Where Should We Place the Forecasting Function?”

Chaman L. Jain, Ph.D

Chaman L. Jain, Ph.D

No matter where you place the forecasting function, you will have a bias in forecasts unless you create an independent department. Production people tend to over-forecast because it gives them fewer headaches resulting from out of stocks. But if they are evaluated on the basis of inventory, they would prefer under-forecasts. Salespeople have a tendency to under-forecast where sales quotas are tied to forecasts. Otherwise, they would prefer over-forecasts to make sure products are available when orders arrive. For marketing people, it all depends. If the advertising budget is tied to forecasts, they would prefer over-forecasts. Finance people, in general, are conservative, but their mind-set may change when they report to Wall Street. Having an independent department is a solution but only large corporations can afford this option. So the question is not how to avoid the bias, but how to minimize it. A good consensus process with a good champion can help to reduce the bias. In that case it may not make that much difference where the forecasting function is placed.

IBF Benchmark www.ibf.org

IBF Benchmark - www.ibf.org

One way to make that determination is to see where different companies have their forecasting function. The figure below can give you an idea, which is based on the survey data of 2008 conducted by the Institute of Business Forecasting and Planning – IBF. (Data are of all the industries combined). It shows that a large percentage of companies have their function in the supply chain (35% = 26% + 9%), followed by Sales (16%) and independent forecasting department (14%). I have been watching the survey data for the last eight years. Two things I have noticed. One, more and more companies are moving their forecasting function to the supply chain probably since this is where operational forecasts are used most. Two, more and more companies are moving their forecasting function away from Finance. The percentage of companies having their function in Finance has declined from 14% in 2001 to 7% in 2008.

Where does the forecasting function reside at your company and why?  It would be great to hear from you!

IBF’s Journal of Business Forecasting (JBF) | St. John’s University – New York USA
Chief Editor | Professor
Dr. Jain is Professor of Economics at St. John's University based in New York USA, where he mainly teaches a graduate course on business forecasting. He is also Chief Editor of the IBF's Journal of Business Forecasting. He has written over 100 articles, mostly in the area of forecasting and planning, and has authored/co-authored/edited nine books, seven in the area of forecasting and planning. His new book, "Fundamentals of Demand Planning and Forecasting," is the basis of IBF's body of knowledge. In a consulting capacity, he has worked for many large multinational companies including Hewlett Packard, Union Fidelity Life Insurance Company, Prince Manufacturing, CECO Doors, and Taylor Made Golf. He has conducted workshops on business forecasting and planning for various organizations including Sweetheart Cup, Eastman Kodak, Jockey International, SABIC, Saudi Aramco, DU-Emirates Integrated Telecommunications Co. -Dubai UAE, and Symbios Consulting Group-Egypt, Goody-Saudi Arabia, Al-Nahdi Medical. He has made presentations on business forecasting and planning at IBF conferences / workshops, Council of Supply Chain Management, Informs, DMDNY in New York, John Galt Solutions and SAS. He has been invited by various institutions to speak on business forecasting & planning including University Technology Malaysia, School of Future Studies & Planning, Devi Ahilya University, India, and Apeejay Svran Institute of Management, India. He is the recipient of 1994 award of the Direct Marketing Educational Foundation for his best paper.

42 Responses to Where Should We Place the Forecasting Function?”

  1. Hi Chaman,

    I believe where the department ends up depends very much on every companies ecosphere as much as on any rational elements. I’ve seen companies where nobody wanted the responsibility because when the forecast turned out wrong (by nature it will be!), they’d get the finger pointed at. In other companies, people fought over the responsibility.
    Your message points out some very good points though; why should different departments come up with different forecasts for the same business? Human behavior is responsible for many of a business’ inefficiencies. Therefore, an independent and rational basis should be laid upon which the forecasts are based. The problem is that most people are incapable of dealing with the complex nature of forecasting, therefore, a dedicated team inside the company – regardless of where it resides – provided with the right training and tools should be able to deal with the task.
    Another point that may expand your subject: How often do companies forecast? i.e. is this a static or a dynamic exercise. Those running on yearly forecasts must have been in for a rough ride when the economy turned 180° halfway last year…

  2. Interesting figures….any breakdown available by industry type, or by process type? e.g. whether production & fulfillment is triggered on an order basis (make/assemble/engineer-to-order), or whether driven by product availability to meet forecast demand (make-to-stock, replenish).
    Could be quite different picture?
    Thanks,
    Roger S.

