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Why a sales forecast is vital in all areas of your business

In today’s fast-paced business environment, an accurate forecast is vital for most companies. But forecast means different things to different people. Sales typically use forecast on customer level whereas production focuses on the material level?

So let’s see exactly how forecast is used across functions and why it’s important to understand the different purposes before improving it.

The CEO

Ok, so the head of the company isn’t really a department, but the forecast helps answer key questions like:

  • What will the sales outlook be for the next three, six, or twelve months, and how does it compare to last year’s sales?
  • What are the largest gaps between budget and forecast?
  • Is future growth coming from the right segments?
  • Are there any sales trends that hurts high margin business?

In short, forecast serves as a reality check for budgets. It helps identify budget gaps and show areas that need attention.

In nine out of ten instances, forecast will be more accurate than budget because it’s refreshed more often and has less bias toward wishful sales target.

So why not use a forecast instead of a budget? This is a discussion I'll examine in my next post.

Finance

The finance team is responsible for controlling how the company’s money is spent. The focus is on business projections and establishing the right investment priorities. Finance plans are long-term and provide the basis for the annual investment plan. The key is to assure investments are correctly aligned with growth and changes in customers’ needs.

A CFO must foresee dynamics that could have a dramatic impact on business. A forecast may assist in the following ways:

  • Determines if current manufacturing capacity is sufficient to meet projected growth. Should we invest in more production capacity? Exactly where are we going to have bottlenecks?
  • Identifies areas with significant investments where forecast drops.
  • Is projected revenue the next three, six, or twelve months aligned with budgets?
  • How much of the product portfolio is no longer selling and becoming candidates for write offs?

Supply Chain

As the name implies, the supply chain team has to make and stock the products that the company sells. Inevitable focus is on getting forecast right at the material level.

Planning uses forecast to plan in advance since there is a certain lead-time for creating the products.

Apart from knowing the expected sales in the lead time period, planning must also receive input from sales if promotions come up and determine what the impact on sales will be.

Supply chain forecast is used in three key areas:

  • Forecast on material level helps determine what to produce.
  • Forecast on item and warehouse levels determine the need for replenishment.
  • Forecast aggregated on production lines assists in capacity planning.

Companies with poor communications between sales and supply chain pay a high price in terms of having high stock levels to absorb the occasional sales shocks. Not only will this increase capital cost, but also increase the cost of scrapping products that have been over estimated and no longer sell.

Out of all the departments covered in this article, operations are hurt the most by poor forecasts.

Without a forecast that is accurate production will not match demand. Consequences are tangible. Production lines will bounce between over and understaffing and so will levels of over and understocking.

Sales

Sales departments are generally separated by region, channel, or business unit. Collectively, the sales department tends to have incentives that differ from those of other departments. They work at a more granular customer-oriented level and have bonus structures for reaching sales targets.

I often see sales targets and forecasts gets tangled up. The forecast is an unbiased estimate of what future sales might be. Sales targets add optimism/wishful thinking and expectations laid out by management.

The sales department needs a forecast that:

  • Shows expected growth or decline in sales for their region, channel, or unit
  • Compares forecast with budgets/targets
  • Clarifies how promotions are expected to increase sales
Sales presents a special situation in terms of forecasting needs, as under-forecasting hurts them, but over-forecasting can actually help them. Under-forecasting “hurts” because running out of stock means lost commissions.

Since sales usually have no ownership of inventory, they would rather sit on a pile of stock than risking a month with no bonus. I know this is simplified but you will be surprised by the amount of companies struggling with this dilemma.

Marketing

Forecast highlights how brands will grow in the next three to six months and gives marketing an option for pushing promotions in areas where sales are trending against target.

Since marketing departments in some industries spend fortunes on promotions, companies need to know the financial trade-offs associated with running different kinds of promotional programs.

The way marketing works with forecast is often centered around price models (regression analysis) to estimate the sales increase at various price points.

Marketing needs a forecast that:

  • Clarifies the relative success or failure of new products
  • Provides an aggregate overview of sales trend at the brand level
  • Shows if new products will cannibalize old products
  • Models the sales impact when price points chang

If you want to improve forecast start with these three questions first

Who will the forecast improvement benefit?

Improving the forecast 10% on item level might lead to massive savings in operations, but will not necessarily lead to a better forecast on the business unit and customer level.

How should we measure it?

Before optimizing the forecast, it is key to establish a measure that will assure transparent results. Measuring forecast is often a heated discussion. For example, sales might measure forecast accuracy on business unit level, whereas supply chain will do the same on material level. Obviously, as we aggregate the sales, the easier it becomes to forecast. So on business unit levels, that forecast might look excellent, but the reality is on material level, it is very poor.

Think of a business unit with two products, A and B. For A Sales they forecast 0, and for B they forecast 100.

Now, one month later, sales occurred in reverse. A sold 0 and B sold 100. For the business unit, the sales were 100 in total, as was the forecast. On this level, sales were 100% accurate, but on item level they were 0% accurate.

I strongly advocate to measure the forecast accuracy on item level since this is the level the company is planning. Inaccurate forecast in this level will be directly linked to stock outs and excess inventory. So a first step is aligning the measurements and then make sure the forecast is improved at the right level.

Why should forecast be improved?

Very often (all too often), the belief is a better forecast will lead to massive savings since the forecast is the fuel of planning in operations. This is accurate from a textbook perspective, no doubt, but in real life there are many more factors which go into planning and affect inventory other than just a better forecast. Actually, a better forecast might not move the needle because the root cause of wrong inventory might be a bad planning behavior, wrong safety stocks or minimum orders that have not been taken into consideration. So before embarking in a forecast project, it is key to know exactly the root causes of imbalances in inventory.

