Abstract
In the globalized world and with markets as competitive as the ones we face today, companies are forced to seek greater efficiency in their business processes. A fundamental business process in companies is to forecast the demand for their products or services to establish the sales and operation plan of the company.
The supply-oriented business processes (purchasing, production and distribution) are focused on guaranteeing the availability of services or products with efficiency and at the best cost and their performance depends on the marketing and sales areas forecasting the best possible demand.
In this sense, a topic that is currently of interest is how to forecast with more certainty the demand for products or services.
General view
More and more companies are redefining and formalizing the forecasting process to carry out better sales and operation planning and, therefore, better financial performance. It is not new to anyone that the challenge is to achieve availability in the necessary quantity and when the market requires it.
To deliver a better level of service profitably, companies need to develop a culture of prediction and planning. When a bad forecast is made, planning breaks down and all areas of the company become inefficient.
This can be directly observed in the poor financial performance of the company. Denied sales, excess inventory of products that customers do not require, margin reduction by selling at discounts to achieve objectives, higher costs in purchasing, production and / or distribution to react to emergencies, etc.,… these are the symptoms.
Forecasting demand with good accuracy is usually not easy. There are no recipes for how to do it and each company has to determine the best way to prepare its forecasts.
The topic of forecasting is extensive and requires ad hoc techniques for each situation. For example, forecasting fast moving products requires different techniques than forecasting slow moving or intermittent demand products.
Forecasting demand for new products requires different considerations.
On the other hand, on certain occasions it is convenient to forecast by grouping similar products and on certain occasions by sales channel or brand.
On certain occasions the use of statistical tools is very helpful and on other occasions it is better to prepare forecasts in collaboration with clients.
If planning success depends on accurate forecasts, then it is a good idea to review how forecasts are made in your company and determine if accuracy can be improved.
A good start to improving forecasting accuracy is by understanding the factors that influence demand behavior and having a better idea of what the different forecasting techniques offer.
What are Forecasts?
The forecast is not a prediction of what will inevitably happen in the future. A forecast is information with a certain degree of probability of what could happen.
The probability of success of the financial plan is a direct function of the forecasting. In other words, the result of the planning and operation of the company is directly linked to the accuracy of the forecasts.
For business forecasts, the best practices suggest a combination of quantitative and qualitative techniques, that is, statistical forecasts as a basis to start the validation process of the final forecasts.
Statistical forecasting techniques have been found to be very useful as they very accurately quantify certain components of demand such as trends, seasonal patterns or events.
Human beings have the ability to analyze many variables that would be very difficult to establish in a statistical model, however, they are limited in the number of forecasts they can analyze, it is inconsistent and additionally, on many occasions, the estimates show biases motivated by state influences. mood, optimism or even influences derived from pressure to achieve the company's financial plan.
Forecasting and Planning: Critical Business Processes
The role of managers and managers is to manage the elements of the business that lead to the achievement of objectives. In one way or another, managers "have a feeling" what will happen. However, in most cases, their decisions are much better if they are supported by figures quantified by a statistical tool, since in this way they start from a more conservative base figure.
On the other hand, it is increasingly necessary to differentiate the demands of customers for the same product, which requires more time and arguments.
What is the cost of bad forecasts?
We are guaranteed that the forecasts will not be 100% accurate and that, in addition, the deviation from the forecasts has an implicit cost, whether the forecasts were high or were low compared to reality.
The fundamental point in forecasting is to be consistent and achieve the least deviation from the objectives:
i) Forecasting above demand has among its consequences excess inventory, obsolescence, margin reduction to promote its sale.
ii) Forecasting below demand has among its consequences buying and producing something that was not planned more expensively, even loss of sale and margin if we do not react in time.
Forecasting requires information from planning. Whoever makes the forecasts should consider the planned activities such as promotions, price changes or even if there was some extraordinary event in recent history that could strongly deviate the estimates. Leaving this to memory will surely cause our forecasts to be less accurate.
Currently, companies are implementing some way to document the history to measure the impacts of events and consider them or not as part of the forecast if they were to take place again.
The conclusion of a study carried out last year by the Institute of Business Forecasting (IBF) entitled "Why Forecasting?" (www.ibf.org) suggests that “today a more formal process of forecasting is unavoidable regardless of what type of business and / or industry the company is located or what function it performs. There is always a need to estimate the future on which to build a plan ”.
This study also establishes that different areas of the company establish different plans based on the forecasts:
- The marketing area requires forecasts to determine what new products or services to introduce or discontinue; in which markets to have a presence or to leave; what products to promote, etc. The sales area requires forecasts to establish quotas or sales targets The supply chain area requires forecasts to plan production, supply and logistics plans The finance area requires forecasts to do better budget of income and expenses.
Finally, the study concludes that although it is difficult to quantify the benefits of business forecasting, in the supply chain there are certain components that can be quantified, showing the advantages of it. One way to measure these benefits is to consider what the loss would have been if the forecast was not accurate. Another way to measure them is by questioning how much the profit (or savings) would have been with improved forecasts.
How to Forecast?
Many companies are now turning to the use of statistical forecasting packages and establishing a more formal process in planning sales and operations.
Before thinking about a statistical forecasting tool or software, it is convenient to understand aspects related to the forecasting process:
A) How statistical techniques work.
B) How much data is required.
C) How the impact of forecast deviation can be measured.
D) How to forecast hundreds of products faster and more accurately.
E) What is the suggested profile of the person making the forecasts, etc.
This will allow you to assess whether you have an opportunity to improve your process through the use of any tools or training. Today, companies have the possibility of breaking cultural paradigms regarding forecasting. Making good demand forecasts is a process that adds value since it is closely related to making decisions that impact the financial performance of the company.
Forecast accuracy as a key performance indicator
Maturity is required to establish forecast accuracy as a key indicator as there will always be deviations between forecast and demand. It is necessary to document and learn from what were the reasons that led us to so much deviation in an estimate. Only through measurement do we obtain a reference that can indicate our performance and / or take immediate action to correct the course.
Best Practices in Forecasting
Best practices suggest a combination of statistical forecasts with experience forecasts. This practice helps to reduce the effects of influence of the plan, emotional influences and also awhen there are many products, automatic statistical algorithms determine a best estimate and not just a simple average.
An improvement in the accuracy of the forecasts can be confirmed when each month the results of the objectives are being achieved. This is also confirmed when the different areas are aligned based on a consensus forecast.
About statistical tools there is a very good variety of software for making statistical forecasts. Statistical packages work very automatically and are inexpensive.
Sales and Operation Plan. (PVO or S&OP)
A good forecast is useless if the supply areas are not aligned to deliver the required products in a timely manner. To avoid this, a formal Sales and Operation Planning process is established for the company called S&OP (Sales and Operations Planning) or also known as the PVO (Sales and Operation Planning) board.
In a simple way, the S&OP process consists of a monthly meeting that, based on the forecasts and information from the areas close to the demand, defines the objectives and activities in a consensual manner. The meeting is held after having previously held meetings with different managers on new products, active products and related aspects of supply.
conclusion
The forecasting process is key to the planning and operation of the company. Decision-making and company profits can be better if companies have good forecasts.
Article prepared in coordination with Corporate Resources Management, SC, the firm of experts and consultants in the development and implementation of business strategies and in training and certification programs for human capital.
