DEMAND FORECASTING: REALITY vs.

THEORY

or

WHAT WOULD I REALLY DO DIFFERENTLY , IF I COULD FORECAST DEMAND ?









NATIONAL MANAGEMENT SCIENCE ROUNDTABLE

NASHVILLE, TENNESSEE

MAY 13, 1991























Steven Robeano
Senior Logistics Engineer
Ross Laboratories
6480 Busch Boulevard
Columbus, Ohio 43229
(614) 624-6124
Demand Forecasting: Reality vs. Theory Page 2 of 14
You know, I must be one of those people the airline has in mind when the pilot gets on
the PA system just before take-off and says,

"Good morning, you are on Delta Airlines flight 1424 to Nashville."

First: I've never gotten on a wrong plane.
Second: Don't they look at your ticket when you check-in?

It doesn't matter, I still worry about it until I hear the pilot's confirmation.

Before we get down to business here, I'll describe the flight we are on for people like
me.

SUMMARY

Formally or informally, the forecast drives the firm. Techniques range from seemingly
none at all, or at most "forecasting by desire", to complex and "sophisticated"
algorithms and models that require tremendous processing power. Usually, it's a
mixture of dozens of methods and options. "What works and what doesn't, rarely
depends directly on time, money, or other forms of business horsepower. It is an
organizational problem, subject to a visible formal structure and also to an often
hidden informal one.

This session will look at forecasting as a form of applied common sense. In a
commercial business setting, simple doesn't necessarily mean weak and advanced
mathematics doesn't necessarily mean accurate or timely.

Sales and Marketing functions in a firm often use several forecasting methods in an
effort to improve accuracy. The Logistics and Operations functions also often use
several methods, with each area complaining that the other's forecasts are not
compatible with their area's needs. There is a lot of resistance to reconciliation. Often
the cause is simply organizational inertia. Other times each area has good reason for
being so parochial. We are going to look at organizational ways to turn these conflicts
into constructive cooperation.

In the '70s and '80s many firms with large distribution systems, including Ross,
installed computerized statistical forecasting systems for logistics. I have talked with
many businesses before, during, and after their selection and installation processes.
Generally all of them showed an improved level of detail and improved accuracy. The
methods and the software may vary somewhat, but most were carefully studied,
tested, and evaluated before implementation.

Users have lots of rosy expectations when planning a new system. Ross Logistics, for
instance, wanted lower finished goods inventory and lower freight costs without
compromising customer service. Others firms may want to drive a production or
purchasing system. Ross got what it wanted, and so it seems, did most others.

But... (did you ever notice that the important stuff always comes after the "but" ? ) But
are whiz-bang forecasters like us getting everything we had hoped for? One benefit
many of us expected was a total integration of the forecast throughout the business,
Demand Forecasting: Reality vs. Theory Page 3 of 14
or in other words, getting everyone in the choir to sing off the same script. This is a
constant struggle between departments in any large business and by the end of this
session you should have a better idea why. Hopefully, you also will be able to identify
and deal with similar problems in your own organization, problems which odds
strongly lead me to suspect your organization shares, visible or not. As time allows, we
would like some information from you on your experiences.

I'm not here to teach you forecasting. Any one of you could teach it as well as I could.
In planning this session I assumed you had a solid understanding of the forecast
methods you are using in your own shop. To be candid with you, I also expected that
you were probably at least moderately uncomfortable with both how and why the
various parts of your firm "do their own thing" with forecasts.

TAKE A WALK AROUND YOUR ORGANIZATION. WHAT ARE WE DOING?

Everybody has a PC.
Everybody has a spreadsheet program.
Everybody has inventory planning and tracking programs.
Everybody has a forecast program.
Everybody has their own forecast.

Whatever are we doing?


FORECAST SOUP

Marketing, sales, finance, purchasing, logistics, production scheduling, and so on, all
see reasons for using the forecasting method or methods they have chosen. Before we
try to manage this conflict, we need some grounding in each other's needs. You don't
have to be an expert carpenter to be able to converse with one. It sure helps to
recognize the tools when you see them, and to have a good idea of what they can and
cannot do. It's tough to build furniture with a saber saw. It can be done, but it's not
very practical.

