Category Archives: Forecasts

How Not to Excel at Forecasting

Simply put, use Microsoft Excel. It’s appalling that a recent survey by ToolsGroup and the Global Market Development Centre (GDMC) found that even though two-thirds of companies in the consumer goods supply chain consider demand volatility and forecast accuracy a high businesses priority, half still rely on Excel spreadsheets for forecasting.

Relying on Excel for forecasting is like relying on:

  • a Longship to get you across the Atlantic
  • your first guess on Let’s Make a Deal to be the right one
  • a shareholder proxy getting on the ballot at a Fortune 500
  • Florida surviving a hurricane season without any major city suffering damage
  • the price of fuel going down and staying down for an upcoming series of spot buys
  • natural resource supply to be consistent and predictable year-over-year
  • a flip of a fair coin to come up heads seven times in a row

Now, it’s true that:

  • the Vikings did make it across the Atlantic in a Longship, but a single storm could sink it
  • the first door you pick, with one-in-three odds, could be the right one, but the odds are actually twice as good if you switch
  • an activist shareholder can sometimes get a proxy on the ballot if he or she has enough time and money, but as pointed out by John Gillespie and David Zweig in Money for Nothing (How the Failure of Corporate Boards is Ruining American Business and Costing Us Trillions), examples are few and far between
  • even though no storms made landfall in Florida in 2011, this is Not a common occurrence
  • gas prices did consistently drop in the USA between September 2008 and December 2008, but have been otherwise steadily rising for the last five years
  • in some years the rice, sugar, and corn crops are almost the same as in the previous year, but given the increase in hurricanes, tsunamis, droughts, and other natural disasters in recent years, this is not a common occurrence
  • yes, heads can come up seven times in a row when flipping a fair coin, but the chances of this happening are less than 1%

In other words, you can forecast with Microsoft Excel, but your chances of doing well, especially given that 90% of spreadsheets have non-trivial errors (and collectively cost enterprises billions, as Fidelity and Fannie Mae found out), are (vanishingly) small (as the complexity of the forecast increases). One has to remember that there’s no intelligence behind a spreadsheet and they are just a source of peril that can cost your organization millions without anyone noticing.

World Trade 100’s Logistics Trends for 2012 — Do They Have Weight? Part II

Yesterday, we reviewed the seven trends for 2012 that World Trade identified for the logistics sector in a recent article and asked if they had weight. Today, we answer that question by presenting the reality (that SI perceives) with respect to these trends.

  • Buyers are expecting 3PLs to be the new Jack-of-all-Trades.

    While some of the larger organizations are adapting to their clients’ requests, this won’t hold true in all cases. Only where the requests are for services similar to what the 3PL is already offering and where the 3PL has the necessary expertise will the 3PL be able to successfully offer the service for the long term. As a result, some 3PLs will falter (and maybe even fail) and, ultimately, retrench on their strengths and smarter buyers will seek solutions from the right partners. (Going to the supplier to handle packaging, a best-of-breed software provider for a visibility solution, etc.) The 3PL as the Jack-of-all-Trades trend will be short-lived.
  • Mobility is King, the Cloud is irrelevant.

    Call it ASP, SaaS, Cloud, or Web 3.0 — smart buyers don’t care. They just want a solution that works on the go. They’ll settle for what works, and won’t be satisfied with who has the most buzzwords in their product description. That being said, buyers still on the learning curve may fall for “cloud” in the short term, but if they don’t get results, the services provider will wish they were up in the clouds far from the angry buyers’ reach!
  • Transportation is going back to intermodal.

    The trucking phenomenon is over. The value proposition of intermodal rail can no longer be ignored.
  • Capacity is climbing up the issues list — fast!

    Regulations and lack-of-drivers are severely limiting available capacity, air capacity is also limited, and low-cost ocean routes are not going to last forever. As a result, smart buyers always have an eye on capacity.
  • The rate of system/data integration is going to increase.

    As visibility is a necessity in today’s supply chain. Execution integration will also improve as lean and JIT continues to be applied to the logistics chain. But business integration will take time. Trust, and undisputable business cases, will have to lead the way.
  • Near-Sourcing will happen.

    The value proposition is back, and, like the value proposition of intermodal transportation, it can’t be ignored. It will take time, as you can’t switch suppliers, or end multi-year contracts, over night, but it will happen.
  • Sustainability will continue to lag.

