Fostering Demand Planning and Forecasting for Nearly 30 Years!

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IBF - INSTITUTE OF BUSINESS FORECASTING & PLANNING

Chapter Meeting IBF SwitzerlandBasel, March 31st 2009

Fostering Demand Planning and Forecasting for Nearly 30 Years!

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High forecasting accuracy is always a big benefit, however, the true value unveils in crisis management

The sooner and more precisely management is able to foresee the length and depth of a demand slowdown, the lower the opportunity costs as compared of doing nothing and react

The Problem is how to accurately forecast a retraction in demand ?

Hypothesis: More than ever, good forecasts are needed in times of crisis

Fostering Demand Planning and Forecasting for Nearly 30 Years!

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An Example: Four Forecast Timelines for one Product vs. Actuals

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Forecast M1

Forecast M4

Forecast M8

Actuals

What happened: The business has started to decline from M1 creating an increase in forecast inaccuracy. In M8 forecast accuracy increases again.

Timing of Understanding:In M8 it is understood that the retraction in demand is not a temporarily one and that the production need to cope with significant lower capacity utilization.

Action

Reaction

Fostering Demand Planning and Forecasting for Nearly 30 Years!

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What Would be the Costs of “Wrong” Forecasting ?

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Fo

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Forecast M4

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Actuals

Assumption:Potential Monthly CostSavings by e.g. Reducing2 Shift Production to 1 Shift: 100.000 EUR

Conclusion:Company 2 would pay more than Company 1 due to „wrong“ forecasting= 4 x 100 K EUR.

Action ReactionCompany 1

ReactionCompany 2

Fostering Demand Planning and Forecasting for Nearly 30 Years!

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The same metrics would also apply for a rapidly growing demand pattern

The company which is able to react faster to the changes in the market will be able to retract business faster and make more profits compared to the “slower” forecasting company

Example 2: The Economy rebounds

Fostering Demand Planning and Forecasting for Nearly 30 Years!

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Example 2: What would be the Opportunity Costs for „Wrong“ Forecasting ?

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Forecast M1

Forecast M4

Forecast M8

Actuals

ActionReactionCompany 1

ReactionCompany 2

Conclusion:Company 1 would have better chances to re-gain market share and secure long term competitiveness

Fostering Demand Planning and Forecasting for Nearly 30 Years!

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Result from Team Brainstorm Session

Basically, two strategies have been elaboratedEarly Indicators Approach

„Data Is Not The Solution“ Approach

Fostering Demand Planning and Forecasting for Nearly 30 Years!

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Early Indicators Approach

Try to identify reliable Early Indicators for the business

These can be macroeconomical ones line Purchasing Index, Consumer Confidence, Business Confidence, etc

These can also be business specific Early Indicators such as Point of Sale (POS) Data

Even if Early Indicators are not telling where the forecast will exactly be, they can show a direction preview of the business

Fostering Demand Planning and Forecasting for Nearly 30 Years!

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Data Is Not The Solution Approach

This Approach is to admit that in the current situation, data will not provide a reliable basis for forecasting and hence, it will be difficuilt to achieve a competitive advantage by solely relying on data

The conclusion of this approach is to maximize Flexibility in the Supply Chain to be able to adapt as fast as possible towards significant changes in demand

On the forecasting side, a naive forecast, where the last month‘s actual becomes the next months forecast may be more reliable strategy than a statistical one