We are also going to look at how different disciplines recognize the need to forecast
and then cope with that need. Evaluation, comparison, and communication are
required.

THE UNDERLYING QUESTIONS: What, Where, and When ?

Each person in a large firm who is involved with any kind of forecasting generally has
a good idea why the organization needs a demand forecast. Lets start at home first.

1. Do you really understand why you believe you need your own forecast?

2. If you were asked or ordered to abandon your area's internal forecast, what aspects
lost are of strategic importance to your role?



Demand Forecasting: Reality vs. Theory Page 4 of 14
Here's a non-standard thought process to get at point #1.

Ross Laboratories manufactures and markets infant and adult nutritionals, and
personal care products. The personal care items have lots of new products in unstable
channels of distribution. The nutritionals, however, also with significant numbers of
new products, are distributed through stable channels. They are mostly high volume
and most are produced to a forecast.

If supply, demand, and transit times were totally predictable and free of random
variation, there would be no need for safety stock in the field. We would ship stuff to
arrive exactly when needed. UPS, RPS, and FED-EX would love it, and the railroads
and truckers would be looking at career opportunities elsewhere. Lucky for them we
can't afford to ship cans of infant formula one-at-a-time even if we did know exactly
when the customer would want them, or where and when the warehouse system
would need them to fill an order. So, we ship/replenish in quantity. The only inventory
really needed with a perfect forecast would then be a function of their replenishment
frequency and quantity. Service level could still be 100 percent as long as "what,
where, and when" were known exactly and there was no variance in transportation
performance.

Of course, not one word of the proceeding is realistic. I don't trust the gas gauge on my
car. I only have a rough idea of what I'll use getting to work and back. To provide high
service at low cost, the logistics function needs to know how much of what is going to
be needed both where and when, as exactly as it can. The game is simply one of "how
low can I go" without running out of gas or spending too much time at service stations
buying a gallon at a time.

THE OBLIGATORY "BRIEF" HISTORY

Ross is a manufacturer of nutritional health care products. Our first post World War II
logistics forecasting system (circa 1950) was manual, and was "THIS QUARTER'S
FORECAST IS LAST QUARTER'S ACTUAL." In those days, its true, inventory was
cheaper but it was really used to fill information gaps and delays, lots and lots of
them. Inventory records in the field were days and often weeks behind. We didn't know
we had sold something until 3 to 5 days after we sold it.

The major stated reason for not using Marketing's forecast was: "Too aggregated
temporally and geographically." No doubt! Marketing forecasted up to 10 stockcodes as
one group, in 8 regions, quarterly. The major unstated reason for the distribution
forecast was to give planners a stationary target to shoot at. The result was simple.
Anybody that needed a working forecast did one on their own. No one outside of
Distribution used Distribution's forecast.

In the mid '60s we got our first computer. (I carry a bigger one in my briefcase.) The
Accountants bought it to account, but the Distribution people talked the Accountants
into letting them "forecast" once every three months or so. Each quarter a forecast was
generated where the value for all of the next 3 months was the average of the last 3
months. In. talking to the old-timers, I found that no one outside Distribution used
that forecast either. One thing is certain, that forecast sure introduced a lot of
smoothing. The planners just loved it.
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In the late '60s we installed our first real system. It was a 3-month weighted moving
average... still naive yes, but at least it was monthly. We wanted to use exponential
smoothing a la R. G. Brown and seasonal-decomposition a la Julius Shiskin. Sorry, no
soap, not on a computer already running 3 shifts that had less memory than a vanilla
XT.

Weighted moving averages are great for smoothing but they badly under-shoot a rising
series and over-shoot falling ones. They not only butcher trends, but they ignore cycles
and seasonals. Was it Freud who said, "Smoothing is not necessarily forecasting.
Sometimes it is just smoothing"?

The replenishment planners noticed this, unfortunately, and asked for an override
option,... an option which they almost invariably used. They used optical forecasting
techniques or the eyeball method. They spoke to the field warehouses several times a
day, pumped sales force people who called in, chatted with customers, and generally
ignored the computer. On short-term forecasting accuracy, I had a rough time beating
them head-to-head. The only real advantage I had was that I killed them on volume.
They could only handle a few items while the computer handled them all. They weren't
concerned about all that however. Crushed again.

