We have all heard the stories. We may have experienced it first hand. Senior executives and accountants find mouth-watering reductions in product costs by transferring production off-shore. Quality no longer seems to be the barrier that it was, communications have improved immeasurably and the decision seems easy to make on financial grounds. At the same time more and more businesses are making their mark by simply importing and distributing third party products manufactured in Asia Pacific or other low labour cost countries.

The transfer of operations to low cost economies is certainly a valid operational strategy, with the potential to deliver significant returns. This is especially true if the company owns established brands and market presence. But with the transfer comes other, often unforeseen, consequences, which if not managed carefully can negate much of the financial benefit.

Forecasting is an essential investment

Sourcing from overseas results in one obvious but fundamental change; extended re-supply lead-times. No longer can the boss walk onto the factory floor (not that he should) and instantly change a schedule to meet an important customer's need. We now have to re-negotiate from a distance - if it's already in a container or on a boat, nothing can be done. In many circumstances lead-times have gone from days or weeks to many months. And the failure to understand the consequences of this change, can risk a company's existence.

Placing that order, three months in advance of expected sale, is committing the company's cash flow. And if you do not sell, or your customers do not buy what you ordered, you could be in trouble. Think of the amount of data analysis and calculation that needs to occur in order to get that number right:

 How much have you sold to each of your customers in the last few weeks or months and at the same time last year or the year before that?
 Your best estimate of when each of your customers will place their orders over the next six to eighteen months, and how much they will order.
 What is your marketing department planning to promote? Don't forget these people have degrees in taking a perfectly predictable demand pattern and messing it up - it's their job. And as long as they sell more or take market share or generate a greater contribution, it will remain their job.
 What are the projections of your sales representatives or indeed the customer?
 How do your sales rank by product, by customer, by product family, by sales territory, etc. so that you can give greater consideration to the more important products, customers, families? etc.
 What orders do you currently have on your books? Do you have any back-orders?
 How is your company, each business unit and each product family performing against the year-to-date budget and against strategic targets, such as market share?
 Are you planning any price increases/decreases?

Forecasting and Demand Planning tools

It is not surprising that getting a good forecast in the face of so many factors is not easy. But now with longer lead times it is essential to at least try, which is where specialist Forecasting and Demand Planning tools such as Demand Solutions come into their own.

The reality is that if you're going to successfully cut costs in the supply chain and not jeopardise your customer service performance, you have to pay a lot of attention to demand - and most companies still don't do that. It never ceases to amaze me that companies will pay hundreds of thousands or millions of pounds to find out what they sold yesterday - faster, but still avoid the difficult, but essential, task of formalising the demand planning side of the supply-chain with some basic tools and processes.

Getting the process right is also key to success. Software tools without a structured process will rarely provide the maximum benefit. Getting forecast accountability right is probably the biggest hurdle. Most times we are approached for forecasting solutions by the operations or purchasing side of the business. After all, they have the highest motivation to do something as they either have too much or too little inventory. And they are the ones that rush around putting out the fires. However, the real responsibility for forecasting should lie with the people that most influence demand. In some companies, its brand managers or product managers, in others it may be representatives or local area managers. The key is to get as close to the customer as possible.

"Demand driven supply-networks" is the new way of thinking

Recently some new thinking on the importance of the demand side has being proposed. The classic description of a supply-chain as a series of chains and links is not the way to think, says Nigel Montgomery of AMR Research. The firm has coined the phrase "demand-driven supply networks" (DDSN), to describe the future landscape of commercial interaction. A couple of years ago AMR came up with the concept of Enterprise Commerce Management (ECM), a vision of software that would extend beyond the factory walls, embrace the supply-chain and give true end-to-end visibility. But Montgomery sees DDSN as distinct from - but connected to - that IT solution.

"ECM is more about the technical architecture, while DDSN is very much a methodology," Montgomery said. And it is this new collaborative way of working which needs to be supported by the latest Forecasting and Demand Planning tools, so that all players can profit from visibility of customer's demand.

The consequences of getting this wrong can be huge, and are visible in most companies that do not take the demand side seriously. There is a famous business game invented by MIT's Sloan School of Management, called "The Beer Game". It has been played all over the world by thousands of people ranging from business students to chief executive officers. The game replicates a typical supply chain with manufacturing sites, distribution centres, wholesalers and retailers.

In essence, it demonstrates dramatically the effect of lack of communication of demand up and down the supply chain. The result is increasing out of stocks and inventory imbalances as the game progresses, as well as seriously frustrated players. It also shows clearly the "bull-whip" effect. The increase in amplification of distortions as demand moves from the retailer towards the manufacturer. Small perturbations at the demand end cause major spikes in demand at the supply end. If your supply-chain cannot respond - you are either out of stock or massively overstocked.

Avoid being lashed by the tiger's tail

The longer the supply-chain and the poorer the communication the more dramatic is the bull-whip effect. Put that in the context of out-sourcing and the dangers are obvious. But on the other hand, so are the solutions. More attention to forecasting and communication of those forecasts up and down the line, together with an efficient and responsive replenishment planning process will provide most companies with the ability to avoid being lashed by the tiger's tail.