October 15th, 2020
The Value of Forecasting and Strategic Partnerships
Well if someone would have told me back in April that six months from then I would be helping customers deal with material and component issues (in October) I would have given them that “deer in the headlights” look for sure. Indeed, back in April my train of thought was more like, “How will I sustain a decent amount of business this year, given this complete and unexpected derailment of the economy!” So, today, as I was trying to console a certain window fabricator about a component shortage that he is experiencing this week, I reminded him of this. It seemed to put his mind in a better place as he realized how this year could be playing out for the door and window industries versus the explosive growth we are currently seeing. I think it creates a calming affect when one realizes that too much business is always better than too little business.
So, he did calm down, especially when a substitute solution was offered by his current vendor.
No customer wants to jump ship over every bump in the road, especially when that bump was due to nobody’s fault other than an expected surge in business. Indeed, loyalty to one’s current supplier in stressful times solidifies partnerships, and such partnerships are crucial. But more on that in a minute. Before we hung up, my customer, now calm, said, “This uptick in business did not happen yesterday. It has been going on for a few months now. This should teach us something. We need to change how we approach business so that we can be better anticipate such surges in demand and adjust more quickly!” I agreed with him 100%, and this immediately made me ponder: How exactly can this be done?
How can we be more responsive to changing market demands—both increases and decreases? Here are four ways:
- We must continually adjust our forecasting models, or at least have a forecasting model in the first place. I am surprised by the number of companies that do not even have forecasting models. And among the companies that have such models, I am surprised by the simplicity of such models. For example, if your forecasting model is based simply upon last year’s usage of each material or component plus an expected growth rate, I would guess that you are currently experiencing supply problems. There are many other factors to consider when devising a forecasting model, including projected housing permits, housing starts, interest rates, projected remodeling expenditures and even political environment. This last one mentioned is certainly playing a role in 2020, as we are in an election year. If you don’t believe that it is a factor, then ask every gun and ammo manufacturer what has happened to their sales during the last three presidential election years, and ask every hunter what has happened to the supply of rifles and ammunition during those same three years.
- Create strong partnerships with your strategic vendors. So, how do we define a strategic vendor? They’re one who is critical to your business with whom your business cannot survive without. If you are a window fabricator, your extrusion supplier, glass supplier, insulating glass component suppliers and hardware suppliers are such examples. What constitutes a strong partnership? To me a strong partnership is one where both parties have empathy for the other’s need to earn a fair profit. In other words, neither party seeks to take advantage of the other.
- Optimize the flow of accurate communication with your strategic vendors. Share information with your strategic vendors on your projected growth or even expected declines that you foresee in your business. Indeed, make sure that you share your forecast with your strategic vendors and update it at specific intervals, such as every quarter or even monthly if possible. This is especially critical in an age when most vendors are making products to order as opposed to filling warehouses. The latter practice results in high inventory costs and distressed inventory.
- Finally, do propose a stocking arrangement with your vendor on a critical material or component for which demand spikes are near impossible to forecast or if it comes with an unusually long lead time. Your vendor may agree to keep a safety stock on their floor to accommodate your demand spikes in return for a slightly higher price and an agreement to purchase any unused material by a specified date. Again, this goes back to having a strategic partnership for such agreements must be mutually beneficial to both parties.
When your customer is experiencing a material or component delay and cries out, “How can we avoid this next time!” you can remind them that a boom is better than a bust. But by focusing on these four factors, one may be able to avoid—or at least smooth out—the bumps ahead.