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

IBF Benchmark –

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

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