Making a Better Sales Forecast

The quality of your forecast improves when demand planning replaces sales forecasting

by Dave Garwood

"Why spend so much time on the sales forecast?" quips the Sales Manager. "The manufacturing people divide it by two after I give it to them, so I multiplied it by three before I gave it to them! Then they divided by four, so I multiplied by five. The credibility gap became ridiculous. Nobody uses my forecast anymore. They make their own!"

The history of sales forecasting often includes numerous examples of second-guessed, multiple self-serving forecasts, and loads of complaining about the lack of an accurate sales forecast. But complaining just doesn't seem to be making a major dent in the problem! Inaccurate forecasts are still often a top item on the Pareto chart of causes for excess inventory and poor customer service.

In spite of some very impressive results in reducing lead times, customers still want the product delivered in less lead time than it takes to buy material and produce the product, thus anticipating what the customer will buy, i.e. forecasting sales continues to be necessary in most companies. If the anticipated demand is wrong, many unpleasant surprises can occur -- excess inventory, long delivery lead times and wasteful costs.

In a previous article, we declared an end to the term "forecast accuracy." The idea is to treat forecasting as a quality issue and focus on minimizing the variation, not accuracy. A few companies are making impressive improvements to improve the "quality" of their forecasting "process." They replaced sales forecasting with a demand planning process. A key difference is described in the following story.

As soon as the ball was snapped, the scrappy 165 lb. linebacker shot through the gap and nailed the 220 lb. fullback to the ground before he reached the line of scrimmage. The announcer explained, "That's the difference between 'Come here' and 'sic em.' The linebacker didn't wait until the fullback got to him with a full head of speed. He didn't wait for the play to happen, he MADE it happen!

Sales forecasting has often been a process where we looked back, calculated a moving average from history for the future plan and waited for the sales to happen. Demand planning is a process that includes steps to make sure there's an action plan to MAKE the sales happen. Participation, accountability, measurement and feedback are essential elements. Although the differences may appear to be subtle, demand planning is significantly different from sales forecasting.

Demand planning is a process where anyone with information about future customer requirements participates in establishing the plan, including Executive Management. Second-guessing the plan is not permitted. Everyone works to one set of numbers. While the Sales Department is responsible for executing the plan, demand planning reaches out to involve many areas to establish the plan. Actual sales are frequently compared to the plan and deviations discussed. It's not an annual event -- reevaluating and replanning occur at least monthly.

Detailed accountability for execution is clearly defined. For example, the total forecast may be 200 units per month, but the business comes from different demand streams, For example, 70 units are expected from eight major customers, 80 units from distributors and 50 units from a special promotion program. Different individuals are likely responsible for each "stream" of the plan. They plan, measure actual sales and are accountable for their demand stream. They don't just wait, keep their fingers crossed and hope the 200 units of sales comes from somewhere. They develop specific action plans by demand stream to make sure they get the business. Accuracy improves by design, not by accident! That's demand planning!

Ask yourself these questions:

1. Is the plan broken down into sufficient detail, i.e., demand streams, to assign accountability?
2. Is accountability for meeting segments of the Demand Plan clearly assigned to individuals?
3. Are the finalized Demand Plans communicated to them?
4. Do the people responsible for executing the Demand Plan prepare an action plan?
5. Is there a review at least monthly of actual sales to the plan and root causes determined when the actual to plan exceeds reasonable limits?

If the answer to most of these questions is 'no,' you may have an excellent opportunity for improving the "quality" of your demand plans. It can be done by better understanding and implementing a robust demand planning process.