Need of Sales Forecasting within the Company: Analytical Essay

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Forecasting is nothing but predictions and hence closely related with the information flow of a supply chain. In this chapter, we will discuss the information flow in a supply chain from different perspectives like information sharing with channel partners, different obstacles in sharing information and bullwhip effect. Describing and analyzing the forecasting process is our purpose. A deeper understanding of the concept of forecasting will be achieved by discussing it together with the role of forecasting in various managerial functions. This will help us to understand how forecasting is correlated to these functions and the place of forecasting function in overall management. Next to this we will discuss both process of forecasting in general and different approaches of sales forecasting. Being a managerial function, we will discuss effective management of forecasting by seven principles which represents opportunities for management to improve the existing process. In the modern world, forecasting is becoming more dependent on computer technology and customized software. Multiple forecasting system (MFS) is a new trend in forecasting system and hence discussed with description of such software such as ‘Multicaster’. Further the forecasting method / technique changes are based on type of product. One could see different methods are available for forecasting. We have discussed a few of them which are relative to product range of companies studied. Since sales forecasting is management function, the performance measurement and finding out errors becomes an integral part of the process and is important for improvement in existing process. Hence we have discussed different measures of performance measurement at the end of the literature review.

Ordering focused forecasting

Traditionally forecasting was done based on orders from retailers. But these orders do not indicate real customer demand and variation in customer demand may increase during backward ordering. Each layer considers these orders as a base of their own demand forecast and pass the same to its supplier downward. A minute change in this demand may elevate inventory because this demand ordering moves back and each stage want to keep some safety inventory with them. In case of the random changes in demand, retailer may interpret it in wrong way and this could cause elevation or decrease of buffers in whole supply chain. As suppliers do not have direct visibility of this demand pattern they may never take their own decisions and hence rely on interpreted information from retailer. This elevates Bullwhip effect

Bullwhip effect: Distortion of information in supply chain

Bullwhip effect is the phenomenon where demand variability increases in supply chain as you move away from retailer to manufacturer. Lee, Padmanabhan and Whang (2004) had defined bullwhip effect at the first time as “the amplification of Demand variability from a downstream site to an upstream site.” It is observed that the order pattern in upstream direction is highly variable than downstream. The amplification in order variation may cause irrational decision making. (Lee et al 1997). See figure 2.1. It indicates the variation in demand between different stages in supply chain while moving upside. These variations are called as ‘Bullwhip Effect’. They also called as ‘Whip-Saw’ or ‘Whip-lash’. It causes dramatic effect on firm resulting in excessive inventory, poor product forecasts, insufficient or excessive capacities, poor customer service due to unavailable products or long backlogs, uncertain production planning and high cost correction like high shipments.(Lee et al 1997). There is no bullwhip effect in an ideal supply chain where as it is assumed that supply is stationary, fixed lead time, constant purchase cost overtime, no fixed cost of ordering and forecasting is not based on past demand ( Lee et al 1997).

Figure 2.1: variation in order pattern in bullwhip effect.

Forecasting Concept

Forecasts are nothing but predictions about future. May be forecasts of sunrise and sunset can be predictable without any mistake but it is not the scenario in business. Business equations changes as timegoes and hence prediction may give error. Mentzer and Moon (2005), describes sales forecast ‘as a projection into future of expected demand, given a started set of environmental conditions.’ One should not confuse the planning process and forecasting process. Planning is nothing but managerial actions which should be taken to meet or exceed the sales forecast (Mentzer& Moon, 2005). The aim of right forecast is to predict demand perfectly. Hence forecasting is necessary to be focused towards maximum accuracy. Where as planning is needed to be aimed towards efficacy and efficiency of all managerial functions to meet forecasting. In business each project starts with planning. But to plan, the prediction about future is needed so that one could prepare plan well in advance. Here the forecast comes in the picture. Forecasts have been used in all kind of companies, service sectors, and government organizations. Forecasts have been used as input to the planning project or set of activities. Hence Mentzer and Moon, ( 2005 ) say that forecasting is the focal point of corporate hierarchy.

A Summary of the characteristics of sales forecast are as follows:

Forecasts are always wrong and hence one should always expect evaluation of errors in it.
Long-term forecast are normally less accurate than short time forecasts. This is because larger standard deviation of error relative to meanshort-termt term forecasts.
Aggregate forecasts are normally more accurate than disaggregate forecasts. Aggregate forecast contains smaller standard deviation of error than disaggregate forecasts.
The Greater the distortions of information in supply chain the higher are the errors in sales forecast.

Need of sales forecasting within the company

Sales forecasting and Planning

Trade industries graft on the principle of satisfying customer demand through appropriate supply. Companies consider sales forecasting as an essential portion of this procedure. Figure 2.2 shows a simplified co relation