  3. I have been working with 3 companies during may 20 years as professional Planning Manager.
    At the pharmaceutical company, the Planning department initiates several scenarios. There was an executive S&OP meeting where a consensus forecasting is generated.
    At the Public Payphone company, the Technical Operations department initiated the Forecast based on payphone booths installations and targeted minutes of calls. Then, Sales and Marketing Department (single sector) generates smartcards products requirements.
    At the Home appliances company, the Marketing Department initiates different scenarios. Then, through business S&OP meetings with Sales and factories, a Master consensus forecasting is generated. This is updated periodically in a reverse way. That is business S&OP meetings are monthly held, then Marketing sector generates the Rolling forecast.

    As a Planning Manager, my role was to validate all these processes. However, I did not any solid forecast technique used by all stakeholders. Once, I insisted to provide a forecasting framework and implement a forecasting technique per product, no one supported the concept, due to the lack of knowledge and the culture of fear from accountability of accurate numbers. I think they some stakeholders were abusing the forecast numbers, especially the Marketing Department, for the sake of specific Marketing activities.

  4. I am currently a Forecasting Manager for Fortune 100 in the manufacturing & distribuion industry. Our forecasting resides initially in the Finance Department where a high level (channel, product & large customer) forecast is derived. From there it is handed off to Supply Chain who determines how to best allocate that forecast among the distribution centers. Of the departments listed in the pie chart, I feel all are a good fit for the forecasting function besides Sales and Marketing. Sales traditionally forecasts low so they can beat the expectations. Marketing traditionally forecasts high so they can receive an increased marketing budget. A joint forecast between Finance and Supply Chain/Logistics/Operations seems to be efficient and effective.

  5. It is an interesting question. And as the graph shows with perhaps no “right” answer.

    But if we look at few of the characteristics about forecasting, this task becomes easier. First forecast is a forecast. It is not the absolute truth. It is based on various assumptions and perceptions. Part of the analysis can be based on algorithms, but finally it is about experience and gut feel / intuition.

    And to get the best forecast it is important to understand the underlying assumptions. And one of the best ways to externalise the assumptions is through dialogue. And dialogue as the name suggests involves at least two parties. And to get the best results it is essential there is a certain amount of tension in the system.

    There are two elements to the forecasting process. One is the technical element – based on past performance, and some of the known factors affecting sales. This often can be automated in various tools like APO or other planning tools. The second element is actually the fine-tuning of this calculation, and inclusion of any newer elements like any fundamental shifts in patterns, events etc. etc. This can be best be done by people who monitor the market. For the bottom up fine tuning this is the sales guys. For top down macroeconomic aspects perhaps coming from strategy department.

    Finally at the end of the day any form of forecast is used by the supply chain function to plan production, distribution, replenishment etc. on a daily basis. Other functions will need this for resource planning, but perhaps an annual view should be sufficient.

    Now if we look at the scenarios described above, it becomes quite clear that the final form of the forecast is driven by Supply Chain. If the Supply Chain is not able to use the output of the forecast process in an efficient manner, it is as good as not forecasting. Hence the ownership of the format of the output of the forecasting process essentially should lie with Supply Chain.

    ERP systems are the brains behind running the first draft of forecast based on historic performance and known programmable factors. This part of the process depending upon who is the driver of ERP system in the company – finance, supply chain or sales, can sit where it can be run efficiently and is maintained appropriately. I have seen in many companies the ERP system essentially is the bookkeeping system and hence finance is the powerhouse. In such organisations finance could be the home for this function. But the design itself should be done with Supply Chain in the lead.

    Finally Sales teams should be able to input their views and fine-tune the forecasts. Very often I think this process is where things starts to get confusing. If the sales team is not clearly aware of the algorithms running the baseline forecast, they will struggle to fine-tune. Also understanding the granularity of their view. Very often sales teams are asked to forecast at the SKU level – for all possible time scales.

