In the last blog we started our discussion on selecting the right forecasting and demand planning software to fit your organization’s needs. We started with first understanding your needs before you talk to vendors, and what to include in your list of requirements.
When it comes to forecasting software, it should be noted that popular doesn’t always equate to quality, and an ERP or an advanced planning system that claims to do it all may not have the forecasting tools you need. There are plenty of specialized and lesser-known products that deliver brilliant results. But how do you narrow them down, and what does something like that cost?
Most companies making the decision to move to a new forecasting/planning system are primarily driven by one or more of the following:
- Obvious forecast accuracy challenges
- A highly variable process that requires dedicated technology to support
- Detail-level forecasts required to support a more efficient manufacturing or distribution system
- Downstream inventory problems that are clearly driven by demand variability
- An attempt to drive more cooperation and ownership between sales and operations through a consensus-based forecast
Figure Out How Much You Can Save With Improved Forecast Accuracy
A mountain of research today shows that improving forecast accuracy delivers a high ROI. Improved forecast accuracy, when combined with software that translates the forecast into meaningful actions, will decrease inventory and operating costs, increase service and sales, improve cash flow and GMROI, and increase pre-tax profitability. [Ed: IBF has a forecast error calculator that will tell you how much your company can save for every percentage improvement in accuracy – this will help you decide how much to spend.]
From our experience, a 15% forecast accuracy improvement will deliver a 3% or higher pre-tax improvement
The forecasting error, no matter how small it is, has a significant effect on the bottom line. From our experience, a 15% forecast accuracy improvement will deliver a 3% or higher pre-tax improvement. In an IBF previous study of 15 US companies, we found that even one percentage point improvement in under-forecasting error at a $50 million turnover company gives a saving of as much as $1.52 million, and for the same amount of improvement in over-forecasting, $1.28 million.
These potential savings should help you decide what is worth paying when it comes to buying forecasting software. That leads us to our next question in our series of blogs to help you with demand planning and forecasting system of many company’s digital transformation:
What Is This Forecasting Software Going To Cost Me?
Cost can be determined by users, size, or complexity of your processes and data. You’ll pay either via a subscription or have an annual service contract that provides access to the software along with support. In addition to these annual or monthly fees, there is generally an up front consulting or installation fee that should include project design, configuration, assistance of data extracts and education. While sometimes this may be flat rate, it is usually on a per hour or per project phase basis. The scope of the project with key deliverables should be provided by the vendor before you start, and an indication of what it will cost.
Typical software costs anywhere from $5,000 to $30,000 per user
Typical software costs (assuming data repository has already been licensed) anywhere from $5,000 to $30,000 per user or very roughly about $2,000-$6,000 for every $100,000 of revenue. These are ballpark numbers and vary based on packages, features and other cost over and above basic systems.
Typical consulting service costs range from $110 to $220 an hour
Typical consulting service costs range from $110 to $220 an hour per resource depending on the collaborative process and you’’ll require anywhere from 600 to 2000 hours depending on the complexity (these costs exclude travel and other expenses). This information can be difficult to get from some vendors upfront because they know costs can add up when dealing with teething problems following installation.
Never rush into a deal. If you try to do things as quickly as possible you will likely miss the full scope of what you need and end up with a solution that fails to deliver the functionality you need, putting you in a position where you have to spend more money down the line. With all of this said, cost should be based on what you get out of it – it is important to understand what your benefits will be before you look at what vendors are charging. The benefits derived from an automated Demand Forecasting solution can be realized in both soft and hard cost savings, as well as overall process improvements.
Indirect Cost Savings From Forecasting Software
Forecast process automation will reduce the time spent on creating and managing the overall forecast process but rarely results in hard labor cost savings due to redeployment. There should be operational efficiency gains from planning and scheduling improvements resulting from more accurate and (sometimes more detailed) forecasts. More predictable financial planning resulting from a more accurate forecast as well as consensus planning driven by the collaborative process changes.
There should be operational efficiency gains from planning and scheduling improvements
Other soft benefits include saving time and energy by focusing resources on the right items. Do I really need to forecast hundreds of C items, or can they be grouped into more natural segments, allowing me to focus on the highest revenue/margin products and customers? This is soft, non-quantifiable benefit. What ROI would you put on having a system that captures the planning process and business intelligence of your teams? Most companies have this spread across hundreds of spreadsheets owned by just a few users – it is impossible to dollarize improvements like this, but they are valuable.
Hard Cost Savings From Forecasting Software
The reduction in downstream finished goods inventory resulting from forecast accuracy improvements provide a one-time saving, as well as recurring savings arising from reduced carrying costs. In a pure make-to-stock or distribution company, the downstream inventory reduction could range from 10% to 20% since forecasting inaccuracies typically drive around 75% of the required safety stock.
Forecast accuracy can translate to increased revenue of 0.5% to 3% with improved inventory availability or demand shaping capabilities
Many companies are leaving money on the table with lost sales or poor service levels. Forecast accuracy can translate to increased revenue of 0.5% to 3% with improved inventory availability or demand shaping capabilities. Total annual direct material purchase, along with logistics related expenses arising from demand variability, can see direct improvements of 3% to 5%. We can also benefit from a 20% reduction in airfreight costs.
It is important to understand these average savings amounts and you should determine what savings you believe you can drive with technology. Sometimes you need to know what finance and executive leadership anticipate in terms of benefits – you need to be on the same page in terms of expectations. It is here that many software providers can shed some light on what is realistic based on past implementations (keep in mind they are trying to sell you a product). Do your own analysis and reach a consensus with any key people in your company before signing on the dotted line.
When To Expect A Return On Investment
Most technology should reasonably have a payback in less than 24 months with many showing ROI in under 18 months. If you’re looking at a particular solution and the numbers are not adding up, you may consider a less expensive solution that meets your company size, and reconsider some of your functionality requirements. Remember not to settle and you just may want to keep looking for other providers that will not only give what you need but also at the price you can afford, complete with the benefits you want. Shop around – there’s a lot out there.
Which brings us to the next question: how do you know you are getting everything you need, and should you consider a third party to help you in this journey? Subscribe or check back soon for the next blog and I’ll answer this question.
I and other S&OP leaders will be discussing this topic and more at IBF’s Leadership Forum in Orlando on October 17, 2018. Designed for leaders in planning, forecasting and S&OP, it’s the best of its kind, and is designed to help managers with implementation and management of people, process and technology. It’s a great event – you can see the schedule here.