Many years later Bob Brown told me to "concentrate on the significant few" and to
"find the assignable cause." I realize now, that's what the planners were doing then.
Not only didn't the replenishment group seriously use Distribution's computer
forecast, neither did most of the rest of Distribution. Anyone who needed one did his
or her own, which by magic yielded results they liked. For the major SKUs they had
the Operations Services group run them on commercial timesharing using, you
guessed it: Exponential smoothing with auto-correlation to de-seasonalize the data.
Marketing and Sales were not much impressed either. They had a method they were
quite comfortable with. Their first step was what the academics call Judgmental or
Exogenous, and what I like to call a Causal model.

Infant formula was a major product in those days, as it is now. They individually
predicted market-share, fertility rates, women of childbearing age, percent of babies on
formula, length of feeding, hospital beds, and product mix. With these and a few other
secret ingredients, like gut-feel and just plain guts, they generated a forecast. He who
lives by the crystal ball however, must learn to eat glass.

The Division President usually didn't like their forecasts. He had his own method. In
effect, he would put two points on a graph, one where we were at the time and one
where he wanted to be. He drew a straight line between them and said "that's the
forecast"... and behold! It was unanimously adopted by Marketing and Sales, who
quickly found some earlier "error" in their thinking. When I was working at Ross part-
time after school, I remember horse-laughing this seemingly unscientific example of
benevolent dictatorship. I learned something though. It took a while, but I figured it
out. This technique, which I like to call forecasting by desire, works. The president was
setting a goal. The goal was adopted as the forecast. The troops busted their necks to
make that "forecast" happen, and by George it did! Distribution grumbled, but stuck
with its independent statistical systems. No one objected. No one outside Distribution
really used them or needed to see them anyway.

Demand Forecasting: Reality vs. Theory Page 6 of 14
In the late '70s we realized we needed better distribution forecasts. Well, we sort of
realized. Our growth overwhelmed the time available for optical techniques. Service
and inventory were getting more expensive and harder to manage. The problem
actually surfaced as a question of how to handle field replenishment in true multiple
plant environments. To replenish, we needed new stocking strategies. Working stock is
easy. It's just a function of replenishment quantity and usage ... which is always linear
and consistent… right? Safety stock is easy too. Just set it to say, two weeks maybe? If
we had to, we knew we could get stuff anywhere in two weeks. Multiplant? Piece of
cake. No product was made at more than 2 plants. That way conveniently, "Who
makes what", was fairly straightforward. ("Straight forward"...that's OSU-ish for
"obvious to the intelligent but not always to me".)

Twenty-five products at forty-five locations and not full dense. A 1000 SKUs are not
unmanageable manually. The logic begins to fall apart at 3 plants producing any one
product and wallows at 4. Grow it to 35 or 40,000 SKUs and the green visors begin to
melt. The best sources told us that to have a good replenishment system you need a
good inventory planning system based on service. To have a good inventory planning
system you need good forecasts. Ah! A reason to forecast.

Like all progressive American World-Class corporations we waited way too long until
we were in a good deal of pain before we began work overhauling our forecasting and
inventory planning system. We spent almost a year looking at every causal and time
series technique under the sun... averages, moving averages, weighted moving
averages, auto regressive moving averages, exponential smoothing, Fourier series, and
Box-Jenkins. We even sponsored a Ph.D. dissertation in Delphi Methods. One popular
vendor said "Do them all, then average the answers." Very democratic.

We selected a technique that was at the time the best combination we could find of
accuracy, speed, efficiency, and economy. I had a boss/mentor some years ago who
gave me a sign that still hangs in my office. It says, " Good, Fast, or Cheap... pick any
two. " We picked Fourier Series, installed it, and then paid our dues on the learning-
curve roller coaster. The system has provision to input information from other sources
and blend it with the statistical forecast. Our own systems folks, consultants, software
vendors, and amazingly the Distribution department users, all agreed it was working
right and working well.

