| Insights

Forecasting the other F word

Understanding How Forecasts Help your Business</strong

Using the simple, but effective Dupont Return on Capital Model, we can see what can happen with more accurate forecasts.

  • Profit = Sales – Costs
  • Return on Invested Capital = Profit / Invested Capital

Improving forecasts increase fulfilled sales and therefore profit at lower investment capital

It is Hard to Hire, Train and Retain Forecast Talent
Skilled forecasters have a unique set of skills. They have to be good at:

  • Math, and especially statistics
  • Handling large datasets and therefore must have good database programming skills
  • Understanding the company’s industry, products and services

It is hard to find people like this!

Improving forecasts increase fulfilled sales and therefore profit at lower investment capital

Forecasting and Inventory Management is often done in Spreadsheets
One software company estimated that 50% of companies use spreadsheets for forecasting.A large accounting firm analyzed their own spreadsheets and found that 90% had formulaic errors. This adds up to problems.

I personally have seen a Client use a spreadsheet created by an employee who left the company 5 years earlier.  No one knew exactly how it worked.  The formulas for calculating forecasts and inventory levels were nonsensical, and no surprise, created stock-outs on some items and excessive inventory levels in others.

However, even when you are using your ERP system, most of the forecasting models in these programs are too simplistic to be effective for complex businesses with seasonality, low-volume (sporadic demand) items and fast-changing demand patterns.

Using Best-of-Breed Forecasting/Inventory Software AND still getting Bad Results
Another common problem we have seen is companies buying great software but manually over-riding it because no one understands the models built in and/or the software has not been properly configured… the black-box syndrome. You cannot rely on great software to replace knowledge.

The Solution – Education & Knowledge
The solution is actually simple, a group of people at your firm should understand the basics of forecasting and inventory management.  This includes sales, operations, supply chain, marketing, info-systems and finance. Then you can properly use your software, buy specialized forecasting/inventory software or talk to us about our Outsourced Forecasting & Inventory Optimization Service.

Supply Velocity has a two day Basics of Forecasting and Inventory Management workshop that can be delivered in two 1 day sessions or four half-day sessions. Forecasting & Inventory Management Workshop

There are other resources such as the Council of Supply Chain Management Professionals (CSCMP) or the Association of Operations Management (APICS) that include these skills in their certification programs.

If you have any additional questions or would like to discuss forecasting and inventory management, email me at: Mitch@supplyvelocity.com.