- Why quantifying procurement costs from forecast error and forecast accuracy is essential.
- Separating the reasons for procurement cost variability and the production costs calculator.
- The background as to the overall topic of forecast inaccuracy cost estimation is explained in this article.
- Conversely, what is the benefit of forecast accuracy? This article contains the calculator for one of the expenses associated with forecast inaccuracy, which is the cost imposed upon production. This can help companies know how much to invest in improving forecast accuracy.
- This is just one of the areas for the benefit of improved forecast accuracy.
See our references for this article and related articles at this link.
Why Quantifying Production Costs from Forecast Error and Forecast Accuracy is Important
- Production in one of the most expensive areas within many companies. It is often thought that supply planning is the primary buffer for forecast error.
- The higher the forecast error, the more expensive it is for companies to maintain sufficient quantities of safety stock to prevent manufacturing from being subjected to high demand variability.
- This is one of the most sensitive areas for which to estimate the costs of lower forecast accuracy.
- It should not be skipped just because of difficulty. Because to not quantify the costs of forecast error on the factory is to say the cost is zero mostly — that is the costs imposed upon the plant are then not quantified and used to justify investments in forecasting to improve forecast quality.
The costs of forecast inaccuracy impose two initial costs on a factory.
- The Costs of Changeovers: This is the cost of stopping (or sometimes in the process industry — slowing the rate of manufacturing) to produce a new product. Forecast error causes more changeovers because the plant is made to be more reactive, and the higher the forecast error, the more the plant tends to produce more of the open orders.
- The Cost (Opportunity Cost) of Unused Production Time: The more changeovers there are, the shorter the production runs. When a transition is taking place, this most often means (again with process industry being the exception — although even in process industry where production continues between production runs, there is often the waste. This is the product that is not the finished good but either a by-product or merely waste) that the equipment is not available to produce the finished good.
These costs are also difficult for many companies to estimate. For instance, in the case of changeovers — change over time, and therefore cost changes depending upon the individual products, and also vary per factory. The costs of downtime due to setups are usually easier to obtain, but still not a simple matter because most companies do not have costing per hour of particular lines in their factories.
The Production Cost Calculator
The natural part is developing the calculator; the tricky part is estimating what inputs to use.
Note: The fields below start off with default values. All but the final field — which is the output field, can be changed. The output field continually updates based upon the input fields – and there is no button to hit to get the output field to update.