Exceptional Sales Forecasting

How World Class Companies Plan for their Demand

Apr 29, 2009 Paul Larson

Forecasting is estimating the future demand for a firm's products and services. It is essential to sound business planning.

The long-term viability of a firm as well as its profitability and efficiency relies on accurate forecasts. When forecasts are done poorly, the entire company must endure the consequences. Financial and operations managers have to deal with the impact of an optimistic forecast. In cases like this, cash is tied up in slow moving inventory. Conversely, a pessimistic forecast will lead to marketing and sales managers to have shortfalls in revenue due to limited product availability.

Forecasting is a Management Control

Forecasts are never perfect but they are helpful in assisting in being prepared for the actual demand. Imagine how successful investing would be if the future could be predicted perfectly. While a perfect prediction may not be in the cards, any steps taken in that direction would be an improvement over no knowledge at all. That knowledge is the control that helps to forecast and plan supply chain activity and is called aggregate planning.

Long-range forecasts usually look out one year or longer. Medium range forecasts cover several months and short-range forecasts go out only a few weeks. An educated guess, management consensus, a survey of the sales force, a survey of customers, history and market research are examples of forecasting methods. Forecasting models of linear regression, correlation analysis, moving averages and exponential smoothing are a few of the quantitative methods available to a forecaster.

Forecasting Techniques

World-class companies have effective techniques of forecasting with exceptional business planning systems in place. Long-range business plans are found throughout the entire organization and affect all facets of the business. These plans are updated often because of an integral long-range perspective that continuously generates new business opportunities and needed actions.

In larger companies, staff specialists maintain sophisticated software that is able to digest great quantities of data. These specialists also have access to forecasting and other sources outside their organizations from many locations around the globe.

Monitoring the Performance of the Forecasting Model

Because business plans are updated often, it is crucial that they reflect any significant departures of actual results from forecasts. This process not only results in plans that reflect the most up to date information, but with increased use and modification, the forecasting model can evolve to be very accurate.

Planning sets up the control that can be anticipated and good forecasts are essential to that planning. This leads fi to develop excellent short-range forecasts also. The effective forecasting of production capacity, size of the workforce, quantity of purchased materials, product lead times, and inventory levels drives a well-managed planning system. There are some firms that have developed a forecasting model so efficient that they use it to update projected income statements and balance sheets.

Forecasting Issues

There are four main issues that can cause difficulties in arriving at an accurate forecast.

1. Competing goals between the Sales and the Operations groups and resulting bias from that goal influence
2. Inherent difficulties in predicting out into the future
3. Loss of forecast data visibility when it is converted to the production plan
4. Difficulty in obtaining an understandable view of forecast exceptions in timely manner

The copyright of the article Exceptional Sales Forecasting in International Trade is owned by Paul Larson. Permission to republish Exceptional Sales Forecasting in print or online must be granted by the author in writing.

An accurate forecast leads to better control

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