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Ment Zer

Ment Zer

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Benchmarking SalesForecasting Management
John T. Mentzer, Carol C. Bienstock, and Kenneth B. Kahn
S ales forecast-ing permeatesall aspects ofbusiness operations.In fact, most businessplans are predicatedon sales forecasts.Marketing plans usu-ally involve projectedproduct changes,promotional efforts,channel placement,and pricing--with consideration of the effect allthese have on demand. Sales management typi-cally sets goals for the sales force and motivatesthe salespeople to exceed those goals----concernsthat require accurate demand estimates. Financeis charged with projecting cost and profit levelsand capital needs, all based on a given salesforecast. Production must concern itself with twovery different forecasts: a long-term one for plan-ning the development of plant and equipment,and a short-term one for the production planningschedule. Because logistics is responsible formoving products to specific locations, forecastsare needed at the product-by-location level.Although virtually every business functionneeds accurate sales forecasts, very little attentionhas been devoted to examining how the forecast-ing function should be managed. Most studiesconcentrate largely on the techniques used, withlittle attention to the systems or managerial ap-proaches involved. Only two known studies havebroadly examined these latter issues. In a surveyof 208 companies, Mentzer and Kahn (1997)found that many system disconnections still existbetween the forecasting function, the informationneeded to produce accurate forecasts, and theforecast users. Four management approacheswere characterized:1. the
independent
approach, in which eachfunctional department involved in the sales fore-casting process develops its own forecasts for itsown internal uses, independent of all other de-partments;2. the
concentrated
approach, in which onedepartment is assigned the responsibility for de-veloping the sales forecasts and all other depart-ments must use the results;3. the
negotiated
approach, in which eachfunctional area makes its own independent fore-cast, but representatives from each area get to-gether every period to reach negotiated finalforecasts; and4. the
consensus
approach, in which a com-mittee develops the forecasts, with representa-tives from various functional areas and one per-son in charge.Discussing the relative advantages and dis-advantages of each of these, Mentzer and Kahnconcluded that the state of sales forecasting man-agement was generally improving. More compa-nies, they found, were using the the negotiatedand consensus approaches rather than the inde-pendent approach.In a second study, Moon, Mentzer, Smith, andGarver (1998) used the experiences garneredfrom numerous companies to develop seven keymanagerial perspectives to guide sales forecastingmanagement.* This article serves as a companionpiece to that study. Whereas the 1998 researchprovided overall managerial guidelines, thepresent benchmarking study illustrates the specif-ics necessary to improve on each of four dimen-sions to achieve the "Seven Keys."To address the issue of how to manage thesales forecasting function effectively, we under-took this research project to study the best prac-tices in the field. We selected 20 companies withhistories as leading financial and/or market share
*Editor's Note.. See "Seven Keys to Better Forecasting,"
Business Horizons,
November-December 1998.
48 Business Horizons / May-June 1999
 
performers, though not necessarily top perform-ers in sales forecasting. To understand the varia-tions in sales forecasting management perfor-mance in successful companies, our aim was toinclude firms at various levels of the supplychain, with varying degrees of success in fore-casting sales. The selection process resulted insite visits with 15 manufacturers, three distribu-tion firms, and two retailers: Anheuser-Busch,Becton-Dickinson, Coca-Cola, Colgate Palmolive,Federal Express, Kimberly Clark, Lykes Pasco,Nabisco, JCPenney, Pillsbury, ProSource, ReckittColman, Red Lobster, RJR Tobacco, Sandoz,Schering Plough, Sysco, Tropicana, Warner Lam-bert, and Westwood Squibb.Company analysis began with a request forany documentation of the sales forecasting man-agement process, including reports, system and/or management procedures, and informal proto-cols. Once this information was analyzed, aninterview schedule was arranged with anyone inthe company affiliated with sales forecasting,including developers and users of the sales fore-casts. The taped interviews were conducted on-site by the research team, with two interviewersin each interview to ascertain reliability, and thetranscripts were analyzed for sales forecastingmanagement content.The in-depth, benchmark analysis of these 20companies led to the conclusion that sales fore-casting management can be divided into fourdimensions: Functional Integration, Approach,Systems, and Performance Measurement. Withineach dimension, four stages of effectiveness wereidentified. Using the characteristics of each stagewithin each dimension, it is possible to deriveguidelines to enable companies to progress to~ward a higher level of sophistication for eachforecasting dimension.Ahhough discussed separately, it should bekept in mind that all four dimensions are inextri-cably intertwined, and discussion of one willsometimes refer to aspects of another. Moreover,although we refer to companies
in
certain stages,it is important to remember that a particular com-pany can be in one stage on a certain dimensionand in a completely different stage on another.Progress in one, however, is usually related toprogress in the others. Finally, no companieswere at Stage 4 on all four dimensions; all hadroom for improvement.
FUNCTIONAL INTEGRATION
E ffectively managing sales forecastingwhen it comes to Functional Integrationrequires implementing what we callForecasting C *
communication, coordination,
and
collaboration.
Communication encompassesall forms of written, verbal, and electronic
inter-
action among the functional business areas--marketing, sales, production, finance, and logis-tics (including purchasing). Coordination is theformal structure and required meetings betweentwo or more areas. Collaboration is an orientationamong the areas toward common goal settingand working together. Figure 1 provides a sum-
Figure 1Forecasting Benchmark Stages: Functional Integration
Major disconnections between marketing, finance, sales, production,logistics, and forecasting• Each area has its own forecasting effortNo accountability between areas for forecast accuracy• Coordination (formal meetings) of marketing, finance, sales, pro-duction, logistics, and forecasting• Forecasting located in certain area (typically operations or market-ing), which dictates forecasts to other areasPlanned consensus meetings, but dominated by operations, finance,or marketing--no real consensus reachedPerformance rewards for forecasting personnel only, based on contri-bution to department in which forecasting is housed• Communication and coordination between marketing, finance, sales.production, logistics, and forecasting• Existence of a forecasting champion• Recognition that marketing is a capacity-unconstrained forecast andoperations is a capacity-constrained forecast• Consensus and negotiation process to reconcile marketing andoperations forecastsPerformance rewards for improved forecasting accuracy for all per-sonnel involved in consensus process• Functional integration (collaboration, communication, and coordina-tion) between marketing, finance, sales, production, logistics, andforecasting• Existence of forecasting as a separate functional areaNeeds of all areas recognized and met by reconciled marketing andoperations forecastsFinance = annual dollar forecastsSales = quarterly dollar sales-territory-hased forecastsMarketing = annual dollar product-based forecastsProduction = production cycle unit SKU forecastsLogistics = order cycle unit SKUL forecasts• Consensus process recognizes feedback loops (e.g., constrainedcapacity information is provided to sales, marketing, and advertising,which can drive demand)Multidimensional performance rewards for all personnel involved inconsensus processBenchmarking Sales Forecasting Management q9
 
