Regarding to the forecast and its process , five important questions need to be addressed for achieving good outcomes.
1. Who owns the forecast?
2. How accurate should the forecast be?
3. At what level should be forecast?
4. How frequent should we forecast?
5. Introduction of new products
1. Who owns the forecast?
In many companies the owner of the forecast seems to be not really pinpointed. This is strange because to my opinion (and many other experts) it is very clear that Sales and Marketing should “own” the forecast. It’s their job, they know the market. They own because they sell it. Which does not necessarily mean they have to actually make the forecast.
This may sound strange but other people can help preparing the forecast. E.g. analysts can prepare a so-called base- or statistical forecast, based on historical data. Sales and marketing can add marketing –intelligence, because a statistical forecast depends solely on a historical pattern and assumes the pattern will not to change in future.
Many other things can be done to assist Sales and Marketing in preparing their forecast. But again: Sales and Marketing own the forecast, they sign the agreed-upon-forecast and are responsible for the accuracy of the forecast. The latter brings me to the accuracy of the forecast.
2. How accurate should the forecast be?
One should realize that every forecast is wrong. If Salespeople (or other forecast-experts) were able to predict with high accuracy they would not work in your company. They would sit on the beach of Tahiti, sipping on a $20 cocktail.
However this does not mean that one should not try to reduce the forecast error as much as possible. Alas we cannot give a real figure about the accuracy of the forecast. It depends mainly on market-characteristics. For statistical forecasts a forecast error of less than 20% (Mean Absolute Percentage Error) at SKU-level is considered to be very good.
3. At what level should be forecasted?
Because S&OP aims to forecast the volume it is not necessary (and even impossible) to forecast at SKU level. The forecast for a special type off-the-road bicycle in a certain color, 20 weeks ahead will be dead-wrong for sure. But maybe the total sales for off-the-road bicycles will be much more according to reality.
In many companies product-families are defined which can be used. The unit in which we measure should reflect the purpose of the forecast. In many companies we want to use the forecast to balance demand and supply of capacity so hours would be one possibility. But we also like to link the S&OP forecast to business plans so $ would be a second option. And if the product-families are homogeneous (like in our bicycle example) even the bicycle could be used as unit. If a commercial product family consists of many different products, sold in total different units Sales & Operations Planning 5 (kg, bottles, packs), and produced on many different capacities one might run into trouble.
4. How often should one forecast?
Normally a frequency of once a month should be sufficient. However if market conditions suddenly dramatically changes one should act as fast as possible.
5. Introduction of new products
The introduction of new products and the demand-forecast of these products proves to be very frustrating. Although we always have high expectations of new products, the reality is that actual demand seldom meets these expectations.
It is a given that the majority of new products fail. A substantial part of obsolescence and write-offs is caused by unsuccessful introductions. Initial forecasts and derived production or purchase batch size were too optimistic. This does not mean that we should not introduce new products! But new products should be treated with extra care. And the influence of these products in the forecast should be closely monitored.
New products should be treated as so called A+ products; products which are very important and require much attention. They have to be monitored closely during the first year after introduction. Introduction of new products is a commercial decision. And Sales/Marketing is responsible for the demand forecast of these products. One should show forecast and sales for new products different from the current products.
At introduction one should state when and how many products (in € or hours) per month will be sold. At introduction one should state when a new product is successful (e.g., x € in the next y months) and when a product should be removed from the portfolio. The responsibility of stating the numbers for success and failure is responsibility of the Management Team.