    Coming back to the organisational question – monthly S&OP meetings that brings together the sales and operations team gives the opportunity for the dialogues that will bring out the assumptions. If run with proper facilitation these meetings can provide loads of input for planning ahead – rather than focussing on just numbers alone.

    So in summary, the forecasting function should sit between Supply Chain and Sales and with some intermediary running the heuristic for historic analysis.

    That is my view. Does it make sense?

  6. I have been working with a government supply department where about 5000 items (without considering SKU) were centrally procured from vendors/sub-contractor and were distributed to government departments (including police and defense force) through various depots located across the country. At the beginning of the year rough cut planning for two year.s requirement is made through ERP system based on which blanket orders were placed with vendors/ subcontractor. Here moderation of system suggested quantity is decided by a high level committee including occasional presence of consuming department.
    For procurement and distribution MRP and DRP engine of the system is extensively used to generate planned purchase, production and distribution orders, based on forecasting parameters. Any moderation is done by Stock Control department and sometime by top management ( in case of major changes arising out of natural calamity, major development programme etc. Clustering concept is utilized to distribute goods from central stores to regional stores to district stores.
    After initial hiccup, the concept of forecasting and enterprise planning was well accepted even in a government bureaucracy . This is also because the system is found suitable for seasonal nature of demand of many of the items.g.school stationary,winter dresses. etc.. where earlier attemt of implementing SIC miserably failed.

  7. Worked with company and was the Project leader on working on core process for forecasting. The margin of error varies by product category, our category was Spice, and the margin of error was 22%. The team consisted of CFO, Inventory Manager, Customer Service, Marketing and of course Sales. We found that the system generated forecast, using history,inventory control then having input from Sales, and tweaking the levels, worked most effectively. By no means an exact science or process.
    Don Simpson

    Posted by Don Simpson

  8. Place the forecasting function in the Supply Chain Group. The Supply Chain Group should be talking to operations, engineering, IT, sales, and customer service for input into the demand plan via the S&OP meetings.

    Posted by Robert Gotsch

  9. For the majority of companies, the many companies that do not have dedicated fully staffed S&OP functions, the recommendation should be that Operations/Supply Chain management owns and manages the forecast function, and that Sales, in general, with some exceptions, owns the forecast in terms of the month-to-month unit volume commitment.

    This split puts the responsibilities into the hands of those people most qualified to be responsible. For Operations management their qualifiaction is the ability to run the process, which should be a resident core competency of Operations – and is certainly required to ‘front load’ the ERP. For Sales, their qualification is their ability to apply their knowledge of the marketplace and their customer base, in conjunction with Sales imperative to sell specific products at certain volume levels. To achieve their commitments/quotas Sales has to have the ability to direct which customers will take which products at what intervals.

    The exception to having Sales own the forecast should be where Marketing takes ownership of the commitment for unit volumes that relate to new product launches and promotions.

    To make this joint ownership arrangement work their needs to be a simple way to reward sucess, and underscore consequence. Consider having a large portion of the bonus system, 50% or more as shared. As example, have 50% of everyone’s bonus – at the very least, every manager in Operations’ & Sales’ bonus, tied to a set if common objectives. These objectives should include: making the sales numbers; coming in at or below budget; and shipping customer orders at 99% on time and complete. These shared objectives force Operations to fully support all Sales efforts and for Sales to be absolutely realistic, and reasonably diligent in rolling-up their input to forecast.

    Posted by Rich Gendon

  10. I believe it to be a misapplication to tag a function regardless of industry. Different industries get their initial signals from different sources. Defense related industries get signals from much different sources and length in the chain than, say, the apparel industry (both of which I have experience). The drivers of demand, be it stability in some far reaching corner of a country’s influence or the sudden appearance of a new garment on the latest teen idol, are greatly varied as are the responses to that demand by the serving industry.