Now that we had the "right" answers we felt this driving "need" to spread the truth as
we knew it to other company functions. Forecast missionaries, if you will. Reception
ranged from lukewarm to hostile. For some reason, other areas wanted to continue to
use their own methods. While everyone one was supportive of our efforts and provided
all the "information" they could, they just didn't want to use our forecast. Why? Simple
really, we had forgotten something we learned while we were evolving our own
"integrated" forecast.


FORECASTS

"Partly cloudy, warm and humid... high 83 ... chance of afternoon
thundershowers... chance of rain is 20 percent. Winds from the West 10
to 15 miles per hour. Sunset 8:43 PM."
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Doesn't sound too bad for a Sunday afternoon in Ohio, does it? Did you ever notice
that most of our decisions concerning weather are binary? They boil down to a "go" vs.
"no-go". You will golf in the rain ... maybe. You won't in a thunderstorm. Some paints
cannot be applied at temperatures over 80 or below 40. The family reunion at Duncan
Run Park should be okay. Should you spray the fruit trees this morning? The labe l
says winds must be under five. The National Weather Service can tell you what time
the sun will set EXACTLY. Does anyone here need to know or care to know exactly?
Probably only Count Dracula.

The most striking thing about a weather forecast is that it is remarkably hardly ever
goal-oriented. Good weather forecasters do not bet on the weather.... they bank on the
climate. They can't influence a thing. Not true of business forecasters.

Business forecasts are for the most part intensely goal oriented. Unlike the
weatherman, business banks on the weather and bets on the climate. There are built-
in incentives to over-forecast when setting up annual expense budgets and to under-
forecast when setting sales or other performance "goals."' The operating climate out
five days, months, or years can't be relied upon to be basically the same as it is today.
Percent sunshine (I love that one nearly as well as "percent chance of rain") can't be
influenced by the Weather Bureau. Sales performance darn well can be influenced by
effort. We can change the future. As a matter of fact, a large part of any business'
employees are expected to and paid to do just that. Businesspeople can actually move
sunshine from Fiscal Year '92 back to Fiscal Year '91. Well, some can anyway. Magic!

Operations forecasts are much, much less goal oriented. The forecasts are at the same
time politically simpler, and paradoxically, mechanically more complex. The
Operations manager is usually more concerned with accuracy and not with
attainment.


FORECASTING IS AN ART

Forecasting is an art, it is not a clear-cut science. Both the prophets of Marketing who
tend to work with causes and gut-feel, and the computerized statistical forecasters in
Operations, who tend to work with history, are still just guessing. Users need to
recognize that statistical history based forecasting is like driving a car on a country
road with the windshield blacked out and only having a rear view mirror to steer by. In
business, we talk about and treat forecasting as a science. But it is still an art, an art
assisted by science.

Let's take a brief look at some of the areas that in many companies may have their
own forecast.

MARKETING
? Very broad, trend oriented.
? Either oblivious to geography or at best interested in large areas like "The
Southeast".
? Forecasts demand, not sales, as well they should.
? Strategies can influence demand and/or sales.
Demand Forecasting: Reality vs. Theory Page 8 of 14
? Competition sensitive (share).
? Time frame is often quarters or years.
? Horizon is at least 3 to 5 years. Bulk of effort is expended on 1 to 2 years out.
? Penalty for over-forecasting is much higher than for under-forecasting.
? There is no financial incentive to over forecast, but great political pressure to do so.
? Very goal oriented.
? Units are dollars, pounds, etc.

SALES
? Broad, trend oriented.
? Performance oriented.
? Geography is very detailed for performance and compensation but for little else.
? Strategies influence demand as well as sales.
? Internal competition is high.
? Time frame is day, week, month, etc.
? Horizon is month or quarter or a year or two at most.
? Penalty for over-forecasting is extremely high. There is strong incentive to under-
forecast.
? Highly goal oriented.
? Units are dollars, pounds, etc.

FINANCE
? Broadest of all areas. To survive, the business needs to make a profit, "make plan."
? This area has the greatest number of knobs to twiddle. Profit not making forecast?
The price can be changed with elasticity deciding the direction. Income and costs
can be cut or to some degree moved "elsewhen".
? Insensitive at best or absolutely numb to geography.
? Time buckets broad, with quarters or years preferred.
? Low sensitivity to mix other than as mix effects cost or revenue.
? Long horizons up to 10 years or even more.

