Why Forecast?

What is the point of Forecasting?

This is a question asked by those who perceive no benefit or doubt the accuracy of the forecasts that they receive and sometimes, by the very people who are tasked with creating the predictions in the first place.

Of course, everyone creates, receives and uses forecasts, from the weather for today to the delivery time of yesterday's on-line order or from the latest expected pandemic infection rate to the overnight election results. You might be driving up to a traffic jam and wondering how long the delay will be or watching the last minutes of a tight sporting match and considering the likely result. So, we all forecast and often without realising or questioning it but formal, structured forecasts are business activity that can create very strong opinions.

Business forecasts abound. There are forecasts received from Customers to forecasts created for the City. There are forecasts from Sales & Marketing, Purchasing, Human Resources, Manufacturing, Inventory, Distribution, Finance and many more. These forecasts can be created from every hour to but once a year and storing, comparing and determining the best and worst is often difficult if not downright impossible. The Demand Forecast cycle might take a Month to produce, be based on biased data from another source and then be roundly abused or ignored by the receivers in Production... so why bother?

Demand Planning

Demand Planning is typically a process that creates a Demand Forecast that is then used by Buyers to create a Purchase Plan and Incoming Supply Plans, Manufacturing to create Capacity and Production Plans, Distribution to create Storage and Logistic plans, Marketing to update Product Introduction Plans, Sales to review against their Promotion Plans and Finance to create and validate against Revenue, Cost and Margin Plans.

In its most basic usage, a Demand Plan presents an expectation of what Customers will want (see point 2 in the diagram) but a Demand Forecast can do so much more! Imagine a Demand Forecast that can inform not just how many products need to be made but instantly advise the bias of Sales and Marketing and the trending accuracy of your last two Budgets as well as help define new production lines and propose locations for extra distribution centres.

In a corporate structure where planning is centre stage the Demand Plan will be created by experts who live and breathe your company data and that of your competitors. A sophisticated and innovative Demand Planning Team will be able to collect and manipulate the very latest data, collaborate with the most knowledgeable people in the business and forecast and re-forecast frequently and quickly.

Planning Maturity

How Mature is your company at forecasting? Do you have people, systems and processes that are compatible? Are your forecasts fast enough, accurate enough? used enough? Do you have a Planning Strategy? There are 4 basic stages of Planning Maturity:

• Basic: Low maturity and little planning awareness.
• Regular: Average maturity with growing planning awareness.
• Strategic: High maturity and good planning awareness.
• Innovative: Class-leading maturity with high planning awareness.

Find your Bias

Everyone has bias both conscious and unconscious and the same is true in your Forecasts. In planning, bias will be present in your forecast, for example the Marketing figures might be optimistic while Finances will be more pessimistic. Forecasts can also have structural bias - forecasts owned by Operations might be SKU orientated, Marketing by product group, Sales by channel, Finance by currency and so on.

Understanding bias will help you appreciate how well your Forecasts are created and consumed. Measure the accuracy and bias trends of you various forecast. How many Forecasts do you have? Who owns them? What bias do they carry? Calculate your Planning Maturity & create a Planning Strategy

The purpose of a Planning Strategy is to evaluate your maturity level and to improve it. The following areas of your business: People, Process, Technology, Information, Performance can be developed to increase maturity and enable your Company Vision. A Mature system and process requires mature resources and if your maturity is not fit for purpose, take the following steps:

1. Create a Planning Community (internal). Either build a department or create a collaborative team. Your Business culture should dictate the format but never be lip service - this journey really can transform everything.
2. Enable the Planning Community to gain greater understanding of Planning Principles & Learn Demand Planning skills. Discussion, Training, Brainstorm. Allow the Community to recognise the power and opportunities ahead.
3. Allow the Planning Community to understand (and shape) the Company Supply Chain Planning Strategy.
4. Make Planning part of The Corporate Culture. Bring the Planning Community representatives into the Board Room.
5. Become part of the Planning Community (external). Schedule visits with neighbouring companies and competitors. Go to conferences and write white papers. Become planning leaders.

Measure your Bias

Capture and archive your forecast data and then measure the various forecasts against actuals for accuracy and bias. Compare the Statistical to the Sales Forecast to the Demand Forecast to the Budget. Even better, capture the forecasts in their raw state (before any overrides are applied) as well as their final state as this will allow you to identify if adjustments are adding value not. Consistent Bias should be identified and managed either through eradication by education or, if that proves too difficult, by adjustment.

Why Forecast?

You Forecast to reduce uncertainty, predict future demand, gain maturity, remove bias and obtain significant benefits such as reduced excess inventory and increased responsiveness.

You Forecast to anticipate change by planning for potential futures whether environmental, competitor activity or simply life cycle management. Scenario planning can start with optimistic & pessimistic versions of your existing plans and develop into a specialist Predictive Team using latest data, technology and techniques.

You Forecast to increase communication between all departments and partners and increase knowledge in everything from production capacity, to future costs and revenues. You Forecast to derive and drive Company Strategy, to grow revenues and improve margins! That's why.

Articles in this series are:

Why Forecast?

How to Forecast?

When to Forecast?

What to Forecast?

Where to Forecast?

Who Forecasts?

If you have any questions, thoughts, additions, queries or contentions about Demand Planning, Oracle Solutions or even grammar reflections please get in touch.