A first step in this direction is to recognize that the demand forecast provides the start of a continuous sales and operations planning process, and should not be taken as the final plan that drives the organization. The latest demand forecast must be matched against supply availability and financial goals to develop an agreed-upon one number plan that reflects the realities of the organization's ability to ship customer orders while meeting revenue and cost objectives. Continuous monitoring and analysis of the latest demand signal, demand forecast, and available supply against this one number plan should be undertaken to understand variances and devise corrective actions. Companies have a range of business levers at their disposal (such as price, promotion and order lead time), which they can use to take corrective action and keep the company focused on its corporate goals of increasing market share and revenues. This information should also pass to the senior management team on a regular basis, allowing for the adoption of company policies that enable rapid response to opportunities and risks.
So where does forecast accuracy come into play? Forecast accuracy should not be used as an arbitrary pie in the sky goal but rather as a vehicle for understanding demand behavior and the organization's ability to predict that demand. This understanding brings with it the opportunity for organizations to develop optimized manufacturing, marketing and inventory stocking strategies and to tune the demand forecasting and sales and operations planning processes accordingly so they are in sync with forecast accuracy. Organizations can now be aware of what can be forecasted accurately and what can't, enabling them to adjust their process and strategy accordingly as well to free up resources to focus their efforts in areas where they can have the most impact.
Yes, accurate forecasts should be a focus for any organization — the more accurate the forecast, the more solid the foundation for effective sales and operations planning. And organizations should be continuously striving to increase accuracy for those products that have demand behaviors that can be forecasted with precision. But keep out of the trap. Successful demand management means understanding what can be forecasted accurately and more importantly, understanding what can't. This enables organizations to develop the right processes and policies to minimize disruptions to the supply chain and realize what they are ultimately looking for profitability.
About the Author: Karen Laucka is a Marketing director at i2 Technologies.