DISTRIBUTION
? Among the least goal oriented, relative to forecasts.
? In many firms, has to be disaggregated from marketing or sales forecasts to get
time, place, and exact product mix.
? Accuracy determines ability to control costs and maintain service (field
replenishment, freight budgets, warehouse rate negotiations, short-date control.)
? Penalty for under-forecasting is greater than for over-forecasting.
? Product mix, geography, and timing are of crucial importance. Operationally, the
time bucket is usually weeks or months, although planning on a daily level is
becoming more common.
? Monthly or weekly forecasts are often spread to days.
? Short horizons of 3 months or less are common.
? There is normally no incentive to hedge operational forecasts other than for
budgets or other performance measures.



Demand Forecasting: Reality vs. Theory Page 9 of 14
Other areas that may make their own forecasts, formal or informal include:

BUSINESS MODELING
BUSINESS PLANNING
COMPETITIVE or MARKET ANALYSIS
EXECUTIVE MANAGEMENT
LONG RANGE PLANNING
PRODUCTION PLANNING / SCHEDULING
PURCHASING
STRATEGIC PLANNING


PICKING A METHOD

There are many issues you have to consider in picking a method or a structure for
your forecast. For the Management Science and Operations Research folks it's often
very easy to focus on mechanics and accuracy, but that's not the whole picture. Lets
invert the mental matrix we just discussed and make the columns into the rows.

SCOPE: How widely is your forecast used? Only by you, a department, a major
functional area, the division, or corporate wide? You need to know who is going to be
quoting you... sometimes inappropriately.

GEOGRAPHY: It is a good idea to work with the largest aggregated division you can.
The top-down folks tell us that if you can get away with a national forecast, do it.
There are two problems with this advice. First, someone else may need more
disaggregated numbers than you do. For example, a national forecast by quarter is
nearly useless for distribution and production planning. Conversely, there may be
grassroots information in disaggregated or local forecasts that when rolled up will give
you a better national forecast than a national model can. This takes some
experimentation. Don't be shy, try it.

SURROGATES: Not all variables are accessible. Everybody talks about demand
forecasting but what they really mean and usually forecast are sales. Do you forecast
dollars or units? What do price changes do to each of those? Are your sales net of
returns? What about sales in one time period from one warehouse that are returned in
another time period at a different warehouse? Yes Virginia, there can be negative
forecasts and a lot of our lovely mathematics can't deal with them.

INFLUENCING: If a forecast can be influenced or the future changed, than a good
businessman or woman will do it. These forecasts must be monitored more closely
than the statistician or mathematician thinks. Leak word to the marketplace of an
impending shortage and a shortage will very likely be created. The classic case is the
new freeway designed at 4 lanes to cover "current and projected" growth that is
overloaded the very day it opens. It's simply there now, and people who were not
counted in the original traffic survey go miles out of their way to use it.

HORIZONS: Operations people, Distribution, Production, and the like, tend to set
their horizons too far out. Operations folks make the mistake of trying to use their
short-term model to advise the marketing and financial folks what they should be
Demand Forecasting: Reality vs. Theory Page 10 of 14
doing and the marketing and financial folks don't see why the Distribution department
has to have its own forecast anyway. Hey, we are doi ng five -year plans aren't we?
Operations might need a longer-range tool for their resource and capital budgeting but
they still try to get their short term forecast to do the job. A planning horizon is like a
diving board. If you jump up and down on the end, there is a lot of slop. Backup to
near the pivot point and there is a lot less range when you jump. Another way to view
this is to think of it as choking up on a baseball bat. You gain control but lose power.

People confuse forecast lead-time with forecast horizons. It has been a while since I
worked with birth statistics directly, but when I did the Census Bureau was up to a
year behind issuing data. If I wanted to forecast one year out, by month, and the data
is 6 months behind, then I really have to forecast 18 months, 6 of which are lead-time
and 12 the horizon.

