As CSM Worldwide works regularly across hundreds of automotive supplier companies worldwide, it is in a unique position to notice and advocate the best practices for applied forecasting and business planning. Unfortunately, suppliers still rely too much on history for decision-making and functional performance measurement, primarily because history is all they can measure often. Increasingly, supplier executives are leveraging and applying rolling future forecasts to feed better real-time decision-making and boost functional performance. The forecast is becoming the primary information source to increase margins by unlocking significant commercial and operational improvements. Here are some forecasting strategies that CSM observes among best-practice suppliers that you can apply now for margin improvements.
Use the three critical inputs for operational forecasting
For near-term operations, suppliers tend to rely too heavily on customer releases or order projections. That reliance is often very expensive. Customer releases typically significantly fluctuate weekly over a 12-week operating horizon. Unless a plant operations manager has additional unique knowledge of the customer's inaccuracies, these fluctuations burden suppliers with added inventory costs and other supply chain expenses. A few of CSM Worldwide's clients have unlocked the ability to compare three key operational forecast references: 1) 12-week customer releases or order projections by part number; 2) immediate past shipment history by part number; and 3) the sales and marketing team's future part forecast for these same part numbers.
For these suppliers, plants gain trust in the marketing forecast because they have a process to collaborate on the forecast for the operational horizon. Having these critical operational forecast inputs readily available rapidly exposes parts with the largest inconsistencies across the three reference points, allowing a new feedback loop to emerge between the plants and the sales team. The newly empowered cross-functional team can quickly prioritize and address the parts that do not align, saving significant supply chain costs. In the new closed-loop collaboration the sales team knows upon which parts to confer with the customer for the benefit of the operations team. In turn, the operations team collaborates with sales and marketing to adjust the part installation or penetration rates to benefit the company's future operational and strategic forecasts. Everyone aligns on the same collaborative future business plan. CSM hears from best-practice clients that they are better at "level-loading" near-term production and are no longer victimized by customer releases. In a few cases, lower-tier suppliers to our clients are volunteering new inventory consignment model for lower inventory costs.
Stop strategic "firedrills" by automating forecasts
For the majority of suppliers, the strategic forecast (five years) is a significant organizational resource drain once or twice per year.
If you can relate to the "forecasting firedrill" then you likely:
Automating the forecast turns it into a constantly rolling strategic and operational business planning tool that unlocks transformational value for the company. It is the primary enabler of the other improvements highlighted in this article's suggestions.
You can start by making the forecast an entry, or touchpoint, within your company's everyday commercial workflow for pursuit of new opportunities and updates to existing opportunities, awards and production parts.
Use a common forecast as a "single source of organizational truth"
Stop letting various business units inside your organization build separate forecasts under separate assumptions that are unknown and/or are inexplicable to management. Use a common
market base. The process of establishing a base can involve organizational consensus, if it doesn't take too long to arrive at this common base. It is okay to have scenarios or
assumptions that vary from the common base, as long as they are known to all and can be modeled across the entire company.
The common forecast removes organizational "excuses" from the company's business planning. It allows the organization to collectively confront the truth, understanding financial and operational constraints and focusing on strategies to improve margins.
After the organization rallies around a single source of future "truth," the forecast business plan can then be used to shape essential future organizational performance metrics (or KPPIs) and scorecarding.
Establish KPPIs™
You wouldn't drive your car forward by looking through the rear-view mirror. Don't steer your company into the future based solely on measured history. KPPIs™ are Key Predictive
Performance Indicators, and they come uniquely from a forecast. They must be derived from a rolling future forecast because KPPIs must be forecast and shared regularly, at least in
quarterly intervals, if not monthly or better. You can only hold people accountable for what can be measured regularly.
Since many suppliers build a multi-year forecast only once or twice a year, they cannot realize KPPIs. Worse still, this leaves them holding employee teams accountable for only KPIs that are largely measurements of history.
Real-time forecasts are beginning to unlock KPPIs for a small minority of CSM clients. CSM research conducted with the OESA (Original Equipment Suppliers Association) exposed many common KPPIs from a few best practices companies, including: three-year future margin targets per customer; future business targeting based on net present value thresholds; two-year future targeted capacity utilization by plant and operation; and three-year future financial contribution targets for product types and business units.
Target future business with the forecast as the primary source for criteria
The perceived gaps in your strategic business plan are the ideal starting points for prioritizing future business targets. Again, suppliers who build a long-term forecast only once or
twice per year have trouble applying this. You have to constantly measure the gaps in your future business plan and then prioritize future pursuits that will fill them. Criteria to
evaluate within your future business plan include future capacity gaps you need to fill and shortfalls of anticipated contribution margin for specific products, customers and operations.
Best-practice CSM clients extend this discipline to also make certain that competitors win the business that they do not want, either by not bidding at all or employing aggressive
bidding strategies.
Remember that business targeting not only refers to organic commercial sales opportunities but also merger and acquisition activities. Some suppliers diligently maintain competitive market share within their forecast business plan. This complete marketplace outlook reveals products and companies worth acquiring to meet future portfolio financial objectives. Conversely, this ongoing portfolio management could also warn management of ill-performing products, operations or customers of which the company may want to dispense.
Create and apply alternate market scenarios
Basing a strategy on a single forecast for what the future holds isn't a strategy; it's tunnel vision. Companies who have enabled rolling future forecasts also tend to create and evaluate the impact of alternative marketplace scenarios. This allows a company to prepare contingency plans for deteriorating or accelerating business conditions. Alternate market scenarios modeled against the business plan are most often based on deviation of vehicle volumes (either specific vehicles or overall vehicle markets), currency fluctuation and alternate raw material prices.
Best-practice CSM clients often build and maintain high- and low-band market volume scenarios in addition to the core business plan. These companies also rapidly construct and model the impact of spontaneous market event-driven scenarios such as labor strikes or catastrophic economic conditions (sound familiar?).
Companies that are prepared for alternate events find opportunities in market chaos to capture revenue and market share, increasing their resulting margins by "gaming" their competition.
Tie financial and operational detail to your forecast
Infrequent revenue and volume forecasting doesn't provide much help in figuring out where you will earn margins, achieve efficiencies and gain competitive advantage in the future. Endeavor to tie cost and capacity information to your rolling forecasts. Adding the financial and operational color to the forecast purposely unites all internal functions within the company to apply it for building business cases and solving problems (e.g., capacity constraints, investment evaluations, evaluating and commercializing new product innovations, etc.).
Best-practice CSM clients are creating "closed-loop commercial management" workflows that enter financial and operational details into the forecast at the same time that they are created within the quotation process for either future opportunities or engineering changes on current parts. This "enter once, use many times" workflow makes attaching financial and operational details to the forecast an efficient process. The details then reside in the forecast every day, solving the problem of reconstructing these valuable attributes retroactively over many weeks just once or twice per year.
John Brennan can be reached via e-mail at johnbrennan@csmauto.com.
