In a manufacturing environment with high configurability, forecasting finished goods can be a complex and challenging task. The number of potential finished products can increase dramatically when many components are interchangeable. Traditional MRP systems would require forecasting each finished product individually, which can be unrealistic or even impossible. Leading ERP solutions introduce the concept of the “Planning BOM,” which allows for forecasting at a higher level in the manufacturing process. This article discusses this functionality in ERP and how you can leverage it with Epicor Inventory Planning and Optimization (Epicor IP&O) to stay ahead of demand despite this complexity.
Traditionally, each finished product or SKU has a rigidly defined bill of materials. To plan around forecasted demand, we would forecast demand for these products and then use MRP to break down this forecasted demand from the finished good level to its components via the BOM.
However, many companies offer highly configurable products where customers can select options for the product they are buying. For example, when buying a personal computer, you choose a brand and model, but then you are presented with options: what CPU speed do you want? How much RAM? What type of hard drive and how much space? If the business wants to have these computers ready to ship in a reasonable time, it must forecast demand for every possible configuration. For some manufacturers, these configurations can result in hundreds or thousands of possible finished good permutations.
The demand at the finished product level may be completely unforecastable in a traditional sense. Thousands of computers may sell each year, but for each possible configuration, the demand may be extremely low and sporadic—some combinations may sell once and never again.
This often forces companies to plan reorder points and safety stock levels mostly at the component level while reacting to firm demand at the finished good level via MRP. While this is a valid approach, it lacks a systematic way to leverage forecasts that account for anticipated future activity, such as promotions, upcoming projects, or sales opportunities. Forecasting at the “configured” level is effectively impossible, and trying to incorporate these forecast assumptions at the component level isn’t feasible either.
This is where Planning BOMs come in. Perhaps the sales team is working on a big B2B opportunity for that model, or there’s a planned promotion for Cyber Monday. While trying to work in those assumptions for every possible configuration isn’t realistic, doing it at the model level is totally doable—and tremendously valuable.
The Planning BOM can use a forecast at a higher level and then distribute demand based on predefined proportions for its possible components. For example, the computer manufacturer may know that most people opt for 16GB of RAM, and fewer opt for upgrades to 32 or 64 GB. The Planning BOM allows the organization to allocate 60% of the demand to the 16GB option, 30% to the 32GB option, and 10% to the 64GB option. They could do the same for CPUs, hard drives, or any other customizations available.
The business can now focus its forecast at this model level, leaving the Planning BOM to determine the component mix. Defining these proportions requires some thought, but Planning BOMs effectively allow businesses to forecast what would otherwise be unforecastable.
Of course, a good forecast still needs to be loaded into an ERP system. While ERP can import a forecast, it often cannot generate one, and when it does, it tends to require complex configurations that are rarely revisited, resulting in inaccurate forecasts. It is, therefore, up to the business to create its own forecasts, often manually produced in Excel. Manual forecasting presents several challenges, including:
No matter how well-configured the MRP is with your carefully considered Planning BOMs, a poor forecast means poor MRP output and mistrust in the system—garbage in, garbage out. Without a systematic way of capturing key demand patterns and domain knowledge in the forecast, MRP can never see it.
Epicor IP&O is designed to extend your ERP system with integrated demand planning and inventory optimization solutions. It can generate statistical forecasts automatically for large numbers of items, allow for intuitive forecast adjustments, track forecast accuracy, and ultimately enable you to generate true consensus-based forecasts to better anticipate customer needs.
With highly flexible product hierarchies, Epicor IP&O is perfectly suited to forecasting at the Planning BOM level, allowing you to capture key patterns and incorporate business knowledge at the levels that matter most. Utilizing IP&O empowers you to analyze and deploy optimal safety stock levels at any level of your BOM.
