Does your company love its sales forecasting process?
If not, you are not alone. While extremely valuable, forecasting’s reputation can be quickly tarnished by bad experiences. Common pitfalls include the lack of a consistent and agreed upon process and the challenges of using cumbersome, expensive software tools. However, companies find ways to address these concerns. A more fundamental issue is knowing what business problems forecasting can address.
Below, we have outlined five of the best use cases for forecasting based on dozens of projects our customers have executed with our technologies.
Sales planning is essential for any company – but especially for firms who are in high growth mode or experiencing a change like adding new products or entering new markets. The fundamental job of the forecast is to balance sales and marketing resources against supply capacity planning. Forecasting will help answer the critical questions:
- Do we have enough sales people to get the volume of orders we have budgeted?
- Do we have the right mix of price, promotion, and marketing in place to drive demand?
- Do we have the essential demand-side resources in place (e.g., travel budget, product training, partners)
If your business does a good job in these areas, you might also ask where you could do better. What territories or teams are over-performing/under-performing – and how will this impact achieving the forecast?
|Sales and marketing resource planning||near-term and long-range planning||volumes and dollars|
Modern sales and operations planning uses forecasting as the central input to the demand side of the equation. The statistical forecast is generated to make adjustments to sales and production planning. And, the organization may make adjustments to the forecast to reflect their insights into how market conditions may impact the forecast.
|Supply and demand balancing||Months and quarters||Volumes|
For many companies, the annual forecasting cycle can be a huge exercise that carries a lot of time, resource, and risk. Adopting a Sales and Operations Planning (S&OP) process and platform can be a great way to address this problem. S&OP is a process that involves generating both dollar and volumetric forecasts to drive visibility into every step of the business process. The output of S&OP includes dollar-based sales predictions, production volume requirements, and inventory levels. By creating a system to capture these metrics, they are available at any time – eliminating the need for the strenuous annual budget preparation exercise.
|Long-range planning and annual budgeting||months and years||Dollars|
The challenge here is that detailed forecasts at a product level must be generated at the distribution center level. While forecasting works great with lots of data, it can choke when the data is too thin. This means good forecasting practice and technology is essential. The best practice here is segmenting out SKU level volumes and dollars and adopting the best forecast strategy for groups of SKUs. ABC/XYZ segmentation is the starting point and groups together SKUs by volume and demand variability to select the best method. Then, forecasting software can automatically choose the right algorithm for the situation, kick out the SKUs with too few data too little forecasting for handling in other ways.
|Mix planning at location level||Weeks and months||Volumes at item level|
A weekly forecast can be generated in different ways. A common practice is to divide the monthly forecast by the accounting cycle (4 or 5 weeks) to approximate the number of weeks in a month. Sometimes, the weeks can be weighted for volume based manager input.
|Determining production resource||Near-term weeks and months||Volumes|
Forecasting to support master scheduling is the foundation for effective customer order promising. It helps to generate an actionable production plan that is more precise, transparent and measurable.
|Sales Planning||Set sales and marketing resources and plan||Months and quarters||Volumes and dollars|
|Demand Planning||Balance supply and demand in S&OP process||Week, months, quarters||Volumes|
|Financial Planning||Long range planning and annual budgeting||Months, quarters, years||Dollars|
|DC Replenishment||Mix allocation stock planning||Weeks and months||Volumes|
|Master Scheduling||Production planning||Week, months, quarters||Volumes|
In case you missed it, our Descriptive, Predictive, and Prescriptive Analytics Explained article provides good guidance to understand and select the best approach.