This summer has become a pleasant surprise for window manufacturers selling the most energy efficient products, as rising energy costs are fueling the market for such solutions. This surge of interest in energy efficient products is pushing out lead times for associated components and creating stress for purchasing agents that they haven’t felt since the Covid days. So, what can be done to improve the situation? Well, accurate forecasting can help.
So how do we obtain an accurate picture of which components and how much of each that we need to order in the weeks and months ahead to minimize inventory yet provide the fastest lead times for our customers?
Well, it would be nice if the purchasing manager could jump into a DeLorean DMC-12 automobile like Marty McFly in the movie “Back to the Future” and send himself forward in time a few months to see exactly what window orders look like. He could then return to the present day to enter orders with each vendor, and he would be sure to know the exact amounts needed. However, time travel is still, as of today, a fictional concept. But we can still do our best at forecasting our inventory requirements.
To forecast demand and prevent stockouts, manufacturers can analyze past sales data, calculate precise reorder points using vendor lead times, and share these rolling forecasts with your suppliers early. By combining baseline trends and estimating the impact of upcoming marketing promotions, fabricators can use automated inventory software to automatically send orders to vendors on a weekly, bi-weekly or monthly basis.
Collecting sales data and tracking sales history is essential. I believe it is most useful to track each item month by month for at least 36 months to identify seasonal shifts that occur during specific times of the year. The effects of bringing on new customers and running specific marketing campaigns can also be programmed into our forecasting model.
Ongoing communication with your vendors is crucial. You can share a rolling forecast and send your suppliers a three- to six-month outlook of your expected needs so they can reserve raw materials and plan for appropriate equipment and manpower requirements.
Review their lead times often. Ask your vendors regularly if their shipping or production times are changing and update your inventory management model accordingly. You can also establish inventory agreements with your vendors to prevent stock-outs of custom-made products, if you are willing to take remaining inventory should your plans change.
You can fine-tune your lead time by counting the exact number of days it takes for a vendor to deliver stock after you place an order.
You can also use inventory management software to set reorder points, which multiplies your average daily usage by your vendor’s lead time in days, and then adds in your safety stock buffer.
Yes, calculating a forecast and updating it periodically throughout the year is a very important part of running a business. There are three major benefits to maintaining an accurate forecast.
The first benefit is: minimizing inventory levels.
Business unit managers love Just in Time (JIT) inventory models. The JIT inventory model is a management strategy that minimizes inventory holding costs by receiving components only when needed for production and fulfilling orders as they come without stockpiling inventory. Essentially, it aims to have the right amount of inventory at the right time, avoiding both shortages and excess stock. More inventory turns translates to higher levels of profitability. But as any purchasing manager can tell you, such a system only works well when there is a steady and predictable supply of raw materials and components available. So, many door and window companies who were well entrenched with the JIT model have been caught off guard more than a few times. This was especially an issue during the Covid years, when demand unexpectedly surged to unforeseen levels. Many purchasing agents panicked and placed orders beyond what was needed, which created a “snowball” effect and pushed lead times out even further. Covid had its way with our demand curve and subsequently upset our supply chains. I now have many customers who have since taken a more proactive approach and send monthly forecasts in advance, enabling the suppliers that I represent to plan production schedules and raw material inventories accordingly. This information is extremely useful when it comes to minimizing lead times and helping to ensure an uninterrupted supply of materials and components to the customers supplying such a forecast!
The second major benefit to forecasting is: optimizing operations planning and budgeting.
An accurate forecast is crucial for planning and budgeting equipment purchases as well as adequate staffing to support the forecasted levels of sales. In this respect, the accuracy of such a forecast is critical as it can have a huge impact upon profitability. If you forecast a huge growth spurt and take a loan out to buy several million dollars of equipment, then your profit levels will suffer dramatically if the projected sales levels do not come to fruition, yet loan payments are due. Or, conversely, if you underestimate projected sales levels and do not hire and train the correct amount of people to man the floor, then your profit levels will suffer dramatically when you find it necessary to pay large amounts of overtime pay to your production staff. In this scenario, you also risk employee burnouts and the possibility of losing key employees who decide they do not want to work tons of overtime and six to seven days per week.
The third key area affected by proper forecasting is: accurate pricing.
Accurate pricing is also critical to profitability. The price of your product is set by three factors: worth perception, standard cost and, of course, profit margin.
Worth perception is determined by your customers’ perceptions of your product and the ability of your sales staff to prop up that perception. It is influenced by the value that your products bring to the table as well as your company’s brand image.
The standard cost is determined by the costs of materials and labor that you expect to incur and that you plan for in advance. Many companies calculate this “standard’ cost and use it to help set the price of each product they sell. But actual costs will vary from this standard cost based upon how things “actually” play out in the manufacturing process.
For example, if you pay more for components because you underestimated how many you would need and had to pay additional costs to overnight materials then this would create what accountants call a “variance.” When it comes to cost, a negative variance is a good thing, but a positive variance is bad. Another example would be if you did not hire enough people to run production because your forecast underestimated the demand. Therefore, you had to pay a considerable amount of overtime to produce the extra amounts needed. In this case, your actual labor cost per unit would be inflated, representing another positive cost “variance.”
These variances all add up and if the net cost variance is on the plus side, then it makes your product underpriced based upon what it is “actually” costing you to make your products. The net result is that you must either raise your price to keep your profit margin steady or lower your profit margin to keep your price the same. In the former scenario, you are likely to lose market share and in the latter scenario, your total gross profit declines. Either way, you earn less profit.
Now gross profit is based upon your revenue minus the cost of goods sold, and this is where worth perception comes into play. The greater your product’s worth perception, the greater the average selling price and hence the greater your revenue.
So, even if you can find a DeLorean DMC-12, unless you have a Doc Brown on your staff with a “flux capacitor” that he can install in it to transport your purchasing agent into the future and back, then estimating an accurate forecast from historical data and trends is your best option to help your company reach its profit goals. Also, helping your suppliers by furnishing them with forecasts of your corresponding component requirements also helps them to better serve you with on-time deliveries while enabling them to give you the best prices possible.