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The vagaries and pains in forecasting . . .

February 25, 2010

Forecasting is a ChallengeFor lots of reasons, I love my work. One of the reasons is that I get to address a wide variety of challenges in a wide variety of companies and industries. Yet, while the details and personalities are different, many of the issues boil down to being pretty much the same. This week, I was revisiting the issue of an executive totally frustrated with business forecasting. He was “losing sleep” over the feeling of helplessness at missing a forecast through no fault of his organization. It was causing major stress in his life.

Forecasting the future is a fool’s game we all find ourselves having to play if our business is of any reasonable size. How else will we plan for the business? If we don’t forecast, we are likely not to be able to serve our customers. On the other hand, when we do forecast and it is wrong to any significant degree, we may needlessly tie up working capital in inventory and/or capital equipment. To make matters worse, our customers are no better at forecasting than we are. At this point, I’m almost convinced that the weathermen are better at forecasting the weather than we are at forecasting business.

So given that forecasting is a guessing game, although we hope it is an informed guess, then how do we build a culture that will help us hold people accountable for an accurate forecast of our business needs while at the same time making sure we aren’t blind to the reality of just how much the final results may well be outside of our control? This is not an easy question to answer, yet I believe it is a significant issue for many companies.

Like so many organizational issues, this one requires many people to step up and own part of the challenge. As an example, let’s talk about the revenue forecast many companies require of the sales team. The sales team knows that they will be measured at least in part on reaching revenue goals. So the tendency is for the sales team to be conservative in the first go-around on revenue forecasts. That way, they will receive a “low quota” to reach. On the other hand, management will look at the headcount in sales and realize that if the forecast is too low, executives will insist on reducing the headcount to match the revenue. This is a well known, “ancient,” game. And from a pure sales point of view, it all makes sense. However, from an organizational point of view, perhaps there are other issues that need to be considered.

What about inventory, for example? If I forecast low in order to make earning my commissions and bonuses easier for me, I will not have the inventory on hand to serve my customers. After all, the product line will be loaded and inventory will be built based on the expected customer needs. So a low forecast may well result in poor customer service. If sales management “wins” and they keep the forecast high in order to justify headcount (and T&E expense accounts, etc.), then we may well wind up with inventory that won’t be sold and thus needlessly tie up working capital.

It is my opinion that we should seriously look at making sure everyone in the order fulfillment process be held accountable for, measured on and rewarded for customer service, inventory, revenue and profitability. It is the executive’s and manager’s job to make sure that the goals for each are shared reasonably by all (perhaps not the same goals for each department of course) and that the reasons for the goals are clearly communicated. Rather than set revenue numbers from the top down, the forecast should build from the bottom up. The consequences for the forecast should be very clear, and the tension between all parties should be allowed to create the compromise needed to finalize the budget. Only by having everyone focused on all the various parts of running a world class order fulfillment process, and owning the consequences of the decisions, can we have continuous improvement in both forecasting and customer service.

This thought process applies to more business processes than simply the order fulfillment process. It applies to all the major business processes and can lead to very inventive ways of compensating employees. What gets measured and rewarded gets done. Make sure everyone is headed toward the same goal. How does your company manage the order fulfillment and forecasting process? Are the sales people measured on inventory turns, RMA procedures, customer service as well as profitability and revenue goals? What keeps you from having the Marketing People also share in the same goals with a different weight on things more directly in their control? Are you willing to be held accountable for any forecasts you might be asked to provide? Are you willing to be held accountable for the consequences of those forecasts?

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