GOALS vs. PREDICTION: This is really a question of attainment versus accuracy.
When a company hits its forecast it doesn't stop there. For business, a forecast is
something to make and then to beat. I think of forecasting as the casting forward of
old data. Prediction on the other hand, is the integrated result of combining all
sources of knowledge about the future.

POLITICS: It is human nature to negotiate reachable goals when it's your goals being
set. Your pay and performance depend on it. It is good management to recognize this
and build stretch into the goals we set for others, but not too much because we get
measured on whether they meet their goals. Everybody likes a safety factor. We might
as well accept the fact that forecasts are very often negotiated. Some forecasts or
predictions are so cut and dried, they really ought to be called policies.

VOLUME: Don't forget the green visor types with the Monroe -mechanical calculators.
Be prepared to accept the fact that certain areas have to give up accuracy just to cope
with the timeliness and volume issues, and just to get the job done.

Computers can build and process models at astounding rates and update them even
faster. Forecast accuracy has to be managed. People-resources are scarcer than CPU-
resources. A firm with several hundred thousand forecasts has to select meaningful
measures, decide what is significant, and concentrate on correcting problems so they
don't pop up again.

UNIT OF MEASURE: This is nearly an insurmountable problem. Some functions need
data in units or cases while others need dollars, hundredweight, shifts, truckloads,
railcars, etc. What is quite sensible to one area may sound like measuring speed in
furlongs per fortnight to someone else. My favorite is "powder pounds fed per sales
day." It is perfectly useless for operations, but our sales force doesn't think it's so
useless. Why? That's how they earn their bonuses.

Computerization has forced some uncomfortable but "logical" measures on all of us.
MRP and DRP need uniform time buckets. In some firms, the pain of coping with the
discipline of thirteen 4 week periods is so extreme that the system is installed on a
weekly or daily basis, and then aggregated up into 4 week buckets just to avoid the
pain of time period reconciliation.

Demand Forecasting: Reality vs. Theory Page 11 of 14
DEPENDENCY: Don't assume its "wrong" to forecast something that is correlated to
another variable just because you don't see the correlation. Your user might be right.
In the 60's, the practitioners laughed at including moon phases in causal models of
births. Many hospitals now staff their obstetric units by moon phases.

Forecasting "experts" usually err the other way. Practitioners like to use correlation of
dependent variables to "improve the forecast." An example of this is our hospital
bottles and nipples. Bottles are packed 24 to the case and nipples packed 500. The
usage correlation is nearly is perfect but safety stocks set this way can be disastrously
wrong. The problem is in the high variance, not the overall accuracy. Safety stocks are
set on variance and overall accuracy is of no great benefit. Some years ago, a colleague
of mine at another division of Abbott mentioned that they could never explain the poor
correlation between IV (intravenous) solution needle sets and extension tubing kits.
Extension tubing use was so heavy that they increased the length of the tube on the
standard sets several times but to no avail. They just refused to forecast them
separately. Anyone who has worked around an emergency or rescue squad could have
told them that knotted tubing is ideal for securing things onto a patient in a wet
environment where adhesive tape just won't stick. Simply a use for tubing that the
manufacturer never thought about.

AGGREGATION: We have probably beaten this point to death in earlier parts of our
discussions. Just remember the three management variables are time, geography, and
stock keeping unit. Aggregating is easy and disaggregating not so easy.

DATA QUALITY/AVAILABILITY: You don't realize how scarce decent data is until you
try to use the data you have. In our early days, Ross threw out valuable usage history
because an the MIS tape retention policy was set to two years per standards. What a
loss. The very first models we ran found data that was wrong and had been for years.
It was not corrected because the totals "tied" on the accounting reports. No one needed
it before now.

Some items are still only tracked by sales territories, which may be very fluid year to
year. Even when stable, they don't align at all with the warehouse service boundaries.
In your shop, is the data "net of returns" or "net of credits?" I bet not, very few are. Is
that truckload order for Brooklyn, NY that was shipped from Boston instead of from
Jersey City (because we were low on stock) now going to hose up both forecasts?

Marketing departments in many organizations just do not retain geographic data. All
our great techniques are of little value if the organization won't invest in the care and
feeding of the database.