    Posted by Gary Breaux

  11. No matter where the forecasting “ownership” resides, cross-functional collaboration is the key to success! Having experienced cultures where forecasting and analytics were stand alone departments, and also environments where either sales or supply chain owned the forecast, the common denominator to the lowest margin of error was input from key department contributors including sales, marketing, manufacturing, analytics, and supply chain. Don’t forget the value of collaboration with the customer as well! The most successful environments also included a level of “accountablity” for the end forecast.

    Posted by Rob Girard

  12. Nice article Anish and thanks for posting. It is clear that there are advantages and disadvantages for the placement of forecasting within the organization. However, as forecasting is an essential part of the S&OP process which is a holistic function that as a business process transcends across multiple functions – the best non-biased place for forecasting is within Supply Chain Management if it exists. I disagree with the author on only one point and that is that this dedicated function is only for larger companies. Even Small-to-medium enterprises can justify such a dedicated position – once they recognize the value. In some smaller organizations – we have created and S&OP Manager position which essentially managed the forecasting process and this worked effectively!

    Posted by Douglas Kent

  13. Hang on a minute…aren’t we overcooking it a little to be calling Forecasting a function? It’s an activity step within the Planning Process…and that activity can in turn be broken down into a sub-process. The Planning Process is where all the key elements of balancing demand and supply, and the strategic placement of inventory come together…the responsibility for compiling the demand forecast may be with a planner, based on input from sales, customer service, marketing etc…but I believe it would be wrong to call forecasting a function.

    Posted by Paul Gooch

  14. We need to put proper Forecasting system in Place based on the frequency at which we need to review our forecast and also the forecasting horizons . I feel (and also have experienced) that accurate forecasting basically is the combination of two things 1)Statistics and second one is prediction (which normally comes thru sales people ) . Fore cassting should be the joint resposibility of both supply chain as well as sales team . Off course the overall owner ship should remain with supply chain .

    Posted by Premdeep Singh

  15. I agree that supply chain should own the forecast which eventually creates the production and subsequent master schedule. The key is to create gap closure with a robust SIOP process. This needs to be a collaborative process between the the stakeholders of the functional areas. The process should include gap closure with the various organizations.

    Posted by Bob Lundeen

  16. I would give the responsibility to sales and marketing and let them own the inventory levels for all products (Finished Goods and Raw Materials). This will encourage sales and marketing to learn more of the skills needed to become business unit managers etc.

    The role can be an ongoing collaboration and can compliment the S&OP in any size organization. You can create KPI with respect to total sales and inventory levels. They can work off trends to create the forecast and use all their customer relationship management skills to fine tune everything.

  17. This is the problem with traditionally structured companies, the functions are set up independently and then managing the end to end process for each LOB involves managing across functions which leads to differing priorities. If this were a Lean company, the departments would be multiskilled and set up horizontally, the entire end to end process for each LOB would be managed in each department. You may think there would be waste as there would be X amount of purchasing staff, one in each area, but if multi-skilled they would be able to assist in other parts of the process, plus the fact there is no split loyalties and therefore no over-ordering, etc, there would be less waste (purchasing, manufacturing and storing excess inventory costs money so the headcount in the traditional way looks like it costs more, but the hidden costs are higher).

    Posted by Mark Cameron

  18. We work together week by week (Supply Chain – PCP – Sales) and the results are very good. In my experience, Forecasting Function must be made in group.

    Posted by Luis Emilio Devoto

  19. Both Gary and Paul make good points please see my discussion link shown at then end of this comment. However forecasting is simple, it is simply that the accuracy of the data used is flawed, therefore as Gary has eluded the ongoing revisiting of why things didn’t go to plan really does work as long as it is undertaken positively rather than negatively.

    One of the keys to this is to view the company culture and see who has what objectives, if your Sales Director has no responsibility for inventory levels, then isn’t it likely that he will instigate higher forecasts to ensure that if the blue bird order comes in he can ship the goods. Where as the Materials Director will downgrade the forecast to ensure that he achieves his inventory objectives. As a Materials Manager in the mid 1980’s I successfully negotiated that the Inventory objective was part of not only mine but also the sales and production managers bonus objectives…………We had our best year ever!

    http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&gid=1783816&discussionID=5065752&sik=1250696669077&trk=ug_qa_q&goback=%2Eana_1783816_1250696669077_3_1

  20. This has been a great discussion on the importance of a forecast and what it should or shouldn’t be. The discussion on where it should be situated is much like the Miller beer campaign, “taste great, less filling”! There is no right answer. The points that resonate from the prior submissions are that who ever is best situated in the company to gather the significant insights and create a Fox News; ‘Bill O’Reilly forecast. This is a forecast that is fair and balanced with no spin in the numbers!

