Forecasting: What, Why and When?

What is Forecasting?

Forecasting is a term used to describe the prediction of future events. Demand Planning is the process of recognizing economic demands for products in the marketplace.

Forecasting enables the future to be visualised, it creates a baseline against which actual data can be measured. The key in Demand Planning is to monitor the gaps between the anticipated (forecast) and the achieved (actual) and then, using forecasting skills and tools reduce that gap in the next cycle.

“The Forecast is an estimate of future demand. A forecast can be determined by mathematical means using historical data; it can be created subjectively by using estimates from informal sources; or it can represent a combination of both techniques.”   [APICS Dictionary]

Why Forecast?

There are lots of reasons why Forecasting is a good idea:

...Meet Market Demand...Manage Lead-Times...Reduce Inventory...Avoid Over Production...Minimise Stock-Outs...Support Budget...Inject Realism...Increase Buying Power...Schedule Resources...Guide Company Strategy...Define Promotions...Maintain Price Structure...Measure Awareness of Demand...Drive Continuous Improvement...Create Stability in the Supply Chain...

The type of Forecast solution that is needed will vary depending in the reasons selected but the key drivers will probably be:

To reduce uncertainty:
Predict future demand and as such reduce uncertainty, leading to reduced costs, increased responsiveness and improved customer service.

To anticipate change:
Plan for future change (adjust for changes in the environment: competitors, new entrants etc.) and drive / support Company Strategy

To improve communication:
Between all departments and affiliates. Drive continuous improvement and migrate to intelligent models. Provide elements of Realism to reduce inventories driven by fanciful sales targets

To increase knowledge:
Project production capacity, project future costs and revenues, compare forecast and actuals to budget, evaluate marketing initiatives and decipher correlations between casuals and actuals

To grow revenues and increase profitability!


When should you Forecast?

Typical Forecast Frequencies are as follows:

budget review High level process just before budget cycle. Aimed at setting base for Budget discussion and high level capacity check (long horizon) 0-12 Months
budget process Process to set sales targets. Set once or twice a year. 6-12 Months
sales forecast Process which is aimed at providing accurate predictions of market potential. Data used to drive supply planning, allocation and production operations. 0-6 Months
sales progress Process (weekly/daily) used to obtain latest sales data from Sales (orders + expected orders). Applies to current month only 1 Month

All businesses are different.  Forecast Cycles, Horizons, Calendars, Time Levels, & KPI's are driven by Business Imperatives, Culture, Leadtimes, IT, Competitors, Habit...   Applying Best Practice may not be feasible in which case achieving Better Practice should be targetted.

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