November 2, 2020
In our previous post, we discussed why d emand forecasting matters and how an accurate demand forecast can mathematically and quantitatively improve your service level and/or inventory levels (cost). Now it is time to focus on the biggest uncertainty of them all . Time. Advanced forecasting algorithms can help eliminate uncertainty through reducing variables that are “unknown” by understanding relationships at a scale that no human could comprehend. This helps turn the seemingly “unknown” in to a “known”. As we stated earlier, advances in math and cloud computing make finding these relationships much easier and can be computed almost instantaneously. However, the element of time is a tricky compounding factor. Even little unknowns become big over time as time compounds all errors and introduces more uncertainties. The most certainty you have is in the precise moment you make an estimate. When you look ahead 1 day, 1 week or even 1-month (as most corporate S&OP) cycles still do – then you must start to rely less and less on facts and more and more on assumptions. Assumptions mean uncertainty and uncertainty means cost. There are loads of examples of this. When I lived in Florida, every September during hurricane season , we would get the dreaded cone of uncertainty any time a hurricane formed. As below shows , the further out you get, the expected position gets wider. By day 5 - the uncertainty stretched over 500 miles – hardly accurate enough to do any planning of significance .