I have had some recent discussions with several colleagues about forecasting versus budgeted forecasting in recent weeks, regarding an article posted on the Supply Chain Expert Community titled: Forecasting Mistake #1 – Forecasting to the Wall. In summary, the author is stating a common problem when it comes to forecasting: the forecast is seen primarily as a budgeting and financial tool, so it is not maintained and utilized to its full potential throughout the year to anticipate customer demand and reduce lead times and inventory. If a budget forecast is prepared for the current year, when the year is half over, we only have visibility for the next 6 months. This leaves all periods outside this window as a large unknown in the demand space, which forces the supply chain to ‘guess’ at future requirements. This forces companies to then rely on increased safety stock buffer points to reduce lead times to customers, or to avoid missed delivery dates, a key customer metric. All this adds cost or reduces customer satisfaction, leading to a deteriorating competitive position and a reduced bottom line. The question is, how can this situation be improved? The answer is: forecasting should be viewed as an important tool in meeting corporate goals for growth and profitability, not just as a budget exercise. In order to leverage forecasting as a vital asset to the enterprise, following issues need to be addressed:
- Forecasts are a dynamic variable, so they can change significantly over even a short period of time. This means the forecast process needs to be much more frequent than annually, preferably monthly. While a baseline is needed (budget) for financial accountability, the demand picture needs to adjust to reality.
- Forecasts should cover your longest lead time items, in order to properly anticipate demand and not be caught short. This means forecasts need to roll forward, covering the full length of the demand horizon at any point in time.
- In order to support a more frequent forecasting cycle and improve accuracy, the forecast must be streamlined and easy to use. A forecast which takes a month to prepare is already out of date by the time it is released. This requires good data to base assumptions on, and a tool which can quickly and accurately generate forecasts for analysis, preferably with the ability to quickly compare various scenarios in order to determine the optimal one for the current environment.
- The forecasting process must be viewed as integral and important tool in the overall functions of the company. The people generating the forecast must be aware of its importance to the strategic interests of the enterprise.
I have heard some people comment that, “Our forecast is always wrong, so we need to look at better safety stock management tools.” While safety stock is an important tool to buffer against unanticipated demand fluctuations, a better strategy would be to invest in instituting a continuous forecast process as a competitive tool. We are currently going through another tough phase in the business cycle, with consumer demand softening and business spending becoming very conservative. This slowdown is causing even more volatility in the market place, which will require even better and more frequent analysis in order to able to respond to the fluctuations taking place in demand. Having an accurate, regularly updated, long range forecast to provide guidance to the supply chain is more important than ever. A tool which can quickly and easily supply such a forecast is a must, as is a process to provide feedback on forecast assumptions to enable corrective action to keep the enterprise on track.