Forecasting: What’s In the Crystal Ball?

In this “forward-looking” session — “Forecasting: What’s In the Crystal Ball?” — Lee Buddress, Ph.D., C.P.M., Gleason professor of supply and logistics at Portland State University and Michael E. Smith, Ph.D., professor of strategy and international business at Western Carolina University, spotlighted their predictions for the domestic and international supply management horizon.

1) Changes in how supply managers source goods and services. As the professors point out, increasing demand — a byproduct of a recovering economy — means supply chains will need to ratchet up production, sometimes unexpectedly. Such was the case at Boeing in recent years.

“They kept ratcheting up production, to the extent that airplanes were rolling off the assembly line missing parts,” Buddress explained. The manufacturer shut down production for two weeks just to enable the suppliers of those parts to catch up, at a cost of more than US$1 billion.

According to Buddress, Boeing might have done demand forecasting, but likely didn’t spend as much time on supply forecasting — a second, equally critical part of the equation.

Besides asking, “If we have to ratchet up production, can X supplier do it with us?”, supply forecasting assesses other critical factors: potential labor issues — a dock workers’ strike, for example; capacity/availability; lead times and changes; materials requirements/critical materials prices; and product/component lifecycle issues.

2) Changes in inventory policies. As Buddress and Smith point out, with increasing mergers & acquisitions on the horizon, new pressures on supply managers — from new executive leadership — will likely demand even more cost cutting. “Say [supply management] is charged with cutting 10 percent by the end of the month,” Buddress surmised. “They’ll do that by not buying. And that affects inventory levels.”

Also on the inventory front, both professors recommend keeping up with new-orders data contained in the monthly ISM Report On Business (ROB) for manufacturing. For forecasting purposes, they say, these figures are even more telling than data on inventory levels. “Maybe a company just made more product that month that it could sell?” they posed.

As the professors point out, the methodology behind the ROB is so well-founded that more than 20 countries have adopted it. That makes it possible to do an apples-to-apples comparison on an international supply scale.

3) Changes in how supply management uses transportation and logistics. As Buddress and Smith look at population-growth projections, they say deomographics will be a major change determinant when it comes to logistics.

Right now, the U.S. is home to the third most rapidly expanding population in the world. “That means congestion on our freeways,” Buddress told attendees. Of course, this also means more goods will need to be transported to more places. “In the next 15 years, truck traffic is projected to double,” he added.

Internationally, incredible population growth in Asia and Africa will also create logistical challenges. Data shows these two countries wil represent the vast majority of global population growth by 2100 — in Africa especially, where the population is expected to triple by then (from about 1 billion to 3.6 billion).

On the water, a new breed of extra-large container ships will necessitate the U.S. to address its coastal infrastructure, as well. For example, the Emma Maersk is 1,300 feet long and 50 percent larger than any other container ship in service right now. Only 5 ports, domestically, can accommodate a vessel that size at the moment.

4) Increased scope of the supply function. Another “crystal ball image” the professors see coming down the pipeline is increasing emphasis on supplier-health monitoring by supply managers. To this end, the professors again recommend checking out the ISM Report On Business, or ROB, every month.

“[The ROB] has been statistically validated over and over again to be the best data there is,” they told attendees. “It’s better than even government data because, for one thing, it’s a change index. Also, it gauges what happened the immediate previous month. Another advantage it has is that it’s a carefully selected sample.”

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