Six Steps to Better Sales Forecasting and Demand Planning
Most companies are immature and uncoordinated when it comes to sales forecasting and demand planning. Follow these six steps to increase forecast accuracy, speed planning cycles, reduce inventory costs, end stockouts and increase customer satisfaction.
Few activities are as important to the success of a company as sales forecasting and demand planning. The difference between adequate and excellent sales forecasting and demand planning can make a significant difference in a company's competitiveness and market position. Yet for most companies, excellence in these core business functions remains out of reach.
This article is based on a recent Ventana Research study entitled "Sales forecasting and Demand Planning: Setting the Agenda for Improving Core Processes." Sharing the study's top-level results, this executive summary details mistakes companies make, capabilities they lack and obstacles executives encounter as they seek to improve their sales forecasting and demand planning efforts. It also explores the people, process, information and technology foundations of sales forecasting and demand planning (SF/DP), and it concludes with a recommended six-step SF/DP improvement program.
A Matter of Maturity
Most companies are only beginning to look at sales forecasting and demand planning as two interrelated activities. Ventana Research applied its Maturity Model analysis to assess responses from 209 qualified research participants (out of 784 executives surveyed) and found that most organizations are decidedly immature in this area. The Ventana Research Maturity Model categorizes maturity into one of four levels:
Tactical - The company does not have an integrated sales forecasting and demand planning process. The information that the processes produce is not very accurate or timely, and the responsibility for managing the process and providing the plans often is left to people not directly in touch with buyers and customers.
Advanced - The company has taken steps to make the process more integrated and incorporates a wider range of data in developing its forecasts and plans. More of the right people are involved in producing the plans, and the company produces them faster and in shorter cycles. Yet accuracy still lags, and the plans and forecasts are not timely enough.
Strategic - The company has integrated sales forecasting and demand planning. It brings the people closest to the customers into a highly accurate process. The company emphasizes the importance of accuracy by measuring and rewarding it. It collects detailed information to use in the forecasting and planning efforts so that it can identify more of the root causes for exceptions that occur.
Innovative - The company has a collaborative sales forecasting and demand planning process that incorporates the people who are most knowledgeable and best equipped to manage the process. It reforecasts and replans frequently, and because it has developed this skill, it is able to do it within the shortest possible cycle time.
Overall, more than one-third (38 percent) of respondents rank at the lowest, Tactical, maturity level, and two-thirds (68 percent) are at the two lowest of the four levels (see chart at right). Those at the Innovative level of maturity, only 9 percent overall, understand the importance of integrating forecasts by the sales department, on the one hand, and the demand plans that drive the operational aspects of a company and the financial budgets that stem from these on the other.
The distribution of maturity was very similar in each of the four component categories by which Ventana assessed maturity: People, Process, Information and Technology. In no component were more than 10 percent of survey participant organizations in the Innovative category, and the largest percentage of firms were in the Tactical category across all components.
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