Three Major Barriers to Sales Forecasting Process Improvement
Introduction
Demand forecasting is a management process that most companies wish they could improve. It is integral to excellence in Supply Chain Management – understanding future demand is a critical element in planning future supply.
It is also integral to successfully managing customer relationships.
Excellence in demand forecasting allows an organization to provide customers with the products or services they want, when and where they want them.
There are some clear signals that demand forecasting is not as effective as
it should be. When inventory levels begin to get out of control, or customer
fill-rates begin to suffer, then companies often realize that ineffective demand forecasting is to blame.
Thus, many companies embark upon forecasting process improvement efforts, but those efforts are often unsuccessful. In the dozens of companies that have participated in our research over the past two decades, we have
seen three major barriers to forecasting process improvement emerge:
1. The Wrong Culture
2. The System is the Solution
3. Management Doesn’t Get It
The Wrong Culture
When conducting forecasting audits at some companies, sentiments such
as the following are often expressed:
Sales and operations live in different worlds – they can’t communicate. You can’t believe anything that comes out of sales – they’re way too optimistic.
You can’t believe anything that comes out of sales – they’re sandbaggers!
You can’t believe anything that comes out of operations – they just want to produce what makes them look good, not what the customers want!
We’re not making our numbers – increase the forecast!
We’re not making our number – push some more product on our distributors!
Such perceptions are indicative of a culture that fails to recognize the importance of accurate forecasts. In many cases, this results from a lack of understanding of how demand forecasting drives so much of the supply chain. Organization-wide training efforts can help to overcome cultural differences
that often exist between the demand and supply sides of an organization.
In addition, performance measurement and reward strategies can help to focus people’s attention outside of their own functional silos.
For example, if salespeople have forecasting accuracy as one of their performance metrics, they quickly become more aligned with the supply side
of the organization, and begin to understand their role in driving supply chain efficiency. Such accountability also improves the attitude of the supply side people toward the sales organization.
The most effective way to overcome the “wrong culture” barrier to forecasting process improvement is to put forecasting in its rightful place in an organization-wide Demand/Supply Integration process (referred to at many companies as Sales and Operations Planning, or S&OP). The conceptual design of such a process is depicted in Figure 1. While it is beyond the scope of this article to explain the Demand/Supply Integration process in detail, the overall benefit of such a process is to establish a formal, disciplined process for the demand side of the company to communicate expected future demand (the demand forecast), and for the supply side of the company to communicate expected future capacity constraints (the capacity forecast). Then, in the context of the financial goals of the firm, strategic decisions can be made about what
to produce (the operational plans) and what to sell (the demand plans).
The key element here is that an effective Demand/Supply Integration process
is formal and disciplined. With such a process in place, both sides of the cultural divisions in an organization can begin to appreciate the issues faced by the other side, and work together to operate a more effective supply chain.
Figure 1:
Demand/Supply Integration
The System Is The Solution
A common barrier to forecasting process improvement is a perception on the part of some people in the organization that forecasting process improvement can be achieved through technology alone. In many organizations, technology solutions are purchased and implemented before there is a complete understanding of the appropriate process for forecasting. In such situations, there is often a perception that because such investment was made in technology, the forecasts should suddenly become more accurate. With such a perception, people will frequently stop applying their time and energy to the forecasting task, believing that this new expensive system will do the job for them. In other organizations, there is a certain comfort level involved with solving problems with technology. As noted above, cultural issues are often pervasive, but those problems are extremely difficult to attack. It is often more familiar to some companies to attack problems with technology, rather than addressing the more slippery issues of cultural mis-alignment.
Overcoming the “system is the solution” barrier requires a re-framing of the source of the problem, and this is where the auditing process can be extremely beneficial. When conducting an audit, be it internal or external, it is important that the audit sponsors publicize it as a process audit. It is critical that the audit not be perceived as a “system selection” process, but rather an effort to understand the strengths and weaknesses of the overall forecasting process. Since the audit will draw attention to issues such as functional integration, culture, and performance measurement, it provides a blueprint for overall improvement, and draws attention away from the narrow focus on technology. The outcome of a well-conceived audit will include recommendations on organizational re-alignment, process, performance measurement, and training, as well as systems, so such an exercise can help to overcome the “system is the solution” barrier.