mary of the characteristics of the Functional Inte-gration stages.
Functional Integration Stages
In Stage 1, each functional area has its own fore-cast for its own purposes. For example:• marketing wants yearly product line fore-casts;sales wants quarterly forecasts by salesper-son territory;finance wants yearly dollar forecasts;• production wants stock keeping unit (SKU)forecasts tied to the production cycle; andlogistics wants stock keeping unit by loca-tion (SKUL) forecasts tied to the replenishmentcycle.These disparate goals cause major communi-cation breakdowns among functional areas, witha lack of any coordinated or collaborative fore-casting effort. Moreover, there is no accountabil-ity for discrepancies among functional areas.Predictably, forecasting accuracy and effective-ness are low in Stage 1.Companies at Stage 2 recognize the need forcoordinated sales forecasts through formal meet-ings of the functional areas, with forecastinghoused in a specific area. The problem with thisapproach is that the specific location gives fore-casts a decidedly biased flavor. When forecastingis located in production or logistics, the forecastsare more operational in nature; when located inmarketing or sales, the orientation leans moretoward marketing. Difficulties are encountered bycompanies in this stage because marketing andsales find short-range SKU and SKUL forecasts of
Figure 2Improving Functional Integration
Recognize forecasting as a separatefunctional area whose
responsibility
isto provide forecasts at levels and timehorizons that are useful to marketing,sales, finance, production, and logisticsEncourage common goal setting throughcommunication, coordination, andcollaboration; enable access to relevantinformation across functional areasProvide performance rewards to allpersonnel involved in the forecastingprocess based on the impact of fore-casting accuracylittle use in determining yearly and quarterlyproduct and product line forecasts, whereas pro-duction and logistics have little use for longer-term dollar forecasts. Moreover, marketing andsales tend to look on forecasts as unconstrainedby capacity, whereas production and logistics areconstantly aware of and bound by supply chaincapacity constraints that limit the potential de-mand to be fulfilled.Coordination in this stage is often accom-plished through "consensus forecast" meetings,but the lack of common goal-setting means themeetings are dominated by either operations ormarketing and finance, to the detriment of theother functions. Because forecasting is a recog-nized area within a specific business function, itspersonnel are evaluated solely on their contribu-tion to the goals of the function in which fore-casting is housed. For example, forecasting per-sonnel located in marketing/sales are evaluatedon sales goals, whereas forecasting personnellocated in operations are evaluated on produc-tion/distribution scheduling goals.A Stage 3 company follows more of a trueconsensus forecasting approach, with more effec-tive communication and coordination among thefunctional areas. Frequently there is a credible,assertive, and confident manager who under-stands the role of sales forecasting in businessplanning and knows the firm's forecasting pro-cess thoroughly--in other words, a "forecastingchampion." With more effective negotiation, thevarious functional areas can reach a consensusforecast that recognizes the goals of marketing/sales/finance and the capacity constraints of op-erations. To achieve more commitment from allpersonnel involved in reaching a joint forecast,all consensus team members receive performancerewards for improved forecasting effectiveness.In Stage 4, companies achieve functionalintegration by stressing Forecasting C 3. Theystructure forecasting as a separate functional area,thereby coordinating the needs of all functions,reducing the adversarial negotiation approachexhibited in Stage 3, and reaching a true consen-sus. Systems provide full access to informationthat affects the forecasting process and outcomes(capacity constraints, promotions, advertisingcampaigns, and so on). Performance rewards arebased on the multidimensional nature of salesforecasting. Instead of rewarding on forecastingaccuracy alone, rewards may be based on divi-sion or corporate profitability and customer ser-vice goals.
Improving Functional Integration
As summarized in Figure 2, companies seekingto improve forecasting effectiveness on the di-mension of functional integration can start by50 Business Horizons / May-June 1999

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