    The reality is that at least 8, if not 9, out of 10 companies only tackle sustainability when forced to do so by regulation or pressured by customers. Very few tackle it for the long-term benefits it can provide an organization because, with the relentless Wall-Street focus on profit quarter-after-quarter, an average organization does not want to bear the up-front cost, no matter how great the potential year-over-year reward in the long-term.

And, most importantly, you’re going to see the following trend start to take shape later this year:

  • A renewed investment in logistics/inventory management/optimization software
    Leading, and better-than-average, organizations are not going to be content to let their 3PLs manage logistics after the fact, when most of the cost has already been locked in, but use advanced software to make sourcing decisions that, when sensible, optimize logistics and inventory costs up-front. Like all sourcing technology trends, it may take a year to pick up steam, but it’s going to happen. Too much money is on the line.

That’s what the doctor thinks. Any divergent opinions?

World Trade 100’s Logistics Trends for 2012 — Do They Have Weight? Part I

Earlier this year, World Trade identified the following seven trends for 2012. The question is, how many are taking shape and, of the ones taking shape, how many are relevant for your supply chain. And are any missing? Let’s start by examining the seven trends WT identified.

  • 3PLs are the new Jack-of-all-Trades
    Apparently, demand for 3PLs to play a role in capacity strategies, to provide technologies that optimize planning and enable visibility in increasingly complex global supply chains, and to increase operational agility is increasing. In addition, some shippers are seeking to consolidate their 3PL bases to relieve an administrative burden of managing multiple providers while leveraging a larger, indirect spend pool. And, some 3PLs are offering more value-added services such as contract and custom packaging, return disposal, and even individual store deliveries.
  • Mobility and the Cloud
    The use of M2M technology is increasing, and more software providers are certifying the use of their solutions for off-the-shelf consumer and ruggedized devices. And some are predicting that 2012 will be a big year for “cloud supply chain”. Supply chain technology vendors will seek ways to use the cloud to facilitate application integration and data visibility, and work with material handling equipment manufacturers to bring MHE automation closer to real world application.
  • Transportation Modes
    There will be more adoption of intermodal transport. This is because trucking faces predicted driver shortages, potential highway user fees, and changing governmental regulations — which is making intermodal rail an increasingly compelling proposition. As a result, new intermodal facilities are being built in several U.S. locations. This option can reduce fuel costs, increase delivery speed, and decrease reliance on OTR (Over-the-Road) trucking.
  • Trucking & Capacity Issues
    New compliance mandates for trucking, including CSA (Carrier Safety Administration) and HOS (Hours of Service) legislation, will further increase capacity challenges in 2012.
  • Partner Integration
    Disparate supply chain players will come together to form partnerships and work together to benefit the entire supply chain. This is because smarter commerce requires seamless integration with all partners in the end-to-end supply chain, particularly in the complex global supply chains of today. Furthermore, the expectation is that this partnership will span the business, execution, and technology layers of the supply chain.
  • Near-Sourcing
    There is an expectation that near-sourcing will likely increase, helped by unstable oil prices, rising labor costs in China (and India), the cross-border trucking program with Mexico, and NAFTA. Plus, Central and South America (and Brazil in particular), which are often on similar time-zones, are also viable sourcing options in many industries, and reachable through land-based inter-modal transport.
  • Sustainability
    According to the article, Sustainability will continue to be a focus for shippers and carriers alike, as long as there is a business benefit.

Not a bad list of trends, and some good arguments for. But what is the reality (that SI perceives)? Stay Tuned for Part II!

Where is Global Trade’s Groove?

A recent headline over on the World Trade Magazine site that asked whether or not global trade still has its groove (Link) got my attention because, even though the global economy tanked from 2008 to 2010, a lot of leading companies are focussed on accelerating the development of Global Business Services centers (which was one of the foci of the recent Hackett Group Best Practices conference) in order to take advantage of lower labour rates in other parts of the world. Plus, I haven’t seen any drop in services outsourcing to India or product manufacturing outsourcing to China. And there has been a resurgence in interest (though not necessarily much in the way of action yet) in moving or creating new manufacturing locations in Mexico and Brazil by US (and even European) companies. So while Global Trade may not have grown as fast as we were predicting back in 2008 before the global recession, it does not appear to have taken any backwards steps by any stretch of the imagination.

Nevertheless, it’s always good to check the pulse. The article addressed the question from a risk, optimism, and emerging market viewpoint.

