Top Three Questions to Ask Yourself When Forecasting
Leaders and planners at consumer brand companies who manufacture, source, and/or retail products all want to know: When forecasts are not always accurate, how do you hedge your bets?
This was a question recently asked by a Supply Chain VP on an educational webinar (which is still on-demand for a few months if you are curious to learn proactive supply chain best practices).
Forecasts, by nature, will always be off. You will never be able to forecast your actual demand—you’re only going to be able to get close. It doesn’t matter if you’re a new brand or have been in the market for years. History doesn’t always repeat itself, nor is the past any indication of future performance.
If you are consistently forecasting low, then you can always take measures to increase the quantities, but it is important to consider what is more beneficial to the organization:
- Would you rather sell all of the inventory and turn down some sales?
- Or, would you rather have to deal with excess inventory at the end of the season, knowing you were able to fulfill every order?
There are many factors to consider so it’s not an easy choice. Some companies like to lean towards forecasting low, rather than forecasting high. This helps minimize excess inventory to avoid discounting and write offs. Others have a strategy to satisfy customers at all costs, where fulfillment rates are maximized and shortages are minimized.
There is no simple formula that will provide a straight answer and the company culture and executive strategy has a lot of influence.
Here are a few questions to also consider:
- What are the opportunity costs of a lost sale?
- Can excess inventory be sold in future seasons, and if so, what is the carrying cost of the inventory?
- Is there an after market for the product that is not sold in-season?
It is kind of like weighing your insurance options. You have to sit down and think about all of these factors and then make a planning decision as an organization. This will impact how you adjust your forecasts and guide decisions to be more aggressive or conservative.
Once the strategy is set, then it becomes crucial to have the supply chain process and analysis tools in place to help execute.
Posted on Wednesday, March 9, 2016