How Forecasting Tools Work With Manufacturing Planning in ERP Systems
A forecast is a company’s educated guess as to the quantity of demand (i.e. how much of a given product will be sold) and at what future date it will be demanded (i.e. when that quantity of a product will be sold).
Proper use of forecasting software in your manufacturing ERP software can help your company stay proactive and get a leg up on purchasing needed raw material and planning required labor/equipment resources to meet these forecasted dates.
The problem.
Many ERP systems only let you register in scheduled demand (i.e. for materials and labor needed to manufacture your product) at the time of order entry; order entry often is only allowed when you have a committed purchase order from your customer.
However, what if you can virtually count on demand for your products coming in the future, but before those customers are able or willing to give you a purchase order for those products?
Furthermore, what if some of the components required to build the product for your customer have extremely long leadtimes, such that by the time your customer does submit a PO, the amount of time it will take to procure the raw material needed for production will make for a very long production leadtime internally (and therefore, an unhappy customer).
Two types of forecasts
Forecasting is the exercise of attempting to anticipate this demand and proactively purchase and manufacture ahead of when you “officially” need to, in an attempt to thwart the process of waiting on your customers for a PO.
Generally speaking there are two categories of forecasting: customer-specific sales forecasting, and manufacturing planning forecasting.
Customer-Specific Sales Forecasting
Customers may provide you with a forecast of what products they anticipate purchasing from you (ahead of when they actually submit purchase orders to you). Or, you may do this on behalf of your customers based on reliable historical trends or other verbal or intangible judgments.
In either case, the basis of a customer sales forecast is:
- Product name/number (e.g. SKU)
- Quantity demanded
- Date of demand
In a manufacturing system like Cetec ERP, a sales forecast like this can be entered (or imported en masse via spreadsheet) with a transaction code of STOCK.
The production planning team, in response, can run a production-focused MRP report generating suggested work orders to schedule and plan/enter at dates in the future correspondent to forecast demand. The MRP and scheduling features even offer convenient delineation between production demand originating from bona fide sales orders (i.e. true customer POs) versus soft forecast demand.
This allows production to stay proactive and build out the relevant material and labor/machine/equipment capacity that should be anticipated to move into place, instead of always having to react to unforeseen specifics and the chaos that ensues.
Internal Planning Via Internal Work Order Scheduling
Note that with sales forecasting, work orders must be actually registered/entered and scheduled into the manufacturing system, creating a planned production schedule that factors both true sales demand in addition to forecast demand.
These entered/scheduled workorders in turn create demand for all of the subassemblies and/or raw material underneath them that will be required to build the workorder.
Therefore, if the production planning team responds comprehensively to the sales forecasts by scheduling/entering internal workorders at future dates correspondent to the forecast dates, then all demand should ripple down the product structure even to the lowest raw material level, so that your purchasing and supply chain team can get a leg up on what raw material needs to be purchased ahead of time (again, especially helpful for raw parts with long lead times).
Note: advanced manufacturing ERP modules may also offer the ability to “auto-plan” and automatically schedule/enter internal work orders (into an unreleased state) based on forecast demand signals.
Bypassing Internal Work Order Scheduling Via “BUILD” Forecasts & Attendant Risks / Best Practices
Another “mode” of forecasting in Cetec ERP lets you tag a transaction code of “Build” onto the forecast. In this mode, the Qty and Date of the forecast demand will skip creation of demand for the part itself itemized on the forecast line, and instead drill down to the component (raw material) levels of the bill of materials (BOM) of even a multi-level complex assembly or product structure to create forecast demand on that date at the component level.
The idea of the forecast doing an automatic drill down to the BOM is so that purchasing can see the impact to raw material demand immediately (without having to wait for production planning to schedule their workorders).
This visibility is especially critical if key raw components have very long leadtimes. In such cases, if the forecasted demand is high enough, purchasing and supply chain may choose to go ahead and get a raw material item on order, enabling their sales team to promise and deliver on shorter leadtimes than your competitors, potentially winning deals for business where faster delivery is a factor.
Companies may choose this method of BUILD forecast to develop their own internal forecasts outside of customer-specific anticipated sales demand, to provide coverage for those extreme cases of long-lead-time raw components needed for common-use subassembly, consumable, or even high-demand finished goods for which, for one reason or another, don’t yet exist on end customer forecasts or end-customer sales orders.
Attendant Risks & Best Practices When Bypassing Internal Work Order Scheduling Via “Build” Forecast Model
Warning! Imagine that your production planning team were responding to customer-specific sales forecasts by scheduling internal workorders down through the product tree, in turn creating scheduled demand for raw material.
Imagine also that your forecasting team entered an internal BUILD forecast for a planning BOM that contained that same piece of raw material.
If forecasts are included in your MRP net demand capture, then your purchasing team may see demand for the raw material required by both the internal production work orders AND the internal BUILD forecast. Perhaps this is desired. Or, perhaps this would lead to OVER purchasing more material than needed.
To avoid this (or to at least provide a check/balance), Cetec ERP recommends regularly running a “reverse MRP” to identify any supply signals (purchase orders or internal work orders) providing more material than is justified by the current open forecast and or sales/production demand.
Note: advanced manufacturing ERP modules may also offer the ability to “auto-delete” or “auto-push/pull” and automatically delete and/or push out or pull in internal work orders (in an unreleased state) based on any identified “overage” signals in the material/work forecasts.
Consuming Demand From Current (or Older) Forecasts and Rolling Forecasts Forward
One final note. Your planning teams may be entering/scheduling workorders against forecasts, and that’s good. But what happens if/when one of those workorders is completed, and the old forecast remains open?
You need some way of ensuring that old forecasts are consumed or at least cleaned up on a recurring basis. The aforementioned “reverse MRP” will help this kind of maintenance.
However, the real recommendation is to regularly delete old forecasts at least as often as you’re entering new forecasts, i.e. rolling new forecasts forward.
One method of doing this is simply to regularly update an old forecast’s previous date to a new date into the future. The planning modules of Cetec ERP will subsequently detect the remission of the old date and the inclusion of the new date for the material/products in the forecast, and plan/signal accordingly. This is helpful if forecast quantities go relatively unchanged month by month into the future.
Another method of consuming old forecasts is to, upon importing new forecasts and forecasts quantities at future dates, simply utilize the “delete prior forecasts” flag. This will remove ALL prior forecasts for that part number in the system, and replace them with ALL forecasts being imported via your new spreadsheet. If your spreadsheet is updated to properly remove the old forecasts and roll forward with the new forecasts (leaving the ones in the middle unchanged), then this could be a fast and workable method to “roll” forecasts forward.