For decades, companies have built supply chains focused on cost optimization, using inventory as a buffer to meet customer service objectives. And since forecasting customer demand can be challenging, companies often add inventory to protect against inaccurate forecasts. From a profit-and-loss perspective, they think of this inventory as “free,” creating little incentive for efficiency. If carrying extra inventory in the form of finished goods avoids a call from an unhappy customer about a missed shipment, most sales executives would gladly make the trade-off.
As sources of growth become more difficult to find, companies are attempting to drive incremental sales increases through innovation, faster speed to market, and customization. In this world, an efficient, high-performing supply chain is critical to success. Yet often companies are challenged by their inability to meet customer service expectations despite having high levels of slow-turning inventory. Such problems are the result of an underperforming supply chain, often resulting from poor forecasting accuracy, ineffective planning processes, and production capabilities that are slow to respond to changing market demand. These inefficiencies become a barrier to growth, leading to dissatisfied customers and lost sales, bloated inventories and stale product, and clogged distribution networks. Ultimately, they consume resources and capital that could be better used to fuel growth through product development and marketing activities.
Many levers are available to address these issues. In BCG’s experience, one of the most effective is a more accurate understanding of future demand. In our work with several large consumer product companies, we have developed a forecasting methodology that is more accurate in predicting demand and can help companies reduce inventory, improve on-shelf availability, and minimize waste. What’s more, BCG’s demand-planning approach and forecasting tools reduce the time employees spend inputting data and developing a consensus forecast, freeing them to focus on using the supply chain to increase productivity, improve speed, and boost innovation. (See the exhibit, “BCG’s Forecasting Tool Improves Accuracy.”)