Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
12Activity
0 of .
Results for:
No results containing your search query
P. 1
Seven Keys to Better Forecasting 11-02

Seven Keys to Better Forecasting 11-02

Ratings: (0)|Views: 510|Likes:
Published by api-3771917
Forecasting Techniques
Forecasting Techniques

More info:

Published by: api-3771917 on Oct 16, 2008
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

05/09/2014

pdf

text

original

 
Seven Keys to Better 
Forecasting
Mark A. Moon, John T. Mentzer, Carlo D. Smith, and Michael S. Garver 
44
S
ales forecast-
ing is a man-
agementfunction that compa-nies often fail to
recognize as a key 
contributor to cor-
porate success. Froma top-line perspec-
tive, accurate salesforecasts allow a
company to provide
high levels of customer service. When demandcan be predicted accurately, it can be met in atimely and efficient manner, keeping both chan-
nel partners and final customers satisfied. Accu-
rate forecasts help a company avoid lost sales or
stock-out situations, and prevent customers fromgoing to competitors. At the bottom line, the effect of accurateforecasts can be profound. Raw materials andcomponent parts can be purchased much morecost-effectively when last minute, spot market
purchases can be avoided. Such expenses can be
eliminated by accurately forecasting productionneeds. Similarly, logistical services can be ob-
tained at a much lower cost through long-termcontracts rather than through spot market ar-rangements. However, these contracts can only 
 work when demand can be predicted accurately.
Perhaps most important, accurate forecasting can
have a profound impact on a company's inven-tory levels. In a sense, inventory exists to provide
a buffer for inaccurate forecasts. Thus, the moreaccurate the forecasts, the less inventory that
needs to be carried, with all the well-understood
cost savings that brings. The ultimate effects of sales forecasting ex-cellence can be dramatic. Mentzer and Schroeter(1993) describe how Brake Parts, Inc., a manufac-turer of automotive aftermarket parts, improved
its
bottom line by $6 million per month after
Excellence in sales
forecasting can boost 
a firm 's financial health
and gratify customersand employees alike,
launching a company-wide effort to improvesales forecasting effectiveness. Nevertheless, firmsoften fail to recognize the importance of this
critical
management function. Our objective here
is to take what we've learned about sales fore-
casting from working with hundreds of compa-
nies, and summarize that learning into seven key 
focus points (summarized in
Figure 1)
that will
help any company improve its forecasting perfor-mance. Although no management function can
be reduced to seven keys, or 70 keys for thatmatter, our hope is that the ideas presented here will inspire senior management to look closely attheir own sales forecasting practices and recog-
nize opportunities for improvement.
Key #1: Understand What Forecasting Is,
and What It Is Not
 The first and perhaps most important key to bet-ter forecasting is a complete understanding of 
 what it actually is and-of equal importance-
 what it is not. Sales forecasting is a management
process, not a computer program. This distinctionis important because it affects so many areasacross an organization. Regardless of whether a
company sells goods or services, it must have aclear picture of how many of those goods orservices it can sell, in both the short and long terms. That way, it can plan to have an adequate
supply to meet customer demand.Forecasting is critical to a company's produc-tion or operations department. Adequate materi-
als
must be obtained at the lowest possible price;adequate production facilities must be provided
at the lowest possible cost; adequate labor mustbe hired and trained at the lowest possible cost;and adequate logistics services must be used to
avoid bottlenecks in moving products from pro-ducers to consumers. None of these fundamentalbusiness functions can be performed effectively  without accurate sales forecasts.
Business Horizons /September-October 1998
 