    I think that each company’s corporate culture is different and finding that place is unique to that environment. You need all of the inputs from marketing to sales with a strong dose of statistical analyses and taking out the hidden agendas that may exist in the inputs. I was a director of forecasting for 6 years and was said to be responsible for the accuracy of the forecast. I gathered the insights the best that I could but when it came down to it, I never sold an item in my life! How could I really be responsible for us not hitting our numbers? Removing that ownership too far from sales can create disconnects.

    I think that the bottom line is put is where it makes the most sense in the organization to get a ‘fair & balance forecast. Create your accountabilities thru a strong S&OP process and just enjoy that beer!!!

  21. I would have to agree with Mark. This is why Forecasting & Planning in an office or from an MRP is a bad thing – you need to forecast where your organisation adds value – the manufacturing – they understand the customer and they know what they need. PS: LOB is “Line of Business” a product group in the insurance industry, for example Motor Insurance line of business.

    Posted by James Sandfield

  22. From my experience, the Forecasting Function has worked successfully in the Supply Chain Group. The Supply Chain Group is an “honest broker” in coordinating marketing, sales, manufacturing, operations, engineering, and procurement in the S&OP meetings. The difference is the line functions tend to think “operationally” with an “I need it now” and we should “never be out of stock” mentality. The Supply Chain Group thinks tactically, strategically, and horizontally across the department “silos”. MRP and DRP requirements are “firm orders” to be built in as part of the forecast, along with the marketing plan projection and sales the sales forecast input.

    The S&OP meeting is conducted with the shareholders by conference call by region on a once or twice a month basis. The most difficult thing in conducting the S&OP meeting is getting the “players” to be present consistently as regular attendees. S&OP is part of the “tool kit” as is Supplier Managed Inventory (SMI) of the Supply Chain Group.

    As an advocate and practitioner of S&OP and SMI, these “tools” are available to assist companies improve customer service, reduce inventory, and free up capital resources tied up in late orders or inflated purchase requests from some of the stakeholders.

    Posted by Robert Gotsch

  23. In the bin?
    Forecasting seems to me to be a waste of time. If you place it in a special department you tend to have many persons working with producing nice charts without understanding the meaning of the very basic data that is used to create the chart.
    Instead of forecasting, work with having production of modules prepared to assemble to order.

    By Tomas Read

  24. If we understand under forecasting the statistical forecast on the basis of historical data, that can be anywhere. We made however good experience with dedicating the forecasting function first of all. Before it people used to run forecast and did supply planning at the same time. Focussing on forecast allows for more professionalism and better monitoring of the market dynamics.

    If we talk however about Demand Plan that should sit in sales as nobody (should) know better, what the company is going to sell and when. Certainly bias is a problem, but will not go away if responsibility of demand plan moves to another function, also independent demand departments need their input (market intelligence) from somewhere and at the end they reporting to someone (even it is the CEO), who has certain interests.

    Bias needs to be attacked by monitoring it and results must be used to trigger the behaviour of those, who create a demand plan. In this sense it must be clear to the organisation that underforecasting creates as much trouble as overforecasting (only for different people). Hence coaching the right behaviour is a top down task and must be understood from all functions in the process.

  25. I had a lot of experiences during my time at Cordis early ’90s.
    Sales (budgeting & bonusses ..), marketing, distribution centres and production all worked with their own set of numbers … very different numbers; and of course a lot of discussions about responsibility of back-orders and obsolete or slow-moving stock.

    I was appointed a new function, trying to fill the black hole between those departments and assure everyone worked with the same set of numbers …

    The start was difficult, but after about one year, we had great results.