MISCELLANEOUS ISSUES: Invest time in understanding both the real and the
perceived penalties for error, especially those unspoken penalties. Find a blend of the
scientific and the touchy-feely. The Delphi researchers have proved countless times
that the organization knows a lot more than we think it does or even it thinks it does.
Its "pieces-parts" just don't communicate very well. Last and by no means least, be
sure to account for all the built-in incentives various business functions have to mis-
forecast. It may not be controllable but it must be understood.


Demand Forecasting: Reality vs. Theory Page 12 of 14
CONCLUSIONS

Common sense tells us certain areas must have the same forecast. There is no sense
to Distribution planning to ship product that Manufacturing just is not going to make.
Unreconciled differences between Production and Distribution negate the benefits of
the best DRP or Fair-Shares Allocation system. There is no sense to Manufacturing
planning to build inventory to cover an annual plant shutdown that Purchasing
cannot cover because they use a different forecast. Unreconciled differences between
Production and Purchasing can negate the benefits of the best MRP systems.

A similar case can be made for Marketing, Sales, and Product Development. They have
to use the same script.

Over the years, I've modified my dream of having one script. I don't think it should be
done and I don't think it can be done. Sadly, the organizations that have gone to one
forecast by edict are the ones that often have the most diverse ad hoc forecasts being
used underground.

I believe the answer is to determine where needs are similar and where they differ and
then to form logical nodes that do use a common forecast or a translation of one. We
see our company as having three basic forecasting nodes or teams:

OPERATIONS:

• Production Planning
• Inventory Planning
• Purchasing
• Distribution
• Manufacturing

MARKETING:

• Marketing
• Sales
• Product Development
• Distribution
• Pricing
• Business Modeling

FINANCE:

• Financial Planning
• Long Range Planning
• Econometrics
• Business Modeling

Business Modeling appears in two teams. In some companies it is part of Finance
while in others it is part of Marketing. Regardless of its place on an organizational
chart, it links Finance and Marketing. In a like manner, Distribution appears in two
Demand Forecasting: Reality vs. Theory Page 13 of 14
teams. Classically thought of as part of Operations, Distribution is functionally an arm
of Marketing. Regardless of formal chart position, it links Marketing and Operations.

Within each of these three major teams information MUST be accessible and freely
traded. Departments that are group members must convince each other and
themselves that it is counterproductive to nurture "private" forecasts.

Something to keep in mind: If Purchasing is forecasting sales or product mix on its
own, it is because it knows something or needs something that Production Planning
doesn't. You can bet Production ought to know about it also.

Managerially, the point is simply that reconciliation is a means... not an end. The
exami nati on and di scussi on process i tsel f wi l l create more i ntegrati on than
forci ng the group members to adopt a common forecast ever wi l l .

THE [IM] POSSIBLE DREAM:

Having the choir sing off the same script may or may not be reachable. In a large
organization it may not be practical. The overall strategy for managing the forecast
problem is to:

• Identify the demand variables you can control. CONTROL them.
• Identify who or what controls what's left. INFLUENCE them.
• Identify whatever is left over and FORECAST it.

If the three forecast teams are stable, then there is real opportunity between the
groups for a combination clearinghouse and traffic cop. This cop can be an individual
or a group. If a group, it can be independent or made up of members from the original
three teams. Regardless of structure, like the forecast team, the cop's job is to:

? Translate definitions and data.
? Warn of dissension adverse to the whole
? Reconcile differences when necessary

The payoff is subtle. Effective organizations are more efficient. Service can improve
while costs go down. As professional forecasters and predictors, we are not victims of
the unknown. We can change the future.

CARPE DIEM
Demand Forecasting: Reality vs. Theory Page 14 of 14

WHAT DO YOU THINK?

When I was a high school senior armed with a used paperback copy of "HOW TO BUY
STOCKS", I started buying stock two or three shares at a time. I did it by telephone
with an out-of-town broker who did not know I was a minor. With some of the
questions I asked, he had to suspect. A big buy for me was three shares of Random
House at $9.

On one occasion I asked him what he thought the market was going to do. Not just a
little abruptly he replied, "Hell, you're the market.... what do YOU think?"

Wel l , what do you thi nk i s goi ng to happen to demand
for ecasti ng practi ces i n the next ten years?