EVOLUTION OF THE
FORECASTING FUNCTION
By Larry Lapide
(This is an ongoing column in
The Journal, which is intended
to give a brief view on a potential
topic of interest to practitioners of
business forecasting. Suggestions
on topics that you would like to see
covered should be sent via email to
llapide@mit.edu).
I
was pleasantly surprised when Professor
Chaman Jain asked me to devote
this column to my perspective on the
evolution of the forecasting function over the
past 25 years to commemorate the Journal
of Business Forecastings 25th anniversary.
I was mostly surprised, however, because I
realized that my experience actually started
earlier (30 years ago), in 1976 during
my rst industry job at a consulting rm,
A.D. Little (ADL). This rm was unique
because Robert G. (Bob) Brown walked
the ADL halls before me and left behind a
strong legacy that was passed on to me. He
was the person in the late 1950s who was
largely responsible for bringing exponential
smoothing and other smoothing forecasting
methods to industry, especially for use in
inventory management.
My bottom line on the evolution during
my tenure is that forecasting functions got
much more important in most companies,
and while the environment in which
they needed to operate got much more
complicated, advanced technology saved
the day for everyday forecasters.
WHAT DO THE NUMBERS
SHOW?
To start my research for this column,
22
I pulled out a textbook I used in 1982 to
teach a forecasting course. It was the initial
publication of Forecasting: Methods and
Applications by Spyros Makridakis and
Steven C. Wheelwright, published in 1978.
LARRY LAPIDE
Dr. Lapide is a Research Director at
MITs Center for Transportation &
Logistics, where he manages its Supply
Chain 2020 Project focused on supply
chain management of the future. He has
extensive business experience in industry,
consulting, and research, and has a broad
range of forecasting experiences. He was
a forecaster in industry for many years,
has led forecasting-related consulting
projects for clients across a variety of
industries, and has taught forecasting in
a college setting. In addition, for seven
years he was a leading market analyst
in the research of forecasting and supply
chain software.
THE JOURNAL OF BUSINESS FORECASTING, SPRING 2006
In it I found data drawn from surveys done
in 1975 and 1976 on the status of forecasting
in business rms. I did a comparison of
these ndings with Professor Jains 2001
benchmarking ndings as published in his
book, Benchmarking Forecasting Practices.
Here is what I found.
The one thing that is clear is that
forecasts are revised more frequently than
in 1975, as shown in Table 1. The majority
of companies in 2001 revised forecasts on a
monthly basis in contrast to the majority in
1975 revising them quarterly or longer.
The 1975 survey also showed that
only 61 and 55 percent of Manufacturing
and Inventory Control departments used
sales forecasts, respectively. The 2001
benchmarking survey did not ask this type
of question, but it did show that 76% of the
respondents held cross-functional consensus
meetings; e.g., Sales and Operations
Planning (S&OP) meetings. This implies
that at least 14% more of Operations
departments use sales forecasts than they
did in the 1975. Lastly, survey comparisons
show that companies were using non-
mathematical techniquessuch as opinion
and judgment-based forecastingmore
extensively in the past versus the extensive
use of mathematical methods today. (See
Table 2)
INTERPRETATION AND
PERSONAL OBSERVATIONS
These survey ndings are relatively
consistent with my observations on the
evolution of the forecast function over
my career. Ive seen that companies are
forecasting more often, using the forecasts
more to drive operational planning, and
using more fact-based quantitative methods
in generating forecasts.
The driving forces that have shaped
these and other changes in the forecasting
function over the past few decades include:
Push to Pull Manufacturing: Probably
the most signicant changes in the
forecasting function have been driven
by the move from the Push to the Pull
Manufacturing paradigm. Up to the
early 1980s, large-scale manufacturing
companies with strong brands ruled
the roost and pushed products out. If
they made something it would sell. So
manufacturing plants made big production
runs of items to keep production costs
low, recognizing that everything they
made would automatically sell or, if
not, the marketing folks would easily
get customers to buy what was left over.
However, over the past few decades, the
increasing afuence of U.S. consumers
gave rise to consumerism, which shifted
market power towards the retailers and
away from the producers. This resulted in
manufacturing increasingly being driven
by the pull from retailer and consumer
demands. For example, P&G is moving
more towards the Consumer-Driven
Supply Network (CDSN) concept,
while AMR Research describes this as
an industry trend towards the Demand-
Driven Supply Network (DDSN). The
shift involved a change in focus to
what I term moving from selling what
you make towards making what you
will sell. With this trend, companies
have been relying more on the forecast
function to better assess what will sell in
order to more efciently drive operations.
And thus, there is more pressure to
produce accurate forecasts. So as we saw
in the survey/benchmarking data earlier,
companies are forecasting more often in
order to increase accuracy by using the
most up-to-date information to revise
forecasts. In addition, more companies
are relying on the forecast to drive
operations and moving from judgmental
and opinion-based qualitative methods to
fact-based quantitative methods that are
THE JOURNAL OF BUSINESS FORECASTING, SPRING 2006
TABLE 1
PERCENT REVISING FORECASTS
Forecasts are 1975 Survey 2001 Survey
Revised (%) (%)
Weekly 3 -
Monthly 28 54
Quarterly 29 18
Semi-Annually 18 -
Annually 18 10
More than a Year 3 18
TABLE 2
PERCENT OF AVERAGE USERS
USING FORECAST METHODS
1976 Survey 2001 Survey
Method (%)* (%)
Time-Series Smoothing 71 61
Cause-and-Effect or
Regression Analysis 71 23
Judgmental or Jury of
Executive Opinions 84 14
*Percent of users that stated they were average in the industry. Multiple answers
result in a total response greater than 100%.