Risk
The eruption of Eyjafjallajokull in Iceland, the disaster in Japan, and the political upheavals in Egypt, Libya, Bahrain, Algeria, and even Albania are placing risk front and center in the Supply Management landscape. Plus, the consistently high price of oil, which could go even higher due to the instability of oil-exporting countries, puts global sourcing of certain goods at risk as the cost of transportation could soon make some global buys unaffordable. In addition, as more of the household budget goes towards fuel, consumers will have to spend less on unnecessary consumer goods. Then we have price increases across certain categories of raw materials as countries like China implement quotas on rare earth metals and create global supply constraints.

Optimism
The article has an interesting quote from Carlos Rice, Vice President of Supply Chain Services for Crowley Logistics who says that we’ve seen an upturn in the economy recently and we are watching the emergence of new markets — not only in India and greater China — but closer to home in Central and South America. What is happening with Brazil’s economy today is almost unprecedented. So, we see lots of opportunities not just east-to-west, but also north-to-south as well. Plus, there has been continuous growth in the trans-Pacific and Asia-to-Europe markets for some logistics carriers, balance is returning to many global trade lanes, and some carriers are seeing up to 20% growth in logistics to emerging markets that are creating a consistent demand for commodities. The expectation is that container trade will be at upper single-digit growth as a whole.

Emerging Markets
Adrian Gonzalez, director of Logistics Viewpoints, notes that the traditional economic powers like the U.S., Japan, China, and Germany are all looking at other developing areas as opportunities for future growth and you see these countries starting out first as sources of low-cost labor in much the same way as China began its development. Then you see the development of a middle class that begins buying products. And we have the situation where countries like China and India are now able to grow and thrive independently of richer countries. In fact, the World Bank states that developing economies were responsible for 45% of world growth in 2010.

So what’s the projected return on equity (ROE) for those invested in global trade? According to Paul Bingham, economics practice leader at Wilbur Smith Associates, barring another unexpected calamity, the [logistics] industry anticipates a slow yet steady global economic recovery. Right now, about 20% of what comanies manufacture is consumed in other parts of the world. Carlos Rice expects that this number will grow to 80% in the next 10 years or so. I personally think this is a bit ambitous with the high price of fuel, but don’t doubt that it will continue to rise as multi-nationals find new low-cost locales to produce in and new markets to sell it. I think the big difference is that there will be more near-sourcing from neighboring countries, or at least countries on the same continent, than there will be global sourcing from locations halfway around the world. What do you think?

S&OP Must Be Integrated “Within and Across” The Organization

Proper Sales and Operations Planning (S&OP) is critical to supply chain success. If the forecasts are low, the organization stocks out and loses sales (and profits). If the forecasts are high, the organization gets stuck with excess inventory, that soon becomes obsolete (and that has to be sold at a loss just to move it). Supply chain success comes from accurate forecasts, which requires good Sales & Operational Planning.

But S&OP is more than just getting the product line managers to sit in a room and agree on a forecast, and it’s more than using good modelling and simulation software (which is a must). Proper S&OP planning is getting sales & marketing and operations (& product line management) together in a room working collaboratively towards a realistic and trustworthy forecast. All of these conditions are necessary.

1. It is not S&OP if you do not invite sales and marketing.
You can have the best forecasting models and software in the world, but they are still useless without the right demand data, which is only going to come from sales & marketing who can tell you what is selling and what changes in the market are likely to lead to increases or decreases in demand.

2. It is not S&OP if you are not working together as a cohesive group.
Just being in the same room is not enough. Both teams must be working towards the same goal, must believe in the process, and must trust the capabilities and insights of the other team. Just like operations must trust sales and marketing to provide real POS data and demand projections based on current campaigns and the state of the market, sales and marketing must trust that operations can build good models based on the data and schedule production and distribution accordingly.

Good examples of how not meeting these conditions can lead to failure are provided in Dr. Terry Esper’s recent article in the Supply Chain Management Review on Demand and Supply Integration: “Within and Across” Integration – The Key to DSI. Despite the introduction of yet another acronym to our space (DSI), and a bit of a long-winded introduction to the issue, it makes some good points and is definitely worth a read. It also provides three ideas to help you create a more cohesive S&OP team and process, which are worth noting:

  • Better Performance Measures
    the performance measures must facilitate integration
  • Ownership Structure
    there must be ownership of the S&OP process that includes both sides of the table
  • Corporate Leadership
    there must be leadership attention and focus on integration