What’s the right forecasting approach in the current business environment?
I am talking about short term operational forecasting here, since that’s the one that drives business on an ongoing basis and has a direct impact on the financial performance of an organization. Forecasting has been a very statistically driven exercise with too much weightage given to quantitative techniques. Quantitative techniques take historical data as the reference or basis for forecasting, and therefore, the results are acceptable as long as the industry and other players work in similar economic environmental conditions. Now, when the consumer demand is extremely volatile and sentiments are down across almost all the industry segments, the historical consumer sales data cannot be considered as the right reference for generating forecasts. And therefore, dependence on quantitative techniques may not be the right approach and might lead to serious consequences such as rise in excess and obsolete inventory, increase in blocked working capital and finally, shortfall in achieving sales targets.
It is a known fact that the recession and slowdown in economy has impacted organizations on both their topline and bottomline, leaving no room for error in any process. Since the tolerance levels for absorbing inefficiencies are at its minimum, organizations are doing a critical health-check by identifying non-value adding processes & cost elements and eliminating them as far as possible. In such an environment, it is highly imperative to re-look at one’s forecasting approach and adopt techniques that are more appropriate, implementable, and let one stay conservative.
In my opinion, I feel that quantitative techniques should be used to generate just a baseline forecast that should get further fine tuned and refined to make it a final forecast, and this final forecast should be used to drive the entire planning process. Doing this at a SKU level may not be feasible, but demand planners should definitely attempt to do it at a product category level and then break the aggregated numbers to SKU level with right business rules. Now the most important part is the fine-tuning of this base forecast, where I feel that demand planners should adopt a two-pronged collaborative forecasting approach and work very closely with:
a) “Internal stakeholders such as marketing and sales teams”. The marketing and sales teams play a very crucial role in boosting sales in a downturn economy, by creating innovative strategies to drive channel push and consumer pull. Usually termed as ‘demand shaping’, its end objective is to drive consumer demand and preferably, organizations focus their efforts to just key brands and geographies. Demand planners should work with these teams to gather inputs and insights about such programs and get an estimate of expected impact on consumer demand. The final forecast can then be prepared by fine tuning base forecast based on these critical inputs which otherwise would have been lost, if there was no such collaboration process in place.
b) “External supply chain team such as distributors and channel partners”. The other critical piece is working with channel partners and distributors, atleast, the A-class partners and geographies and receiving consumer preferences and signals as early as possible. Termed as ‘demand sensing’, its end objective is to be as close to the consumer as possible, so that any demand signal can be quickly picked up and made visible to all members back in the supply chain. Demand planners should work with these partners through periodical consensus planning meetings and get involved in their forecasting process, help them in improving it and use it as the basis for fine tuning its own generated base forecast. Again, let me emphasize here that, it is nearly impossible to capture this precious information through the historical data an organization has. Having very close and continuous interactions with channel partners is a very significant step towards getting the forecast numbers right.
Now, having said that, it doesn’t mean that it will result in a perfect forecast but yes, definitely, it will have all the supply chain members signed in for the final forecast number that drives all the other planning processes. The risks are shared and organizations will take less time to react to any untoward instances especially, when we all are in the middle of this crisis situation. Please do share your comments and views on this; I am willing to hear your experiences and feedback.