Mere mention of the word "forecast" has been known to cause stress for planning, operations, and sales people alike. Forecasting is part art, part science, sometimes confusing, and often misunderstood. It does, however, serve an extremely important function in business.
Through forecasting, businesses have the opportunity to build action plans that will enable them to provide the required level of customer service while managing inventory levels and operations plans that optimize costs. Sounds easy, doesn't it? This is where we find that (art + science) x confusion = misunderstood. Just like math, forecasting has a few rules that, when heeded, can alter the equation and result in success.
Rule #1. The forecast is always wrong. Are you thinking, "If the forecast is always wrong, how can it be useful?" Therein lies the lesson of Rule #1--it is more important to focus on continuous forecast improvement than creation of the perfect forecast.
Rule #2. The higher the level of aggregation, the more accurate the forecast becomes. Each business should determine what levels of forecast are truly useful to the business and focus on improving those areas. This brings us to the lesson of Rule #2--building the perfect forecast sometimes costs more than the gains you receive from having the perfect forecast. Focus on the levels that are most useful to the business.
Rule #3. The further out into the planning horizon we forecast, the less accurate the forecast will be. This is because more information about demand is made available as the demand period draws closer. This new information can be used to improve the quality of the forecast, thereby making the forecast more accurate in the nearer horizon. New information is the key to the lesson of Rule #3. Regular review and revision of the forecast to include new information is a necessity to create the continuously improving forecast.
Rule #4. All forecasts are not alike. Not all markets behave in the same manner, and within markets, some products have additional variability. New product start-ups, promotional products, and substitute products are difficult to forecast accurately because they have little or no history, conservative market expectations, or other unknown factors beyond our control. Lesson of Rule #4: be aware that operational flexibility is necessary when working with less forecastable products.
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