    In summary, this is how we solved this issue :
    1. Marketing is the owner of the forecast (from their function, they should know what happens in the market …)
    2. Marketing has to liaise with sales and check mkt expectations vs. sales expectations and sales results.
    3. Marketing shares the FC with Supply Chain; Supply Chain questions critically the Forecast. (Eventually, SC communicates about capacity problems …). The result is a documented SALES Forecast which is saved. At regular times (e.g. every 3 months), real sales are compared with the previous Forecast; significant descrepancies need to be explained and this will be base for discussion of revised forecast. The SALES forecast should also contain a sense of error-margin. Depending on kind of products, forecasts can be done on item groups (with top-down split based on historical data) or item based.
    4. Supply Chain transforms the SALES Forecast into a DISTRIBUTION forecast (if different distribution/warehouse levels); taking into account pre-sales stock build up, phase-outs, desired safety stock levels per distribution level/product level (e.g; pre-sales stock at central level; after 6 months move safety stocks to local sales levels … note also that inventory stratagies can be different for A-B or C items; low cost vs expensive items etc.; items with low or high expected sales FC error margin …) This is the job of Supply Chain
    5. Thru systems, DISTRIBUTION forecast is converted to an unrestricted production plan (if needed/appropriate also for semi-finished products)
    6. Supply Chain defines S&OP together with production; execute together Rough Cut Capacity Planning. If needed, distribution plans are revised.
    7. Agreed S&OP is transformed into shop floor plan by production planning and communicated to Supply Chain. (Eventually, SC to check anomalies on item level).
    8. At end of production period (weekly/monthly); Supply Chain calculates the production score : how much of commited shop floor plan is delivered to distribution chain (for each item max. 100%; unplanned items do not count etc.). This confirms that production is in line with the requrements planning and does not live it’s own life.

    I know this is a lot and still not yet in detail; but this process has proven records for me.

    If you need additional thoughts/comments or have remarks, please do not hesitate to contact me.

    Stefaan Vandooren

    Posted by Stefaan Vandooren

  26. Same thing with Quality people. Production tends to force product out overlooking quality problems. Sales tends to hold up shipments for the most minor infringements for the sake of the customer. I think both Forecasting and Quality should be independent functions.
    By
    Julie DuPei

  27. This an interesting debate that have been going on for years. I can relate to it and would like to share my experience with the other practitioners. I worked as a Director of Supply / Demand Planning at fortune 100 CPG company and came up with similar conclusion. The forecasting function reported to me at the supply chain department. Building the tactical forecast required collecting inputs from various functions including Marketing, Sales, and Production Planning. The forecast provided by sales reflected their regional promotion plans and/or sales quotas. It was evident that they tended to send a statement indicating how their sales qotas are overstated by under-forecasting their territories. On the other hand, the forecast provided by Marketing reflected their business plans to deliver the P/L. They tended to underforecast few categories and overforecast others in order to meet their annual plan (AOP). Production planning provided inputs reflecting capacity and inventory availability and occasionally highlighting the overstated forecast that caused surplus inventory. The various functions left all these inputs to the forecasting function who in return consolidated and challenged them by applying statistical algorithms to come up with an objective forecast. It was a successful process but required time and effort to establish an independent department who is accountable to deliver a final objective forecast that depends on subjective inputs from various functions.

    Posted by Naser Bawab

  28. I’m working in a sales & marketing company acting in the chemical product distribution. We are implementing SAP and this question falled yesterday. We don’t have an answer yet.
    It makes sence to place the forecasting into the Supply Chain but how to obtain the commitment from sales & marketing ?
    Is forecasting not somewhere a kind of product management skill ?
    Is Supply chain not there to deliver what the business people think will happend ?

    Some questions falling during our actual discussion and your comments will be very well appreciated.
    Thanks
    John

  29. LinkedIn Groups
    Group: Sales & Operations Planning Network
    Subject: New comment (2) on “Where Should We Place the Forecasting Function?”
    John,

    Its somewhat of a two part requirement. You may want to consider using SAP/CRM as a way to collect forecast data from Sales Force. On the demand side, we are using APO to organize this information for RCCP as part of our S&OP process. You should discuss this approach with your consulting partner to see if this can be put in scope for your project.

