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.
The Impact of Failure
When it comes to sales forecasting and demand planning, ineffective use of information and technology has tangible impacts. Companies find that inaccuracy of sales forecasts contributes to customer dissatisfaction and increased inventory cost. For example, retailers are pressuring consumer packaged goods (CPG) companies to minimize stock-outs, and pricing pressure and markdowns result in net reduction in gross margins. Yet few CPG participants in the research have accurate forecasts: Just 8 percent achieve better than 80 percent accuracy, compared to 37 percent of other industries.
Shorter product life cycles are shrinking the time companies have to succeed in the market. Inefficient trade promotions also dampen performance. Ventana's 2006 benchmark research covering scorecards and dashboards and sales and operational planning (S&OP) revealed that companies place a high priority on optimizing sales, revenue and profitability yet that place too little emphasis on optimizing production, logistics and fulfillment, all of which are vital to long-term success. For example, among companies that sell into retail, only one-fourth of participants that have accuracy of more than 80 percent in their demand plans said they have orders cancelled frequently or sometimes. In contrast, more than half of those that have a less accurate demand planning process experience cancellations more often.
To be effective, the demand planning process must span the organization and cross functions. Yet it is not always easy (or even feasible) for many companies to integrate plans across departments, sales pipelines, demand forecasts, revenue expectations and products. Organizational issues can contribute to the difficulties. Ventana found that one of the factors in companies at the Tactical level in the People category (47 percent) is that they delegate primary responsibility for the sales forecast to the wrong people — that is, to product management, finance or supply chain managers. Similarly, they have the wrong people — in sales or manufacturing — create the demand plan.
Process design and quality of execution have major impacts on overall effectiveness. The Tactical companies (43 percent) update their sales forecasts and demand plans no more often than quarterly, in some cases annually, and take more than one month to prepare them. At the Advanced level (22 percent), companies plan and forecast more often (monthly) but still take several weeks to prepare them.
Most firms also fail to take advantage of the improvements that information technology can provide in their sales forecasting and demand planning activities. IT enables them to collect, analyze and distribute a much greater variety of information than ever before, but Ventana's research shows that these technologies have not been widely adopted. Companies at the Tactical or Advanced maturity level for Technology (63 percent) rely on spreadsheets and ERP systems to handle these tasks. Companies at the higher Strategic and Innovative levels of Technology maturity (37 percent) have adopted dedicated planning and forecasting applications that provide multidimensional views of data and that support account-level plans and statistical forecasts.
For most organizations, the understanding of what's possible is limited, so they fail to seize the opportunity to make better use of information and collaboration to improve the effectiveness of sales and operations. Ventana Research recommends senior executives take a close look at sales forecasting and demand planning and assess how well their company is performing them in the context of what the most advanced companies are doing today.
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