Variation and Forecast Error

Consider the following conversation:


Sales/Customer Services: Why were we short last week on item _______?


Planner: Orders were above forecast?


Sales/Customer Services: How do we prevent this cut in the future?


Planner: I guess we just carry more inventory to prevent next time.


Sales/Customer Services: Thanks.


This conversation goes exactly this way at most of your companies.  The 1st bolded statement could be replaced in any blog post in this series and the 2nd bolded statement makes me cringe.


As in most things, we build on the ideas of others and there are experts in all of the areas that I talk about that I have learned from.  To expand on this post, I would HIGHLY RECOMMEND that you go buy a copy of The Business Forecasting Deal by Michael Gilliland.It is an excellent resource on this topic to ensure you don't try to go wildly solve forecast problems that just won't be solved.  Or better put, sometimes a better forecast can't be made, however you don't simply stop and bandaid with inventory.


As in all things, there are alternatives other than band-aids.  Inventory is the band-aid.  If demand or order variation are creating problems, review the following to improve:


1. Compare standard deviation to forecast accuracy of each item

2. Review the promotional activities to ensure they're connected into your forecasting/scheduling

3. Does your business allow orders to be moved up to hit sales quotas for periods?

4. Do your most volatile items allow for added lead times to hedge against the variation?  If given a choice of longer lead time or better normalized ordering patterns, will your customer adapt?

5. Is the item plannable and your forecast assumptions just wrong?

6. Set a naïve (simple) forecast model and compare accuracy to what you're doing. Are your planning resources being diverted to items which need enhancements stemming from items 2-4 above and it's leading them to not have time to focus on items fitting in #5?


Sometimes forecast variation is simply self inflicted wounds that visibility and effort can help solve.  Sometimes our planners are focused on the wrong things and we need to do an assessment of where forecasting effort adds value and where you're chopping a tree that's just not coming down.


The last thing you want to do is see the conversation above lead to mindlessly carrying more inventory, more warehouses, more cost, less cash, and so forth.  Apathy will touch all of these posts going forward, but your business can solve these problems without the need to just mindlessly carry more inventory.


Velocity Advisors exists to help in all of these areas!  Inventory can be optimized via better demand management.  Visibility to not just the measurement of accuracy, but where those stem from, where is your time being allocated, and where can you better partner with sales and customers to put policies in place to make the unplannable become plannable, and remove obstacles that give the excuse to just store more product.


Let's partner today.