    As far as the commitment from your Sales/Mktg force, if not already in-place, you should probably be looking at develping an S&OP process where your General Manager is a key player and can help push this through the organization, otherwise, you may need a “Sales Analyst” role whos role it is to collect this information from the Sales Force and feed it in to the APO system.

    Good luck.

    Gary Thomas
    Director, Supply Chain Management

  30. Gary Thomas’ comments are correct.

    First the senior Marketing/Sales needs take accountability for improving forecast accuracy and use a formal, monthly demand planning and review process as part of the monthly S&OP cycle.

    Within that environment, the Demand Manager should report through Sales or Marketing. In that environment, forecasting is not a supply chain function.

    Refer to Chapter 6, definition 13 in the Oliver Wight Checklist for Business Excellence, 6th edition.

    Posted by James Small

  31. LinkedIn Groups
    Group: Sales & Operations Planning Network
    Subject: New comment (4) on “Where Should We Place the Forecasting Function?”
    John,

    One of the key ways to improve forecasts is to make sure at whatever level in the company is forecasting it is being measured.(i.e. by salesman, or by region, or SKU). Two Chemical companies I have worked with forecast SKU/major customer for A items and new product intros. By managing the A items you are getting the most cost crucial SKU’s that tie up a large percentage of your inventory with your time available. They still look at B’s and C’s just not as often.

    Demand Managers are the most common assemblers of collaborative processes, and in some cases – because of limited resources, they just forecast SKU level by exception 80/20 themselves.

    Normally the function is within sales and marketing, but I’ve seen it gravitate towards operations if no formal supply chain group exists.

    Good luck in helping your company determine what people want and when they want.(true demand forecasts – customer req’d date history)

    Posted by Mark Thomas

  32. Hi John, I’m the Demand and Revenue Planning Manager for innocent drinks and we’ve actually gone a 3rd way. We’ve setup a business delivery function that develops our market strategy and plans as well as predicting future demand and our Demand Planning function sits in that area. We get our account managers (sales guys/girls) to forecast their accounts and then have short term operational overrides in place from our operations teams based on input from customer’s operations teams.

    Give me a shout if you want to talk more.

    Cheers.
    R

    Posted by Robin Parsons

  33. Chaman,

    I am an economics major at the University of Michigan. I have just one question for you and that is, how often do suppliers update and/or forecast their demand function? Let’s say I had an idea that could update it up to the second and break it down in local markets, even as specific as a sporting event. Would that be of great value to producers and retailers?

    Thank you for your time,

    Chris.

  34. Chris

    If I understand your question correctly, what you are asking is how often they revise their forecasts. Below are the results based on the recent survey by the Institute of Business Forecasting and Planning.

    a. Once a month —64%
    b. Once a quarter –13%
    c. Once a year -3%
    d. Others -20%

    Specific events certainly have a role to play. If they are known at the time forecasts were prepared, their impacts are incorporated in forecasts. If they are discovered at the last minute, then their impacts are incorporated into the baseline forecasts intuitively and collectively in the monthly consensus meeting.

  35. Chaman,
    in my opinion ownership of the forecast figures is key – departement which is closest to the area of what is forecasted to make forecast – but also be responsible and made liable for any deviation. Deviation in positiv as in negative to be seen as bad.
    => if you are not measured against your accepted target you will always have an excuse.
    Who should better forecast sales then sales people / production better then manufacturing => but make everybody liable for deviation.

    Regards

    Nicolai

  36. Hi John, I agree with Robin’s approach. Forecast ownership has always been argued as either belonging to the supply chain or to sales/marketing. My push is that it it belongs to both. Demand and supply balancing can’t be done well in silo’s.
    The approach I am trying to implement is basically; demand management creates a forecasted range of possibilities based on history, trends, regression models, etc. These forecasts are then given to sales/marketing with the qualifying assumption that these forecasts will be accurate as long as historical sales are a good indicator of future sales. Sales then identifies where this assumption is not valid (new competitors, new markets, recession, etc) and over-writes the baseline forecast while documenting the assumption changes. Sales also over-writes the baseline for any events (marketing campaigns, channel loading, etc). Measure the accuracy of both the analytical and the marketing over written forecast and publish forecast value added metrics. Use the FVA metrics to identify where sales needs to focus improvement efforts.
    Supply chain could probably own building the analytical baseline forecast, but sales/marketing would need to own the FVA metrics (assumption and event management) to drive improvements in accuracy. S&OP would be a good place to manage this process.
    Hope this helps?

