Considering the fact that forecasting is the foundation for many business processes, it is surprising that so many companies still struggle to create a robust, value adding process against which to plan their supply chain operations.
Traditionally, the focus of forecasting has been on the technical aspects, with forecasters valued for their techniques and processes. However in the wider business, forecasting is often a heavily politicised and damaging process, with blame for inaccuracies being directed at forecasters, leading them to focus on avoiding ‘being wrong’ rather than striving to maximise their contribution to the business.
It is of course possible to not forecast at all and simply react to customer requirements.
This is exactly the philosophy that underpins the Kanban approach, where supplier replenishment orders are directly linked to customer demand, with buffer stock held to deal with the volatility of demand until the replenishment order is received. This is equivalent to using the previous period’s actual sales as next month’s forecast, something known as a naïve forecast.
That said, this approach is not an effective solution for the majority of businesses because the volatility of sales would require high levels of working capital – dead cash being tied up instock.
For forecasters to add value they must be able to anticipate this demand volatility to reduce the burden of buffer stock, while maintaining the same level of customer service. Amazingly though, in our experience, 30-50% of product forecasts are typically found to be value destroying, i.e. worse than a naïve forecast…