The importance of a forecast really depends on the environment in which you operate. If you are fortunate enough to be in an environment where customer orders coincide with your cycle time, then the forecast is really more for mid- to long-range planning. However, if you are in an environment like mine, you promise a three-day ship even though it takes three months to procure the materials. This is where the forecast drives everything you do on a daily basis. To be successful in that kind of environment requires a much higher level of engagement. Here I share what I found to be “The Ten Commandments” of the forecasting profession.
First Commandment: Have Fun In Your Forecasting Role
People can sense whether or not you love what you are doing. People tend to have more confidence in someone who loves what he or she does and takes pride in doing it. Enjoy the fact that in forecasting you can make a living by being wrong all the time. But, if you don’t enjoy crunching numbers or interfacing with a wide variety of personalities, then forecasting is probably not for you.
Salespeople are paid to sell, not to forecast. Therefore, to obtain input from them, we must educate them
Second Commandment Pretend You Know How The Economy Impacts Your Business
It won’t matter whether you are right or wrong. What matters is that you took that element into account and that you sound like you know what you are talking about. Who knows? You may even get lucky and find a leading economic indicator that will help to improve the forecast.
Third Commandment: Be Able To Discuss The Complex Algorithms Without Boring Your Audience
Most people don’t like statistics, so make even the high-level algorithms simpler and easier to understand. With this ability, people will think you actually know what you are talking about.
Fourth Commandment: Don’t Take The Numbers Provided By Sales Or Marketing As Gospel
Take the time to review and validate them against history, and then get out and interact with them. If you disagree with their numbers, talk to them about why you feel your numbers might be better. They are guessing anyway, so they will appreciate any constructive input you may provide, especially if they are being held accountable for the accuracy of their numbers.
Fifth Commandment: Establish A Forecast Accuracy Metric That Is Objective, Quantitative, And Manageable
Whichever metric you choose, it should:
• Accurately depict whether the forecast is getting better or worse
• Point to items that need the most improvement
• Measure accuracy at your procurement lead time (typically three months)
• Provide accuracy information by customer, branch, brand, product category, etc.
• Be automated so that it does not take days to compile that information. I would suggest a weighted forecast accuracy that will allow you to aggregate the data into one forecast accuracy number for any view you choose. It does not matter what the number is; what matters is setting a baseline against which improvement can be measured.
I once told what I thought to be a very funny joke to an Accountant who sat there staring at me as if I had just insulted his entire family
Sixth Commandment: Obtain Input From Different Stakeholders
The next step is to get input from various stakeholders. No one has all the information needed to make a forecast. You need input from Sales & Marketing, and Finance, etc., but always remember, they are not paid to forecast, you are. Salespeople, for example, are paid to sell, not to forecast. Therefore, to obtain input from them, we must educate them. Once they understand that they also have a stake in good forecasts, they will be more willing to contribute.
What is important is that you have a consensus, and everyone agrees on the numbers at both the upper and lower ends
Seventh Commandment: Review With The Participants The Dollar Forecasts At An Aggregate Level Each Month
If the dollars look good, there is no need to get into all the ugly SKU details unless someone has a specific issue to discuss. You should also be prepared to discuss the exceptions. Where were the big misses last month? Are the phase-ins and phase-outs properly forecasted? What promotions are coming up? Get Sales/Marketing to buy into the high-level dollars and then have them spend the rest of the time addressing “events” that the statistical package did not factor in. You can have 10 people looking at the same set of numbers, and all the 10 will come up with a different forecast. No particular one is any more appropriate than the other. This is where the Forecast Analyst rules.
There is no point in wasting anyone’s time reviewing statistically sound forecasts unless there is an upcoming “event” that needs to be considered. At the end of the day, what is important is that you have a forecast consensus, and everyone agrees on the numbers at both the upper and lower ends. You will know you have a consensus when you can go into a meeting and not hear “those numbers aren’t right.” That, more than anything else, will jeopardize the integrity of the entire process as well as the effectiveness of the Forecast Analyst.
Eighth Commandment: Understand Your Audience
You must work with Sales (who would rather be out selling), Marketing (who would rather be picking out all the pretty colors), Finance (who wonders why the one report is $.06 off from the previous report), and Production and Inventory Control (who will be using your forecast in its production planning). With the wide variation in personalities you encounter, you must be flexible and willing to adjust your communication style to your audience. I once told what I thought to be a very funny joke to an Accountant who sat there staring at me as if I had just insulted his entire family. It did not turn out to be the icebreaker I’d hoped for, because I did not adjust my presentation to the audience.
Ninth Commandment Involve P&IC Early On In The Process
Typically, nobody knows more about the product categories and SKUs than Production & Inventory Control associates. They will be the first ones to bring any product mix issues to your attention. Get them involved early on in the process so that the mix can be adjusted before the planning system starts sending out bad messages. Nothing upsets P&IC (Production & Inventory Control) more than coming in on a Monday morning and being told by MRP to make/buy all the wrong parts.
The high-level dollars may look fine, but this is where the rubber meets the road. Make sure you are spending enough time at the SKU level detail. An SKU forecast accuracy metric and exception-based reports will help you sift through the possibly unmanageable number of SKUs you are responsible for forecasting. If you are responsible for a couple of hundred parts, you may very well be able to forecast at a SKU level. But, if you have tens of thousands of parts, then you are probably forecasting at an aggregate level, thereby possibly overlooking the importance of forecasts at the SKU level.
I learned early on in my career that people are much more likely to help an idea succeed if they are part of the design process
Tenth Commandment Keep Your Eyes Open
There are countless webinars, seminars, and books that can help you stay on top of any developments in Demand Planning. IBF is one key resource that I have used over the years, but there are many more that can also help you develop your skills and processes. Don’t stagnate and fall behind what others are doing in the field. New ideas help stimulate other new ideas, which make the job interesting. Most new ideas cannot just be dropped in. You need to use your creativity to adapt them to your organization. This requires a very unique skill set that most people struggle with. This is why it is critical to implement any change as a “team.”
I learned early on in my career that people are much more likely to help an idea succeed if they are part of the design process. If you just try to push it through, I guarantee you will experience a lot of resistance In the end, I would say if you are a Demand Planner/Forecaster or hope to be one someday, stay focused on improving the forecast accuracy while making it fun for yourself and for others. Once the organization has the confidence in the forecast, it will be used to drive both short and long-term business decisions. Forecasts are the key input to any S&OP (Sales & Operations Planning) and/or IBP (Integrated Business Planning) process.
This article first appeared in the Fall 2011 issue of the Journal of Business Forecasting. To receive the Journal and other benefits, sign up for IBF membership today.