Tag Archives: raw materials

Demand Forecasting in a “Build to Order” Company

We often come into contact with potential customers who claim that they cannot use a forecasting system since they are a “build-to-order” manufacturing operation. I find this a puzzling perspective, because whatever these organizations build requires lower level raw materials or intermediate goods. If those lower level inputs are not available when an order for the finished good is received, the order cannot be built. Consequently, the order could be canceled and the associated revenue lost.

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The Average is not the Answer

Fluctuations in an inventory supply chain are inevitable. Randomness, which can be a source of confusion and frustration, guarantees it. A ship carrying goods from China may be delayed by a storm at sea. A sudden upswing in demand one day can wipe out inventory in a single day, leaving you unable to meet the next day’s demand. Randomness creates frictions that make it hard to do your job.

At first blush, it sometimes seems best to respond to randomness with the ostrich approach: head buried in the sand. You can settle on a prediction and proceed on the assumption that the prediction will always be spot on. The flaw in that approach is that it ignores statistical methods that allow us to make use of a wealth of knowledge about our knowledge itself—how confident we can be in our predictions, and what breadth of possibilities confront us. The efficient approach to tackling the problems that stem from randomness is not to ignore uncertainty, but to embrace it with eyes open.

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