Management Doesn’t Get It
In some of the organizations with which we have worked, senior executives do not have an understanding of the importance of demand forecasting on the effective management of the firm. In some companies, senior managers have not embraced the notion that the firm participates in a supply chain, and that effective supply chain management requires effective anticipation of future demand. In other companies, management has simply not been shown the gains that are available from investment in forecasting excellence.
Overcoming this barrier requires an effective forecasting “champion” to be in place, and this individual must recognize the importance of gaining support from senior executives. Championing change is one of the most important aspects of this individual’s job, and speaking “management-ese” is a critical element of gaining necessary executive sponsorship. Placing forecasting improvement in financial terms is an excellent way to appeal to senior management in terms that they will embrace. Process improvement can result in top-line effects, from fewer stock-outs and higher fill rates. It can result in reduced costs by reducing inventory carrying costs, reduced trans-shipment costs, and more effective procurement efforts, both for materials and for transportation. And it can impact the balance sheet by dramatically lowering inventory levels. These improvements all add up to significant improvement in return on shareholder value, a measure that will always appeal to senior management.
Executive sponsorship can also be obtained by effectively identifying the “pain points” that currently exist in the organization. The most common pain point that identifies forecasting as a problem area is when inventory levels grow out of control.
When this is the case, the chief supply chain officer is a likely candidate for executive sponsorship. In other cases, the firm has a major pain point associated with supplying scarce products to important customers. In such a situation, the chief sales or marketing officer can be an effective executive sponsor. When a forecasting champion can identify the most important pain point that results from ineffective forecasting, then it becomes much easier to “sell” the value of forecasting improvement, and win the support of that executive.
It is critical to obtain effective executive sponsorship for any effort in process improvement, and identifying the true pain points, along with “selling” process improvement through financial results, is the best way to overcome the “management doesn’t get it” barrier.
Conclusion
Most companies can benefit from improving their forecasting processes.
But in many companies, there are barriers in place to realizing the benefits
that can come from forecasting process improvement. In our experience,
these barriers are normally associated with cultural issues, and are difficult
to overcome. Without question, the presence of an effective change agent
– a forecasting “champion” – is the most important element of a process improvement effort. This individual must be someone who has the ear of senior executives who can provide the resources and the sponsorship that is required for true change. He or she must have the ability to gain buy-in from a variety of functional areas – marketing, sales, finance, logistics, operations, procurement – to embrace a process that includes Demand/Supply integration. Although the barriers articulated here are difficult to overcome, the effort is worthwhile. Significant improvement in forecasting performance can result in dramatic decreases in inventories and other supply chain costs, and dramatic improvements in customer service levels, and thus, overall firm profitability.
About the Author
Dr. Mark A. Moon is Director of the Sales Forecasting Management Forum and Associate Professor of Marketing at the University of Tennessee, Knoxville. Prior to joining the UT faculty in 1993, Dr. Moon earned his Ph.D. from the University of North Carolina at Chapel Hill. He also holds MBA and BA degrees from the University of Michigan in Ann Arbor. His professional experience includes positions in sales and marketing with IBM and Xerox. Dr. Moon has been nominated three times, and has once been the recipient, of the Allen H. Keally award for teaching excellence. His primary research interests are in buyer/seller relationships, demand management, and sales forecasting.
He has published in numerous journals including INDUSTRIAL MARKETING MANAGEMENT, JOURNAL OF PERSONAL SELLING and SALES MANAGEMENT, BUSINESS HORIZONS, JOURNAL of BUSINESS FORCASTING and THE INTERNATIONAL JOURNAL OF FORECASTING. He has worked with numerous companies on sales forecasting re-engineering efforts, including Eastman Chemical, Hershey Foods, Lucent Technologies, DuPont, Union Pacific Railroad and Motorola.
Mark A. Moon, Ph.D.
Associate Professor and Director, Sales Forecasting Management Forum
Department of Marketing and Logistics
University of Tennessee
324 Stokely Management Center
Knoxville, TN 37996
865-974-8062
865-974-1932 (fax)
mmoon@utk.edu
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