Theory of Constraints Handbook - James Cox Iii [178]
Another aspect of ignorance regarding forecasting relates to the forecasting horizon and the time periods within that horizon. Management likes to look at “the big picture” and thus wants to see not just the forecast for next month, but also for the subsequent months—at least up to one year. Suppose the forecast for next month is 1000 units plus or minus 500 units. Now, if the forecast for the month after that is also “on average” 1000, the “plus or minus” is probably larger. The farther in time we go, the larger the spread of the forecast. There are two reasons for it:
1. Naturally when estimating, the forecasting error gets larger for subsequent periods because any deviation in the trend of the sales would get larger the farther out in time we look (increased uncertainty).
2. The most troubling point in forecasting is based on the assumption that the characteristics of the past are not going to change, and thus we can deduce the future from the past. As we look farther in time, there is a higher chance that an event will change the basic parameters. Just consider the case where today your main competitor has opened his manufacturing facility not far from you and he is going to try to move your clients to him. Suddenly, the rules of the game change and you cannot rely on the past to deduce what your future sales will be.
The direction of the solution to forecasting demand is hidden exactly in the notion that for the very short-term we have a good idea of what is going to happen. Even when we look at the short-term, we must consider not just the average, but also how much we might sell. In other words, we need a confidence interval to give us a reasonable range so we can decide how to prepare ourselves to a valid level of sales. When response time is rapid, there is no real need to forecast beyond the short-term except to look at approximations of capacity, materials, and cash requirements.
The Current Undesirable Effects in MTS
Every time a production order is released without a definite customer order, it might create a surplus of inventory and at the same time delay the production of another product, which might be in high demand on short notice. There is no way to avoid these mistakes, simply because we are not prophets and we cannot really know the future.
The unavoidable result is that at any given time the finished-goods inventory of some of the products is excessively high relative to the actual demand, while there are shortages of other products. All we can hope for is to eliminate the shortages to such a low level that we have almost “no shortages,” while the surpluses of inventory are rather limited.
The current state causes many other undesirable effects within the shop. Holding too much stock takes its toll on financials, limits space for other items, and causes pressure to “get rid” of stock. Producing based on misunderstood long-term forecasts leads to producing very large batches (“we should produce this product only twice in the year to gain efficiency”), which causes long production lead times and delays for products that are truly required by the market.
Already mentioned is the confusion between MTO and MTS that leads to inability to state clearly when a current request can be met safely. Another common undesired effect happens at the level of common components that go to many end items. Components are often “stolen” by the overproduction of end items with low demand, while other items are short. What makes the “stealing” effect special is that it creates anger and tension because the cause and effect are visible to employees. One can clearly see how the decision to produce too large a batch has exhausted all the necessary components for a truly urgent order.
What to Do? The Direction of the Solution
The Basic Principle of Flow
The immediate conclusion in understanding the characteristics of forecasting