In consumer electronics, delivering the right product at the right time can mean the difference between explosive growth and mere survival. Let’s say a hypothetical company builds a laptop called UltraBook with steady sales for 2020 and 2021. The company forecasts its 2022 material needs—components like microprocessors, SSDs and display panels—based on the previous years' demand. Suddenly, as 2022 dawns, a respected tech reviewer declares UltraBook “a value-packed powerhouse for today’s mobile professionals.” Within months, demand has doubled, then tripled. UltraBook is the portable on everyone’s list—but one they can't get.
Caught off-guard, this company can't purchase critical components fast enough to ramp up production to meet unexpected demand. With buyers frustrated by long waiting lists, by the end-of-year holiday season, the manufacturer is replaced as #1 by a savvy competitor.
PROMOTED
The moral of the story: Consumer preferences and trends can shift radically based on new information. Relying on annual or even quarterly forecasts doesn’t cut it anymore. Being able to predict what they need to produce and when, and how much material they'll need to do so, can help businesses stay ahead of the curve.
Traditional methods of forecasting assume patterns observed in the past will repeat in the future. While this provides a baseline for forecasting, the accuracy is disrupted when significant changes in market conditions, consumer preferences or external factors occur—like a pandemic or a negative review gone viral.
However, today’s business and consumer trends turn faster than ever. Because these forecasts operate on data from longer-term cycles and trends, companies relying on them are often slower to adapt to rapid shifts in conditions or demands. Unless you operate in a stable market untouched by disruptive factors, annual forecasting may fail to hit the mark.
To counter these deficiencies, it’s important to closely watch industry trends and demand. However, it's also important to have more recent data to better predict your cash flow, payment cycles and supplier behavior in the here and now. This information helps ensure you’ll always have the materials you need to meet that demand, even when it changes.
What data do you need, and where do you get it? I’ll focus here on the purchase-to-payment side of the house, as it is my company’s area of expertise, but similar concepts apply to the customer orders and receivables side, as well. For the purchase-to-payment cycle, including procurement and payment, there are two broad sources of data I recommend capturing for a better, more up-to-the-minute view of your operations.
Getting purchase request data processed quickly is important to fulfillment. Know of an upcoming customer contract that will require ordering significant materials? You might create a purchase request to send your materials supplier an electronic “heads up” to ensure they have available what you’re going to need—especially if it falls outside normally ordered quantities. These notifications can make all parties aware of orders and invoices as early as possible in the cycle, as well as how they will affect their respective cash flows.
Tip: No automated purchase request notifications? Simply alert vendors of the potential order. While not always as accurate or scalable as automation, it should still improve your procurement, delivery and near-term forecasting.
Purchase requests aside, most orders and invoices today are sent and received via email. Automation tools can monitor a dedicated email address, extract the data and push it into your accounts payable system. (Full disclosure: My company offers automation services, as do others.) Automated capture of invoice data from emails can help ensure it is transferred accurately and rapidly into the system.
Tip: If you outsource this function, I recommend ensuring the partner you select offers true automation services. In my experience, some “automation” providers actually use a team of manual data entry clerks behind the scenes with a 48- to 72-hour Service Level Agreement (SLA), making the service neither automatic nor instantaneous.
Automated notifications and data capture can provide near real-time visibility and allow you to track the income or payments against your budget right now. You can also analyze purchase request and invoice data to learn about your vendors’ invoicing habits to help better predict. your cash flow. Analysis can reveal, for example, that certain suppliers always send their invoices 30 days after delivery. This, along with each vendor’s terms for early payment discount, can help you optimize when you pay. (Ex: Should you hold that cash for a full 60 days or opt for an earlier, reduced payment?) You can start making granular, accurate predictions about when you will (and will not) need cash on hand to pay each supplier.
Of course, automated real-time data capture doesn’t negate the need for historical data, nor do automated analysis, machine learning (ML) or AI tools take us humans out of the loop. Historical data is key to training ML algorithms to predict for the longer term. However, having both historical and real-time data accessible together can enable you to make better decisions for today and tomorrow, not just the next budget year. ML and AI can reduce the time spent on data collection, crunching, manipulating and reporting on trends and predictions from days to minutes, giving back time to your team to perform more valuable tasks. Nevertheless, I recommend having multiple pairs of human eyes review, interpret and ultimately accept (or reject) the conclusions these tools make.
Having purchase request and payables invoice data hit your systems as soon as possible can greatly assist in creating current, accurate financial forecasts. By layering longer-term budget data on top of the current purchasing and payment data, you can know instantly how you are tracking against your monthly, quarterly or annual goals. And instead of learning about impactful trends after the books are already closed, you should be better able to capitalize on those trends—or pivot away from them—while they are still fresh and relevant.
This article was originally published to Forbes.com as a part of their Forbes Business Council on December 29, 2023 and authored by Yooz CEO Laurent Charpentier.