well, especially with tangential members of the supply management team who may not be familiar with the strategic importance of forecasts. An offhand comment about business conditions, or a quip of company gossip, may undermine a carefully constructed forecast.
Rolling forecast methodology
The key to communicating forecasts lies in aligning the needs of the supplier with the operational realities of your business. Suppliers like the security of long-term orders and buyers like the cost benefits of ordering higher quantities, but they need manage exposure in case there are schedule changes. Rolling forecasts can bridge this gulf, augmenting static forecasts with real time information, all while limiting exposure for the buyer and supplier.
Consider an example of a 12-month purchase agreement with forecasted monthly deliveries of 10 units each. Assume that the supplier has a 30-day lead time for manufacturing and an additional 30-day window for planning. The buyer and seller agree that any release of the annual agreement is fixed for 60 days. Using this method, the buyer commits to take the in-process material and the seller is able to maintain production stability in the short term.
Monthly, the buyer updates the forecast with an actual release quantity for the next time period, making adjustments in quantities or delivery dates as needed. If the need moves up or down, schedule changes and lot sizes, and even unit costs, can be easily modified. If the order needs to be canceled, exposure is limited to the work in process.
Forecasting is an underutilized tool to improve the supply management process and reduce risk across an integrated supply chain. Using them creatively will help suppliers more effectively plan their business, resulting in improved performance, stronger relationships, and lower costs.