THANKS for your time!

In today’s fast-paced business environment, an accurate forecast is vital for most companies. But forecast means different things to different people. Sales typically use forecast on customer level whereas production focuses on the material level?

So let’s see exactly how forecast is used across functions and why it’s important to understand the different purposes before improving it.

The CEO

Ok, so the head of the company isn’t really a department, but the forecast helps answer key questions like:

  • What will the sales outlook be for the next three, six, or twelve months, and how does it compare to last year’s sales?
  • What are the largest gaps between budget and forecast?
  • Is future growth coming from the right segments?
  • Are there any sales trends that hurts high margin business?

In short, forecast serves as a reality check for budgets. It helps identify budget gaps and show areas that need attention.

In nine out of ten instances, forecast will be more accurate than budget because it’s refreshed more often and has less bias toward wishful sales target.

So why not use a forecast instead of a budget? This is a discussion I’ll examine in my next post.

Finance

The finance team is responsible for controlling how the company’s money is spent. The focus is on business projections and establishing the right investment priorities. Finance plans are long-term and provide the basis for the annual investment plan. The key is to assure investments are correctly aligned with growth and changes in customers’ needs.

A CFO must foresee dynamics that could have a dramatic impact on business. A forecast may assist in the following ways:

  • Determines if current manufacturing capacity is sufficient to meet projected growth. Should we invest in more production capacity? Exactly where are we going to have bottlenecks?
  • Identifies areas with significant investments where forecast drops.
  • Is projected revenue the next three, six, or twelve months aligned with budgets?
  • How much of the product portfolio is no longer selling and becoming candidates for write offs?

Supply Chain

As the name implies, the supply chain team has to make and stock the products that the company sells.  Inevitable focus is on getting forecast right at the material level.

Planning uses forecast to plan in advance since there is a certain lead-time for creating the products.

Apart from knowing the expected sales in the lead time period, planning must also receive input from sales if promotions come up and determine what the impact on sales will be.

Supply chain forecast is used in three key areas:

  • Forecast on material level helps determine what to produce.
  • Forecast on item and warehouse levels determine the need for replenishment.
  • Forecast aggregated on production lines assists in capacity planning.

Companies with poor communications between sales and supply chain pay a high price in terms of having high stock levels to absorb the occasional sales shocks. Not only will this increase capital cost, but also increase the cost of scrapping products that have been over estimated and no longer sell.

Out of all the departments covered in this article, operations are hurt the most by poor forecasts.

Without a forecast that is accurate production will not match demand. Consequences are tangible. Production lines will bounce between over and understaffing and so will levels of over and understocking.

Sales

Sales departments are generally separated by region, channel, or business unit. Collectively, the sales department tends to have incentives that differ from those of other departments. They work at a more granular customer-oriented level and have bonus structures for reaching sales targets.

I often see sales targets and forecasts gets tangled up. The forecast is an unbiased estimate of what future sales might be. Sales targets add optimism/wishful thinking and expectations laid out by management.

The sales department needs a forecast that:

  • Shows expected growth or decline in sales for their region, channel, or unit
  • Compares forecast with budgets/targets
  • Clarifies how promotions are expected to increase sales

Sales presents a special situation in terms of forecasting needs, as under-forecasting hurts them, but over-forecasting can actually help them. Under-forecasting “hurts” because running out of stock means lost commissions.

Since sales usually have no ownership of inventory, they would rather sit on a pile of stock than risking a month with no bonus. I know this is simplified but you will be surprised by the amount of companies struggling with this dilemma.

Marketing

Forecast highlights how brands will grow in the next three to six months and gives marketing an option for pushing promotions in areas where sales are trending against target.

Since marketing departments in some industries spend fortunes on promotions, companies need to know the financial trade-offs associated with running different kinds of promotional programs.

The way marketing works with forecast is often centered around price models (regression analysis) to estimate the sales increase at various price points.

Marketing needs a forecast that:

  • Clarifies the relative success or failure of new products
  • Provides an aggregate overview of sales trend at the brand level
  • Shows if new products will cannibalize old products
  • Models the sales impact when price points chang

If you want to improve forecast start with these three questions first

Who will the forecast improvement benefit?  

Improving the forecast 10% on item level might lead to massive savings in operations, but will not necessarily lead to a better forecast on the business unit and customer level.

How should we measure it?  

Before optimizing the forecast, it is key to establish a measure that will assure transparent results. Measuring forecast is often a heated discussion. For example, sales might measure forecast accuracy on business unit level, whereas supply chain will do the same on material level. Obviously, as we aggregate the sales, the easier it becomes to forecast. So on business unit levels, that forecast might look excellent, but the reality is on material level, it is very poor.

Think of a business unit with two products, A and B. For A Sales they forecast 0, and for B they forecast 100.

Now, one month later, sales occurred in reverse. A sold 0 and B sold 100. For the business unit, the sales were 100 in total, as was the forecast. On this level, sales were 100% accurate, but on item level they were 0% accurate.

I strongly advocate to measure the forecast accuracy on item level since this is the level the company is planning. Inaccurate forecast in this level will be directly linked to stock outs and excess inventory.  So a first step is aligning the measurements and then make sure the forecast is improved at the right level.

Why should forecast be improved?

Very often (all too often), the belief is a better forecast will lead to massive savings since the forecast is the fuel of planning in operations. This is accurate from a textbook perspective, no doubt, but in real life there are many more factors which go into planning and affect inventory other than just a better forecast. Actually, a better forecast might not move the needle because the root cause of wrong inventory might be a bad planning behavior, wrong safety stocks or minimum orders that have not been taken into consideration. So before embarking in a forecast project, it is key to know exactly the root causes of imbalances in inventory.

THANKS for your time!