“I hate this part of my job -there’s no way to be right.” I’d had the same thought many times.
I was talking to a fellow demand planner, who was under pressure to provide more accurate forecasts. It was a no-win situation.
“So stop trying to be right”, I told her. “Present your forecast, document and clearly outline your assumptions and ask for feedback from your team. Let the group own the decision.”
“I’ve never thought of that”, she replied. “It would take the pressure off me and get the team to collaborate.”
Which is exactly what I wanted her to see.
Being Right Is A Trap
It’s a standing joke that in forecasting you are either wrong or you are lucky. Yet there is often pressure on both salespeople and demand planners to provide accurate forecasts, especially for revenue and production planning. But forecasting is an inexact process. If we were correct all the time, we would not call the work forecasting, but prediction.
In my experience a large part of being a demand planner is educating people about what is and is not possible to forecast. We also need to help set reasonable expectations around what can be accomplished by forecasting.
How Being Wrong Can Be Good
“We missed our forecast again. Why aren’t our forecasts improving?”
I hear this often. I see 2 basic causes for this.
1 – We don’t understand the data that we are using to forecast, usually because we haven’t taken the time to analyze it properly. Do we understand the seasonality and trends in the data? Have we calculated the variability? Have we identified the items that are truly unforecastable or that have such extreme seasonality that they have to be handled manually, and removed these from our forecast models?
Demand planning is mostly about data, and the more we are familiar with what our data is telling us about the business overall and the item performance in specific, the more likely we are to be able to forecast accurately.
2 – We are not close enough to our customers to understand how they plan, so that we can align our forecasting with their planning. It’s not enough to rely on the salespeople talking to their buyers; we need the demand planners talking to the replenishment, planning, logistics and customer service teams on the customers’ side as well. We need a variety of perspectives on our customers’ business and planning practices in order to be able to align our process to support them.
So how can being wrong be good? Each time we miss a forecast we need to reassess our interactions with our customers and our analysis of our data. At the same time we need to be realistic and recognize that sometimes forecasts are wrong due to unusual circumstances: hurricanes strike, rivers flood, containers fall of ships or get lost, dockworkers strike and freight ships to the wrong locations. Some causes are truly beyond our ability to predict, and therefore to forecast.
Forecasts Don’t Have To Be Right To Be Useful
In my opinion one of the major contributions we can make to our business is to help people understand the value of forecasting. We need to continually remind people that a forecast is not going to be 100% accurate, and that it does not need to be 100% accurate to be useful. We need to help the sales teams and the leadership see that even inaccurate forecasts can be useful.
How to do we do this?
Document, Document, Document
This is an area where I believe most demand planners are deficient – including myself. We can’t learn how to improve our forecasting unless we consistently analyze our failures, that is, understand what drives our misses. Unless we understand what caused us to miss a forecast, we will likely repeat the error. This analysis can be tedious and time consuming, but it is also where we can add the most value.
An example from my own current work is the forecasting for an item that is selling better than either I or my customer predicted. We are both struggling to understand how this particular item has outperformed all our forecasts for the past 3 months, and what we should forecast for the coming months. By documenting what we have learned we now know the following:
- Last year we had significant supply issues, so our sales history – which is driving our forecasts – is severely skewed.
- The item is being promoted this year, and this drove additional sales volume.
- Comparable products are priced higher this year, while this item has the same retail as last year.
- The customer is carrying higher inventory levels this year.
This information will help us understand what is happening this year, and will help us improve our forecasts for next year. It can also help us better understand the interaction of in-stock, promotional activity, competitive pricing and monthly inventory levels.
Documentation Does Not Equal Excuses
Even if we can document the causes of our forecast misses, this does not excuse us from improving our forecasts. Production efficiency, fill rates, on-time delivery and customer satisfaction all depend on reliable forecasts. The purpose of documentation is to learn how to improve our forecasting practices, not to excuse poor performance.
So What Should I Document?
Here’s what I recommend for regular reporting:
- Weekly sales and comp sales (customer POS)
- Weekly shipments
- Monthly unit consumption vs. forecast
- Daily short shipments
- Promotions (item, quantity sold vs. non-promotional periods, time period and promotional pricing and rebates)
- Monthly forecast misses in units
For your monthly S&OP meetings I would also add:
- Risks – factors that can restrict sales (i.e., supply issues, raw material shortages, delays in product availability, etc.)
- Constraints – production capacity, labor shortages, packaging issues, etc.
- Assumptions – your overall assumptions behind your planning; is the business growing? Has the seasonality shifted? Is the customer carrying more or less inventory than in previous years?)
- Opportunities – changes that can add incremental sales (new items, promotional opportunities, product expansions to more locations, decreased competition, rebates, etc.
Document these in detail and review them each month so you can track their impact on item performance.
All Plans Are Wrong – Some Are Useful
The more we can shift the focus from forecasts being “right” or “correct”, and emphasize what we can learn from our incorrect forecasts, the more we can learn about how to properly forecast our business. As demand planners our task is to present the most realistic picture of future demand, together with the risks, assumptions, constraints and opportunities that are contained within our numbers. And by educating our fellow team members how to make the most of “bad” forecasts, we can add significant value to our company’s planning processes.
For world-leading insight into forecasting and planning from industry leaders, join us in Orlando for IBF’s Business Planning, Forecasting & S&OP Conference from October 20-23, 2019. Learn from directors and SVPs of planning and supply chain at the world’s biggest and most innovative companies, and hear our keynote, Garry Ridge, CEO of WD-40, share his thoughts on leadership, employee engagement and more.