Many companies consider the most important
decisions about forecasting to revolve around the
(
selection or development of computer softwarefor preparing the forecasts. They have adopted
the overly simplistic belief that "If we've got goodsoftware, we'll have good forecasting." Our re-
search team, however, has observed numerousinstances of sophisticated computer systems put
into place, costing enormous amounts of timeand money, that have failed to deliver accurate
forecasts. This is because system implementation
has not been accompanied by effective manage-
ment to monitor and control the forecasting pro-
cess.
One company we worked with has an excel-
lent computer system with impressive capabilitiesof performing sophisticated statistical modeling of seasonality and other trends. However, the sales-
people, who are the originators of the forecast,
use none of these tools because they do not un-
Figure 1The Seven Keys to Better Forecasting
Seven Keys to Better Forecasting
45
Keys 
Issues and Symptoms 
Ac ions 
Results 
Understand what 
 forecasting is 
and is not.
Computer system as focus,rather than management
processes and controls
Blurring of the distinction
between forecasts, plans, and
goals
Establish forecasting group
I
mplement management
control systems before
selecting forecasting software
Derive plans from forecasts
Distinguish between forecasts
and goals
An environment in whichforecasting is acknowledged
as a critical business function
Accuracy emphasized andgame-playing minimized
Forecast demand, plan supply.
Shipment history as the basis
for forecasting demand
"Too accurate" forecasts
Identify sources of information
Build systems to capture key demand data
I
mproved capital planning
and customer service
Communicate,
cooperate,
collaborate.
Duplication of forecastingeffort
Mistrust of the "official"
forecast
Little understanding of the
i
mpact throughout the firm
Establish cross-functional
approach to forecasting
Establish independent forecastgroup that sponsors cross-functional collaboration
All relevant information used
to generate forecasts
Forecasts trusted by users
Islands of analysis eliminated
More accurate and relevant
forecasts
Eliminate islands 
of analysis.
Mistrust and inadequate infor-
mation leading different users
to create their own forecasts
Build a single "forecasting
infrastructure"
Provide training for both users
and developers of forecasts
More accurate, relevant, and
credible forecasts
Optimized investments in
information/communication
systems.
Use tools wisely.
Relying solely on qualitative
or quantitative methods
Cost/benefit of additional
information
Integrate quantitative andqualitative methods
Identify sources of improved
accuracy and increased error
Provide instruction
Process improvement in
efficiency and effectiveness
Make it important.
No accountability for poor
forecasts
Developers not understanding
how forecasts are used
 Training developers to under-
stand implications of poor
forecasts
Include forecast performancein individual performance
plans and reward systems
Developers taking forecasts
seriously
A striving for accuracy 
More accuracy and credibility
Measure, measure,
measure.
Not knowing if the firm is
getting better
m
Accuracy not measured at
relevant levels of aggregation
Inability to isolate sources of forecast error
Establish multidimensional
metrics
Incorporate multilevel
measures
Measure accuracy whenever
and wherever forecasts are
adjusted
Forecast performance can beincluded in individual perfor-
mance plans
Sources of errors can be
isolated and targeted for
i
mprovement
Greater confidence in forecast
process
 
