Depressing! There is no other way to describe recent headlines of plant closures, layoffs, mortgage defaults and personal bankruptcies. If you are one of the lucky people to still have a job, you may be feeling very anxious about your future prospects. Your company’s sales are down, inventory turns have plummeted and earnings are vanishing! Have you thought about positive concrete steps that you can take to improve your organization’s performance during these difficult times?

If your company has product lines that are experiencing a sudden downturn in consumer demand, you should pursue IMMEDIATE corrective action. The most critical tasks must be accomplished by your demand forecasting group.

CORRECTIVE ACTION #1: Perform an immediate macro-adjustment to forward demand forecasts.

Your shareholders will hate you when you implement this step. However, you need to swallow some tough medicine to ensure that your supply chain replenishment processes are not operating

under the false hopes of pre-recession sales.

CORRECTIVE ACTION #2 -  Repeat Step 1 one month later

Most organizations will underestimate the magnitude of the downturn. Conversely, a small number of pessimists will overreact during the first macro adjustment. The objective of actions 1 & 2 is an immediate recalibration of your demand forecasts to “realistic” levels.

CORRECTIVE ACTION #3 - Increase forecasting smoothing constants.

Most forecasting techniques, like exponential smoothing, include a smoothing constant (alpha) that affects the responsiveness of the forecasting process to recent demand changes. Given the recent volatility of the marketplace, you should utilize larger alpha values to further refine your estimates of recessionary demand.

In coordination with these actions, your inventory planners should make the following actions their number one priority.

CORRECTIVE ACTION # 4 -- Cancel or delay open orders for finished goods

As a result of steps 1 & 2, your finished goods planners should review the financial implications of eliminating or delaying open replenishment orders. When the costs of carrying excess inventory outweigh the costs of delaying/cancelling orders, this corrective action should be implemented.

CORRECTIVE ACTION # 5—Revisit and readjust your finished goods safety stocks

Many organizations utilize a statistical algorithm, based upon the standard deviation of forecast error to establish appropriate safety stock levels. Given recent volatility, your error may have significantly increased. This in turn will increase your safety stocks if left unchecked. If this situation applies to you, recent safety stock increases should be reversed.

The most common method for establishing safety stock is to link it to a fixed number of weeks of supply. This approach

utilizes the demand forecast to establish the exact value of the safety stock. If your demand planners have not performed steps 1-3, your safety stock is most likely overstated. The preferable course of action is to fix the forecast. Alternatively, you can adjust the number of weeks of supply down to have an equivalent effect.

CORRECTIVE ACTION # 6—Verify your lot sizes.

Several lot sizing rules (suggested order quantities) utilize past annual demand to determine optimal replenishment quantities. For example, the formula for EOQ is based upon the square root of the annual demand. Clearly, this will be overstated in many instances. The best approach is the recalibration of EOQ’s based upon a realistic future forecast of demand. A word of caution however. If order sizes are dramatically reduced, transportation costs may increase as previous full truckload replenishment become LTL shipments.

CORRECTIVE ACTION # 7—Recalibrate your reorder points

Recall that reorder points are calculated from safety stock and demand during replenishment lead-time. You should already have safety stock recalibrated (See action 5). The last step is to determine demand during lead-time utilizing realistic forecasts.

Dick Verbeek CPIM CIRM CSCP is the author of this article. Readers are encouraged to contact him at Dick.Verbeek@SupplyChainOptimizer.com to discuss the tactics contained in this article.