generally more accurate. of the forecasting function. This has
driven greater use of quantitative
Increased Complexity and Globalization: forecasting methods because technology,
Over the past few decades, there has in the form of computers, was needed
been a trend towards greater competition to cope with the increased scale of the
among manufacturers. Industries have business environments being forecast.
been consolidating through signicant
merger and acquisition activities, and
there has been a proliferation in the A SHORT WALK DOWN
number of products being sold. In TECHNOLOGY MEMORY
concert with those factors, increased LANE
competition has resulted in more frequent
new production introductions and the I always like to start off any forecast
shortening of product life cycles. This technology discussion with my anecdote
has made forecasting more complex about talking to some Microsoft software
because demand forecasting needs to application managers some years ago. One
be done for more products, at more of them asked me what software vendor
locations, and for more business units, was the market leader in forecasting. To his
as well as with less historical data, given surprise I told him his company, Microsoft,
the greater numbers of short life-cycle was because most people used spreadsheets,
fashion-oriented products. In addition, especially Excel, for planning and
growing globalization and the growth forecasting. In reality, the software vendors
of multinational companies necessitated were trying to get Microsofts customers to
demand forecasting on a regional basis, move to forecasting software applications,
thereby adding to the overall complexity away from Excel spreadsheets.
27
 When I started working in 1976, there
was no spreadsheet softwaresince there
were no personal computers (PCs) to speak
of except those that were custom-built by
computer geeks. Any forecast software
applications were proprietary and only
ran on the particular mainframe or mini-
computer for which they were developed.
SYBIL/RUNNER was one of the early
software tools that included a variety of
forecasting methods for use by students and
business forecasters.
The methods imbedded in the proprietary
software at that time included the Census
II Decomposition Method, which primarily
estimated seasonal factors and trends, and
various moving average and exponential
smoothing methods. Exponential smooth-
ing methods were popular because they
needed a small amount of disk storage
space to implement, since only the most
recent forecasts needed to be stored rather
than several years of historical data. At
A.D. Little, I used APL (A Programming
Language) that ran on a time-sharing
machine to do forecasting consulting work.
As PCs came into greater use, forecasting
software packages (See the benchmarking
book by Professor Jain for the difference
between a package and system) were
introduced running on standardized
PC operating system platforms. These
forecasting software packages were largely
for use by a single user in a standalone
environment.
The early packages were eventually
overshadowed by the use of spreadsheets
for forecasting. The rst commercial
spreadsheet, VisiCalc was marketed in
1979, and it was the market leader until
Lotus 1-2-3 (launched in1982) took over.
While Excel came out a few years later,
it became a phenomenon when it was
released in graphical-user form running on
the Microsoft Windows operating system in
1987.
While the 2001 benchmarking data
shows that Excel and Lotus had a combined
market share of 46% versus 54% for
forecasting software packages, I suspect
that spreadsheets could possibly have had
28
around 90% market share in the heady days
of growth in spreadsheet use in the late
1980s.
Forecasting software systems, designed
to do more of the large-scale forecasting
tasks and for multiple users, began to take
off in the early 1990s. These were largely
developed to run in client-server computing
environments. Manugistics was clearly an
early leader in this forecasting systems
market. (Interestingly, imbedding statistical
forecasting software developed by the
former-ADLer, Bob Brown, using the
APL software language!) Think Systems
(purchased by i2 Technologies), American
Software, and Demand Solutions were also
early leaders in the marketing of forecasting
systems. Today many companies use
forecast systems versus packages
because they allow greater interoperability
among various planning systems and more
collaboration among demand forecasters
and planners. They also have the ability
to handle the large-scale planning
environments needed to move closer to the
Pull Manufacturing paradigm and to handle
todays increased complexity.
SUMMARY
Over the years, Ive seen the forecasting
function become much more complex,
more important, and more dependent on
sophisticated forecasting software. The
good news for business forecasters over
my tenure is that they have become more
valuable to their companies. This has likely
translated to increased salaries, greater
respect from executives, and long-term
job growth for those forecasters who have
been successful during their tenure in the
forecasting function.
The future is even brighter for business
forecasters because businesses will continue
to become more complex and global, and
are still a long way from truly moving to
the Pull Manufacturing paradigm. To help
forecasters out, technology is continually
improving. The best news overall is that, as
in the past, a good business forecaster will
never be wanting for employment in the
future.
THE JOURNAL OF BUSINESS FORECASTING, SPRING 2006
REFERENCES
1. Brown, R.G. Statistical Forecasting
for Inventory Control. New York:
McGraw-Hill Book Company. 1959.
2. Makridakis, Spyros G. and Steven C.
Wheelwright. Forecasting: Methods and
Applications. Santa Barbara, California:
John Wiley & Sons. 1978.
3. Jain, L. Chaman. Benchmarking Fore-
casting Practices. New York: Graceway
Publishing Company. 2003.
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May 18 & 19, 2006
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For Info.: 800.440.0499
EVOLUTION IN BUSINESS
FORECASTING...
(Continued from page 15)
Lean Manufacturing: This is a recent
trend in consumer products, although its
been around discrete manufacturers much
longer. The objective here is to shorten
your manufacturing cycle in order to
lessen your reliance on forecasts.
Six Sigma: Frequently lumped in with
Lean Manufacturing, this is actually a
process management approach, more like
Total Quality Management.
Sales and Operations Planning: This is
hot every ten years or so, and its hot
right now.
This is not to say that these initiatives dont
have a merit, but none of them so far have
become the next big thing. I think the next
big thing will be when companies gure out
how to optimize their forecasts by using the
rich, granular data available through POS,
RFID, and other sources.