4
6
REs
The ideas presented in this article are drawn from a program of rethat has spanned more than 15 years.
Phase
1
began in 1982 withsurvey of 157 companies that explored the techniques they usedd
to
cast.
Ten
years later, under the sponsorship
of AT&T
Network 
Systems,
the survey was replicated and expanded in
Phase
2
to explore not onlytechniques but also the systems and management processes used by
companies.
Phase
3,
conducted between 1994 and 1996, was sponsoby a consortium of companies consisting
of AT&T
Network -Systems,
Andersen, Consulting, Anheuser-Busch, and Pillsbury. It took the form' of a
benchmarking study that consisted
o
in-depth analysis of 20 companies:'.
Anheuser-Busch, Becton-Dickinson, Coca-Cola, Colgate-Palmolive,
Fed
-
eral Express, Kimberly Clark, Lykes Pasco, Nabisco, JCPenney,
Pillsbury„
ProSource, Reckitt Colman, Red Lobster,
RJR 
Tobacco, Sandoz, ScheringPlough, Sysco, Tropicana, Warner Lambert, and Westwood Squibb.
Finally,' -
Phase
4
has been conducted since 1996 and consists of 
a
series
of fore-
cast audits: The forecasting practices of seven companies-Allied Signal,
Du
Pont
Agricultural Products Canada, Eastman Chemical, Hershey
Foods
USA, Lucent Technologies, Michelin North America, and Union Pacific ..
Railroad have been studied so
far
in this phase and compared to those
of the 20 benchmarked
companies.
The references to this research arelisted at the end of this article.ormal studies, the learning
nted by
more
than 20 years of g with a large number of major
R g
casting
systems
and processes.firsthand observation of whatsting in companies, large;
d services and that are "
or retailers.
In additign io
presented here i
experience to c
corporation.Our ideas
actually 
and s
derstand them and have no confidence
in the
numbers generated. As a result, their forecasts arebased solely on qualitative factors and are oftenvery inaccurate. A similar case is a technology-based company that has created another highlysophisticated forecasting tool, yet the salespeoplecontinue to underforecast significantly becausetheir forecasts have a direct effect on their sales
quotas. Both of these examples show how some
companies focus on forecasting systems ratherthan forecasting
management.
On the other hand, some companies have
been more successful in their efforts by
recogniz-
ing the importance of forecasting as a manage-ment process. Some have organized independent
groups or departments that are responsible for
the entire forecasting process, both short- andlong-term. One large chemical company
has
formed a forecasting group not associated witheither marketing or production. It has ownershipand accountability for all aspects of forecastingmanagement, with responsibility not only for thesystems used to forecast but also for the numbersthemselves. The group accomplishes its missionin several ways: providing training in the meth-ods and processes throughout the company; de-signing compensation systems that reward fore-
cast accuracy; and facilitating communication
among sales, marketing, finance, and productiondepartments, thereby improving overall forecast-ing effectiveness. Recognizing the importance of forecasting, this firm has put an organization in
place to manage the process, not just to choose
and manage a system.Another way in which companies confusewhat forecasts are and what they are not is byfailing to understand the relationship betweenforecasting, planning, and goal setting. A salesforecast should be viewed as an estimate of whatfuture sales might be, given certain environmen-
tal conditions. A sales plan should be seen as a
management decision or commitment to what thecompany will do during the planning period. A
sales goal should be a target that everyone in the
organization strives to attain and exceed.Each of these numbers serves a differentpurpose. The primary purpose of the sales fore-cast is to help management formulate its sales
plan and other related business plans-its com-
mitment to future activity. The sales plan's pur-pose is to drive numerous tactical and strategicmanagement decisions (raw material purchases,human resource planning, logistics planning, and
so on),
realistically factoring in the constraints of 
the firm's resources, procedures, and systems.The sales goal is primarily designed to providemotivation for people throughout the organiza-tion in meeting and exceeding corporate targets.Whereas the sales forecast and the sales plan
should be closely linked (the former should pre-
cede and influence the latter), the sales goal maybe quite independent. The objective of those
who receive a sales goal should be to beat that
goal. It
can be developed based on a sales fore-
cast, plan, and motivation levels. However, be-
cause forecasters should strive for accuracy, it is
not appropriate for a forecast to be confused
with the firm's motivational strategy.
It is particularly problematic when sales fore-casts and sales goals are intertwined, because thismixture leads to considerable game playing, es-pecially involving the sales force. If salespeople
believe that long-term forecasts will affect the
size of the next year's quota, they will be stronglymotivated to underforecast, hoping to influencethose quotas to be low and attainable. Alterna-tively, as one salesman at a parts supply companyput it, "It would be suicide for me to submit aforecast that was under my targets." In bothcases, because goals and forecasts are so inter-
t
wined, salespeople are motivated to "play
games" with their forecasts. There is a built-indisincentive to strive for accuracy.
Some companies have expressed a reluctanceto "manage to different numbers," suggesting thatwhen the forecast and the goals differ, it createsconfusion and lack of focus. The reaction to suchperceived confusion is to develop inaccurateforecasts that can affect performance throughout
Business
Horizons / September-October 1998

Activity (12)

You've already reviewed this. Edit your review.
1 hundred reads
1 thousand reads
Mike Ford liked this
Pratibha Pandey liked this
aduraidi liked this
Raghu Nayak liked this
DellComputer99 liked this
Brooklyn Vijay liked this
Rajesh Verma liked this

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->