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by Laurus Nobilis
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Suppy Chain

Forecasting Methods: Cross Functional Demand Forecasting (E)


Forecasting Methods


What are recommended forecasting methods? Who are the stakeholders that are involved in forecasting methods?


Posted: Aug 2009

Demand forecast is the cross functional document that is aligned for the incoming period. The Sales forecasting methods should involve all stakeholders, not just sales department. Although the sales can set volume targets, they can be unrealistic in some cases. They can be higher or lower than real demand, due to tactical reasons, but they can also be reflection of wishful thinking than the real demand forecast.

Unrealistic demand forecast can create serious consequences along the organization. If the demand is estimated too high than is real demand, there is a risk of product obsolesce. Once the product approaches the expiry date, the chances for customers to accept it are minimal. Write off is causing direct negative impact on profit of the company. As the chain reaction, the raw material can also become obsolete in case that sales volume is much lower than initially planned. Secondary negative effect of overestimated volume is increase of stock in warehouse. This is causing related costs, e.g. additional warehouse renting due to overstocking.

On the other hand, if the demand forecast is lower than the real demand, the risk of stock out ( out of stock ) is possible. The stock out is leading to direct loss of profit, due to lost sales opportunity. As a secondary effect, the service level is compromised, which leads to retailer's dissatisfaction and potential deterioration of future co-operation. Finally, the consumer is tending to switch to another brand in case that stock-out is frequent.

Therefore, the choosing the right forecasting methods is crucial decision for proper inventory management. The correct forecasting method for demand forecasting requires involvement of all stakeholders, primarily sales and supply chain. The good approach to sales forecast starts with:

  • Sales analyst / demand planner is calculating the historical forecast based on the same period of previous years and trends of several previous months of current. The historical forecast is estimated on the level of every SKU. This approach is continuing along the process.

  • Since the sales of previous years can have some deviation caused by different factors, it is necessary to normalize the historical forecast. The normalization requires a good database of previous years promotions, stock-outs, or any other factor that influence sales volume. Normalization means flattening the sales curve for the factors that occurred in the last year and are not likely to happen in this year. Promotion that happened last year caused volume increase. In case that promo is not taking place this year than it is necessary to deduct this incremental volume. On the other case, if there was stock-out at the same period of previous year, while the stock-out is not anticipated for this year, than it is necessary to fill the gap on the curve of historical demand.

  • The demand forecasting is starting point for the activities among the whole organization. Since inaccuracies can lead to overstocks and write offs on one side, or stock outs on the other side, the sales forecast is should be aligned on the cross functional level.

    Now when the sales forecast is normalized, it is necessary to enrich it with the current promotions. Expected volume incremental should be added on top of normalized sales forecast.

  • Enriched sales forecast should now be revised by sales people, usually high position managers. They need to give their input, based on the current trends in the market, information from the customers, competition activities, and most of all from their experienced.

  • Next step is alignment of demand forecast with supply chain. Up to now the sales forecast is just the imaginary plan. The supply chain is supposed to materialize this plan, meaning to purchase raw materials, produce the product, store it and finally to deliver it to the customers, as per sales orders. The supply chain is giving feedback on the sales forecast, regarding feasibility and potential restrictions.

  • Once the supply chain is returning feedback to demand planner, the final adjustments are done. This is considered to be the final unconstrained demand forecast.

The process of demand forecast alignment is very complex and time demanding forecasting method. Still it is very important, since errors in forecast are creating inevitable losses to the company. In order to track efficiency of sales forecast, it is necessary to track sales forecast accuracy.

Related Reading:

Demand Forecasting 
Forecasting Accuracy





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