What Is Going On With Manufacturers Demand / Sales Forecasts?
Industrial manufacturers are experiencing slumps across the board. The good news is that customers are not canceling orders; however, they are delaying BIG TIME. For example, half of an industrial equipment manufacturer’s backlog moved out at least one or two quarters as customers focused on year-end inventory levels. In another industrial equipment manufacturer, quotes remain relatively optimistic yet the sales orders show a series gap for a quarter. Of course, they will work to pull orders forward while filling the gap. In a third industrial equipment manufacturer, they are struggling to find items to produce in certain plants as orders are delayed. These suppliers support equipment for food, electrical, automotive, and many other industries.
Aerospace manufacturing is a complete mess. Boeing’s quality issues kicked off a flood of concerns in the industry, causing the boom and aggressive ramp up plans to come to a screeching halt across the supply chain. The Boeing machinist strike added fuel to the fire (refer to our recent article on the aerospace supply chain to learn more), causing ripples in the end-to-end supply chain. Boeing’s suppliers (tier 1) to its suppliers’ suppliers (tier 2, 3 etc.) have been impacted. Demand is in a slump even though end user demand remains robust. That is tough for a supply chain to go from peak to trough and ramp up, shut off, and ramp back up successfully.
Other manufacturers are also experiencing a slump in demand. Look no further than the latest ISM’s (Institute of Supply Management) Purchasing Managers Index (PMI). It is down to 46.5 from 47.2 last month and 46.7 one year ago. Thus, overall demand is sluggish. According to CEOs from these manufacturers, they remain optimistic but are seeing sluggish sales currently. Of course, there are industry outliers to the positive side as well. The bottom line is that there is a lot of conversation about waiting on the election results, preparing for year-end and temporary delays.
During these turbulent times, demand planning is critically important. Staying on top of the latest sales orders, quotes, customer inputs, market conditions, etc. will be the difference between success and failure.
Critical Importance of the Demand Plan
Maintaining the demand plan is critically important to ensuring superior customer service and supporting growth plans while also focusing on improved profitability and working capital. Why? The demand plan starts the process. You cannot effectively review capacity, provide forecasts to critical suppliers, order materials, replenish facilities, and optimize inventory unless you have a sales forecast to drive your master production schedule and materials and replenishment (distribution) plans.
Equally important, if you aren’t on top of your demand plan, you might be sourcing suppliers, ramping up purchases, planning for outside storage, and ramping up labor when your demand is falling off the cliff. On the other hand, you might be refusing to use overtime, not adding to your operational resources, and proactively managing costs responsibly yet you are completely unprepared for a volume surge that arrives unexpectedly. Focusing attention on the demand plan is the best way to mitigate volatility and poor performance.
In fact, volatility is the only thing that has remained the same. As long-term employees retire, it seems as though clients are less prepared for volatility as they aren’t experienced in seeing these changes earlier in the process and are less prepared to handle them as well. The more volatile the demand plan, the more on top of changing conditions you must be. As conditions change, demand in your end-to-end supply chain changes. Given lead times throughout, small changes in demand will lead to big changes in your extended supply chain. If you must pivot constantly late in the process because you aren’t keeping track of your demand plan, efficiencies will suffer, expedites will increase, freight costs rise, production schedules change, and customers suffer.
Best Practice Demand Planning Processes
Demand planning, also known as sales forecasting, is simply your best picture of your customer needs. Demand planning kicks off the SIOP (Sales Inventory Operations Planning) process although the only way it is successful is if the demand plan is on a strict weekly and monthly cadence to capture changing conditions. To learn more about how to roll out the full SIOP process, read our book, SIOP: Creating Predictable Revenue and EBITDA Growth.
Our best clients put together a tailored, robust demand planning process. If they are engineer-to-order (ETO) or configure-to-order (CTO), they proactively manage sales orders, quotes, spares/ aftermarket forecast, and model or configuration string demand. If they are high volume manufacturing focused on consumers, sophisticated sales forecasting and predictive models provide the best advantage. To learn the details to develop a best practice demand planning process, read our article, Upgrade Demand Planning Processes & Software to Navigate Economic Challenges and/or listen to our guest appearance on a podcast, Preparing for Demand Shocks.
For example, an aerospace manufacturer was reluctant to put in a sales forecast because they were hesitant to purchase early and completely resistant to producing early. Sales talked with customers, Customer Service reviewed customer consumption information, Marketing/ Programs incorporated market conditions, and Planning reviewed historical trends. Fast forward a quarter, and the manufacturer was able to take orders and charge expedite fees when the competition couldn’t because the manufacturer relied on the forecast. Although they didn’t commit to the material forecast timing, suppliers were able to secure capacity, and the manufacturer gained margins. Operations was able to get ahead of the machinery and labor requirements, and invested in the appropriate skills.
In an industrial manufacturer, there was severe volatility in the sales forecast because they were ETO and couldn’t see into the future in enough detail to prepare successfully. After they tied their quotes and quoting system to the orders and ERP system, they were able to gain better visibility into the demand plan at the dollar level. However, you cannot produce dollars; you must know which widgets to produce and which materials and components to purchase. Thus, we developed configuration strings which provided better visibility into the models, subsystems, and/or generic parts. By integrating this information into our business intelligence system and ERP system, the product forecasts could be extrapolated into meaningful information. Thus, when the competition struggled to keep up with post pandemic sales, the manufacturer was able to secure materials in advance when supply was tight and order the appropriate machinery and hire additional skills to fulfill the demand plan with high service levels and margins.
If you are interested in reading more on this topic:
What is Your Demand Plan? Sales Strategies for Success