• The cost of imperfection: On some products, at certain times, an inaccurate forecast can be very costly. Not being able to support customer demand can drive them to competition, or at least lower their total consumption over a period of time. Overstated forecasts can lead to excessive inventories or the devotion of scarce raw
materials or resources to a product not selling, at the
expense of a product that is selling above its forecast. Ultimately this can result in writing off or reprocessing obsolete inventory or spending premium dollars to make more of a product in short supply (in overtime, premium transportation, and increased costs for expedited delivery of raw materials from suppliers).
Unfortunately, the fact that the impact of an imperfect forecast can be very painful often does not result in greater or more effective efforts to reduce that inaccuracy. In fact, a feeling of hopelessness often emerges, since the forecaster doesn't see a way of solving the problem and believes that she'll inevitably be blamed no matter what she does. This often results in devoting efforts and energies to something they feel they have more control over, so as to offset their "failure at forecasting" with successes in other endeavors. For the sales and marketing executive, it's better to spend time trying to "sell more" than trying to reduce the inevitable inaccuracy of predicting what they indeed do sell.
• Rising expectations: In this world of kaizen or continuous improvement, ever-shortening cycle times, "six sigma" quality, lowered costs, and mass customization, everyone expects everything to get better faster, all the time. This fuels the feeling of hopelessness regarding forecast accuracy and can provide an environment that seems overwhelming or impossible to deal with.
Many changes in the environment make the expectations higher and the conditions worse. For instance, customers wanting more specialized features means that products are proliferated and each of these features has to be forecast. Customers and supply chain partners requiring more frequent deliveries made more quickly, with everyone holding less inventory to dampen demand variations, puts at a premium having the right inventory and resources available when you need them. This is because resource and inventory planning must be based on a forecast unless the total supply chain cycle time (including the planning and manufacturing time of your suppliers and their suppliers) can be made shorter than the total demand chain cycle time (including the replenishment time for your customers, their customers, and the ultimate consumers).
This situation is made even worse when the impact of product availability on meeting personal, functional, and organizational goals such as quotas, revenue targets, and sales agreements are taken into account. Don't overforecast or you'll be seen as a failure for not meeting the forecast. But don't underforecast or the right amount of budgeted resources and inventory will not be available to support the sales. The answer to the question, "how much will we sell" is often greatly influenced by who's asking the question, at what time of year, in what context (for instance, how are we doing against our targets and budgets so far), not only how much, but when, and what they'll do with that answer and who else they'll share it with.
Not only is it harder to actually forecast in this environment, the impact of an inaccurate forecast becomes more painful. If the problem were just estimating total demand by product for a year, the solution would be easier. But knowing how this demand will actually occur during the days and weeks of a year is critical in any organization that wishes to manage its inventor}', utilize its resources, and provide high customer service to thousands of customers over multiple products.
In the minds of sales and marketing executives, the plusses and minuses will even out over the course of the year and they will meet the annual number by the end of the year. This can be seen as accurate forecasting from their perspective. But from the perspective of the supply chain planning personnel, this is good enough only if the organization is willing to live with excess inventories and temporary shortages during the course of the year. But the tolerance for these situations has never been lower in virtually every company in every marketplace.
To Be Continued