It’s an important step in achieving company goals.
As we start a new calendar year, most businesses are thinking about the New Year to come in the form of a forecast of sales for the next 12 months. In many cases, the forecast is relatively simple and informal. “Next year will be like last year”, “We’ll do 5 percent better next year”, or “We’ll sell a little more of product A but less of product B.”
Companies that don’t do a more detailed forecast than that are greatly limiting their ability to marshal their resources to meet customer demand effectively. They will likely be caught with too little or too much inventory at some point, the need for expediting or overtime, and some disappointed customers and lost sales.
It’s not that a forecast is a cure-all. But it is an essential tool for success in your market. There’s a great piece of dialog in Alice in Wonderland by Lewis Carroll. Alice asks: “Would you tell me, please, which way I ought to go from here?” The cat answers: “That depends a good deal on where you want to get to.” When Alice says “I don’t much care where”, the cat replies “Then it doesn’t matter which way you go.”
Without a direction – a strategic plan that sets the company’s goals – and the forecast that details how you’re going to get there, there’s no telling where you’ll end up. “. . . so long as I get somewhere,” Alice adds as an explanation. “Oh, you’re sure to do that,” says the Cat, “. . . if you only walk long enough.” If you don’t care where your business ends up, just press on and hope for the best. But I think most business owners and executives want a better plan than that. And a good forecast is an essential ingredient to getting there. The forecast can identify where action is needed to meet the goals, pointing to sales and marketing effort needed to close the gap. Once the demand plan (forecast modified by the aforementioned actions) is in place, the supply side knows what is required of them in order to produce or procure the products, when, and how many to satisfy the customer demands. Everyone is working together to achieve the same objectives.
Forecasting is a difficult and thankless process for most of us. Predicting the future is difficult enough but then having your prediction be proven false, openly, as it almost always will be, is embarrassing and possibly damaging to the business. Nevertheless, a forecast is a necessity and companies really need to put the effort into building as a good a forecast as possible.
A forecast is (or should be) a living thing. It’s not sufficient to create your forecast in December and lock it in place for the year. The forecast should be reviewed and extended on a monthly basis, as soon as you have another month’s worth of actual demand data available. Rebuild the forecast for the next twelve months (at least), measure the error (this month’s actual compared to the forecast for this month), try to determine why it’s different and whether that difference is likely to recur, and perhaps take corrective action to bring demand into agreement with the forecast in the coming months.
Finally, there are techniques for maintaining desired customer service levels in spite of forecast errors, primarily involving safety stock, but that’s a subject for another day. But once again, the forecast is a critical part of that strategy.
You may not like doing forecasting. You know they will not be 100 percent accurate. But they are important to achieving your company goals. You do have specific, measurable and achievable company goals, right?
Reprinted from Portsmouth Herald / Seacoastonline.com – December 23, 2014