    Posted by Richard Herrin

  37. The forecasting department should reside within the the department that is responsible to manage inventory or production.

    Three reasons:

    1. The department will be measured on how well they service customers as well as Inventory levels.

    2. Credibility and trust. If you would be charged with managing inventory, would any of you be more inclined to trust and accept a forecast from a employee from a different department that may have different goals and objectives?

    3. Understanding of forecast error. The sign of the forecast-error is key to managing inventory, it should be the only measure for organizations managing physical inventory.

    Unfortunately many organizations use MAPE which is worthless, MAPE does not give an indication of over or under-forecasting. MAPE is easy to report corporately and many corporate managers like it just because it is easy to compile and report. Another horrific fallacy of MAPE is that it measures how you performed against the Actuals, not what percent of the Forecast (plan) did you actually achieve. Let’s say your MAPE is 10% however the past three months your Sales/Finacial Plan underperformed by 6% and you have been building inventory?

  38. Chaman,

    Thank you for taking time to answer my question. I now pose a new question to you. It seems that revising your forecasts more often would provide more accurate predictions, true? So wouldn’t a company be better off to revise every 2 weeks, or every week, or even so much as every day? And lets say that this is true, and I provided a company a method in which to revise their forecasts more often, then a company would be able to very accurately predict their sales after time. Couldn’t this save everyone in the supply chain a great deal of money in warehousing costs?

    Thank you for your time Chaman,

    Chris

  39. Chris

    I did not imply that companies revise their forecasts too frequently. I just gave the numbers what companies are doing. It is a waste of time and money if the revised forecasts do not add any value.I think forecasts should be revised when sufficinet amount of additional data becomes available, market dynamic has changed for one reason or the other (one competitior has left the market or new one has entered the market, competitor has recalled its product, which will cause an increase in the sale of your product, or for any other reason),or product has an extremely short life cycle. Even if we improve our forecasts with frequent revisions, but we don’t have enough time to react, it would not help. To decide how often to revise, one should determine whether the incremental cost is worth the incremental benefit, which may vary from product to product, company to company, and industry to industry.

  40. Good discussions … however, as a consultant in this topic, I feel I have best answer. First we must define a few things.
    Demand forecasting is resposible for colsolidation of forecast inputs from all business unit and creating an unconstrained forecasted using those inputs, historical data, and any number of demand programs.
    This group can reside within the supply chain but MUST not be tied to any of the business unit (free of all bonus targets and political interferences) KPI is forecast accuracy (both consolidated and from the business units). They manage the concensus process and provide the business units with feedback on gaps. They also have finace budgeting responsibilities (NOT MANUFACTURING BUDGETING)
    This unconstrained forecast can then be given to the supply planning department (also within the SC). That department manages the link between the inventory (SS, WFC, OOS, backorders, etc..) and the production site via MPS or MPP. They use site manufacturing constraints, product DC balancing, customer proritixation matrix, etc… to produce the constrained supply. The are the communication hub between the commerical group and the manufacturing group and convert the forecasted budget into a MANUFACTURING budget.
    The S&OP process is managed through the operations group which usually reports through the finance department. This group manages sku lifecycle, new product launches, ROI, cost, etc… The S&OP process is NOT a concensus meeting! It was origially designed as a communication tool to discuss short term production issues and long term capacity constraints. Demand forecasting, supply planning, marketing, sales, finace, and operation all present current KPI’s and stratigic visions. The manufacturing sites also participate to share capital plans as well as to understand future product budgeting. Feel free to shoot me a question if I am unclear (rubygem73@yahoo.com)

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