Prophecy™

Demand Forecasting knowledge

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“Why do we need a specialized tool for demand forecasting?"

  • Every business needs to plan the future. Otherwise, it is unable to take decisions.
  • That plan requires many levels:
    • What are we going to sell?
    • To whom?
    • At what costs / prices?
    • Over what timescales?
    • What resources will need to be in place to be able to deliver the plan? (Short term, medium term, even longer term.)
  • Planning for the future, over the levels described above, becomes the most critical success factor for your business. All meaningful business decisions and actions stem from it.
  • So why conduct what is arguably the most important management activity using a sub-optimal tool (such as Excel)?
  • Assertion: the primary driver of the business plan is volume - it drives revenue, variable costs and profit.
  • Without a clear, phased, detailed plan for volume you risk:
    • Lost sales/profit through out of stocks
    • Disappointing the customer through inability to supply
    • Wastage / high stock holdings
    • Adverse cash-flow
    • Management time spent on inappropriate activities – inquests over the past versus proactively shaping the future.
  • Therefore it seems very likely that relatively small improvements in the volume forecast will provide relatively large savings in the risk areas.
  • You can go simple or complicated on ROI on a forecasting tool. Either way a forecasting tool that leads to an improvement in forecast accuracy is very likely to have a high ROI.
  • A robust forecasting process, supported by the right forecasting tool, allows deviations from plan to be recognized earlier, avoids panic sales measures by enabling earlier sales/marketing program revisions and therefore allows for a more cost-effective, thought-through route to the achievement of overall company budgets and targets.
  • Don’t underestimate the ‘soft’ benefits of an improved forecasting process/software:
    • Less diversionary activity required to support the process.
    • Improved ‘quality time’ spent planning the future.
    • Less latency in the forecasting and planning process à more iterations possible in the same time à a more considered plan.
    • All parties think and collaborate more extensively / effectively about what drives sales, promotional effectiveness etc. Business knowledge improves as a result, resulting in more effective future plans.
  • The ‘difficulty’ with deciding to implement a forecasting tool is that, in reality, no one organizational ‘silo’ owns the whole of the forecasting process. BUT THAT IS NOT A REASON TO RETAIN A SUB-OPTIMAL SOLUTION OR PROCESS!

What should we consider when choosing a specialized demand forecasting solution?

  • Considering the variability of sales by sku / time period, how many skus have a steady rate of sale? The more variable the rates of sale, the more human intervention is required in making a forecast, the more software assistance is required to help the human make more informed decisions.
  • A purpose-build software application, used in multiple customers / countries for many years, has to be a better tool for the human forecaster than spreadsheets. ‘Better tool’ à translates into ‘better forecasts’ à when driven by the right personnel and business process.
  • Statistical forecasting does not generally work in ‘real-world’ markets because the factors which affect sales (i.e. promotions, competitor activity etc..) occur in different combinations and on different timescales each year. A different approach is required – one much more dependent on human judgement and knowledge.  (There are no ‘silver bullets’ for forecasting.  It’s a time, skill and knowledge thing, where the software tool you use helps you to make the most productive use of your time, skill and knowledge.)
  • Forecasting works best when it is integrated into the overall business planning process – one forecast à all functions are rowing in the same direction. Therefore the software and process must embrace / include:
    • Planning for revenue and profit as well as volume, as standard.
    • Single, agreed volume forecast driving financial and operational plan.
    • Captures all relevant inputs – i.e. sales knowledge, promotions, competitor activity etc..
    • Allows sales and marketing management to share ownership of the forecast with finance and operations (irrespective of the process that actually creates the forecasts or the individuals who originate the numbers).
    • Supports ongoing comparison with and monitoring against Budgets – by customer and product where appropriate.
    • Is easy enough and flexible enough for all participants of the process – sales, marketing, finance, operations – to use and derive value from.
  • For the forecasting software to ‘empower’ the human forecaster to extract maximum insight from the historical and plan data, it must:
    • Collect and present forecast-relevant information in the most helpful way for each user. (Each user may have unique requirements / preferences for how they see the data.)
    • Be easy to use and responsive.
    • Eliminate manual data entry of history, new products etc..
    • Offer insightful graphs and reports which aid human judgement.
    • Provide instant extension of volumes to money.
    • Allow plan comparisons with the company’s targets and budgets, ideally by customer and product. Why allow a forecast to be used which does not deliver the company’s budget (unless the budget is genuinely unachievable as a result of changed market conditions)?
    • Provide instant and real-time consolidation over products and customers so that the impact of changes at the micro level can be reviewed / reassessed at the macro level.
    • Allow multiple forecasters to share the database in real time – e.g. where sales managers forecast major customers.
    • Support a robust workflow process which includes forecasters and reviewers.
    • Routinely identify forecast accuracy levels and trends. (If you don’t identify your forecasting mistakes how will you improve your accuracy?)
  • There are clear benefits from deploying the forecasting software to more than just the forecaster(s). Visibility of the plan within the business assists all decision-makers.  The opportunity to compare the evolving plan (actual to date plus forecasts) against the company’s budgets and targets gives the data in the system added value and importance.  Forecasters have to assume greater responsibility and accountability when the plan is made visible to senior levels in the company.
  • Equally, the evolving forecast provides an insightful springboard for senior level business control and decision-making. If the plan is less than the budget, what activities are necessary / possible to get back on track?  The forecasting system offers this business control and early warning system when it encompasses financial forecasting and is deployed to the appropriate business personnel.

Summary:

  • Forecasting is a critical business activity and therefore forecasters should have the most appropriate tools to help them.
  • Excel probably isn’t that tool.
  • Small improvements in forecast accuracy can lead to significant financial savings.
  • Forecasting should be a multi-function owned process, irrespective of who prepares the initial forecasts. Everyone must buy into the forecasts.
  • Getting better at forecasting means the business can be less reactive to events and more proactive in planning the future.