Figure 2.2: Sales forecast in operations planning and sales planning

End customers create demand, and practices such as promotions will increase this. Marketing therefore focuses on the formation of demand by end customers. Different strategies like serving other parties in this streamline like wholesalers and retailers make the same thing easier for the sales department. Supply should be sufficient to satisfy demand. Multiple management roles, such as production, procurement and distribution, work together to sustain inventory. In this chain, numerous distributors also play an important role. Constant flow of information flows through the complex structure of the various management functions and the parties involved. The process begins with demand and concludes with the functions of supply. Sales and operating system (S&OP) handles this information flow. For different companies, the S&OP process is different and can change as the environment changes. Lappide and Larry (2002) describe the operational control of S&OP. As we have already addressed this planning process, revenue forecasting acts as the basic seeding for the S&OP system. The forecast may be based on the study of past history of demand. The arrow of sales forecasting emerges from the demand side as the advertising role originates and handles the demand towards the end customer. Based on the sales forecast, the capacity plan is prepared by the supply side. The capacity plan is nothing but the ability of maximum possible inputs to satisfy demand. In order to consider approaches, both forecasting and capability plans are analyzed through the information network. In this process, Mentzer and Moon (2005) describe two major plans. Plan of service and plan of request respectively. Considering various time-to-time information gathered and approaches pursued, the request plans are provided from the S&O process. The demand plans provide sales and procurement divisions with an idea of future product release and action to achieve corporate strategies. Based on the available information; the S&OP operating plan is issued to provide functions. Each project is made up of various operational projects. Smooth S&OP operation requires precise forecasting. Continuing with the S&OP model of Mentzer, Armstrong (1983), demonstrates how the method of forecasting interacts with structured planning. See figure 2.3

Figure 2.3: Correlation framework for formal planning and forecasting

Planning is a series of business activities. Planning is to agree on priorities and to take appropriate action. The four planning steps: 1) identify goals; 2) develop strategies; 3) review strategies and take appropriate action; 4) track outcomes. Commitment to the fundamental goal is a key to success. But the exact prediction also plays an important role in the effective preparation and achievement of the final objective. One needs to understand that the difference between planning and forecasting. Forecasting is the assessment process of giving estimates and the planning process is the preparation of strategies based on these predictions. Double arrows indicate two-way flows of information between the database and the planning module, according to figure 2.3. An S&OP model operational plan was used to take action. Data can be sent for future and present use to the main database. Choosing the prediction method is an intermediate step between this task. The choice method depends on the company’s different needs. Figure 2.4 can describe it.

Figure 2.4: Use of forecasting methods for the various needs in the company’s planning

Sales forecasting and sales

Sales and forecasting are both closely interdependent as a managerial function. According to Miller and Heiman (1985), the forecasting function during sales planning should not be underestimated. The division of sales consists of different levels of management and sales force. Planning takes place on the basis of forecasting, and sales goals are defined region, time or service. Territory bases assist in the preparation of horizons and levels. That is, I.e. One can predict the product wise (SKU) or the product and place wise (SKUL). Time scales could be calculated by the existence of sales force commissions during forecasting.

Sales forecasting and finance/account

During corporate planning, the finance department carries important functions and plays a crucial role. The finance department determines on the financial level of spending on various consumer projects based on the forecast. This planning normally takes place annually. In some cases, preparation can last up to 5 years, such as launching new products and achieving long-term goals. In addition, the finance department will also manage the forecast-based corporate profit. Can division can target annual profit rates and, depending on policies, can last up to five years. Intervals are determined on the basis of product character and other terms such as once a month. (Mentzer & Moon, 2005)

Sales forecasting and production/purchasing

Output and average scheduling are closely linked to forecasting demand. Long and short-term forecasting is widely used in development and planning, according to Mentzer and Moon (2005). The long-term prediction should take place once planning is considered. When planning the selected product / product range for production; related functions such as selecting the right supplier, developing supplier relationships and planning the manufacturing plant’s cost structure are important. Building the whole system can take many years and therefore long-term forecasting is necessary. Plans rely on future sales of goods to be produced and site-wise sold.

The production plans rely on the purchase forecast during short-term forecasting. Wisner and Stanley (1994) suggest a close relationship between forecasting and purchasing. This shows the value of forecasting during the master purchasing plan preparation process. Purchasing activity requires time lags due to suppliers ‘ delivery and logistical intervention and therefore the purchasing department needs to know the scheduling outlook so that no stockout can take place. It helps to smooth out – of-stock production. (Mentzer & Moon, 2005)

Sales forecasting and logistics

The transportation department shall be held responsible for both storage and distribution from the storage site of produced goods to the destination. The logistics department, therefore, needs demand forecasting with SKU and SKUL rates. In preparation, both short and long-term forecasts are required. Long-term SKU-level planning is needed to decide warehouse and service storage capacity together. It is also necessary to consider transportation services during this long-term planning. The logistics department plans its own service plan based on the production plan and therefore forecasting plays an important role in the scheduling of logistics. The short-term forecast falls in the picture on an urgent basis and for tiny SKUsThis routine varies from daily (in some severe conditions) to order-based weeks or months. Companies usually either buy specialized logistics facilities from logistics providers from third parties or prepare them on their own. When buying or renting these services, the client should be aware of the service characteristics required. From the production forecast, this can be known. SKU and SKUL-based forecast are needed for this reason. (Mentzer and Moon, 2005)

Sales forecasting need in Marketing

The success of marketing is based on the company’s ability to meet customer demand and needs. Conditions such as stock outs and low innovativeness may lower demand and may result in loss of sales. A company is planning its activities in view of this principle. Refer to Figure 2.5

Figure 2.5: Sales forecasting need in Marketing: a flow.

Marketing plans are based on current demand, demand derived, pricing of competitors and various promotions. Knowledge of the forecast is needed to yield from the marketing plan. Annual rates can normally be considered and cycles can be either monthly or quarterly depending on the product (Mentzer & Moon, 2005; Armstrong & Brodie, 1999) Table 2.1 outlines the need for revenue forecasting in different administrative functions.

Table 2.1: Forecasting Requirements of Various management functions.

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