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Forecasting Demand Part 1: Is a Demand Forecast a Sales Target?

How many companies realize that sales forecasting is difficult and then invest in correcting problems caused through bad planning? We keep safety stocks and high inventory levels, both in process and finished goods; we invest in increasing production capacity - machines and manpower; we spend a fortune on marketing in the wrong markets; we purchase sophisticated planning tools to reschedule production more efficiently; ... and the list goes on!

So much waste is generated in organizations because we don’t understand the markets that we are trying to sell our products into. Of the total capital tied up in high inventories alone, what percentage is spent on generating and measuring sales forecasts daily/weekly? If we could forecast accurately, by how much could we reduce our inventories and improve the quality of our plans?

Most forecasting is judgmental and intuitive. Unfortunately, many times companies use judgmental forecasting where they should not. In many cases forecasting is confused with goal setting!

If sales people are asked to forecast sales, these figures then become their sales targets and the yardstick by which they are measured. These sales forecast are normally driven to a great extent by budget. What does this really have to do with actual customer demand?
Statistical forecasting separates the process of forecasting from that of goal setting. The forecast will then be objective and the process will remain flexible to change as the market changes. This forecast is thus much more valuable to the business than the sales goals. Sales campaigns and promotions designed to meet sales targets can be modeled into these tools as events. This all make the demand forecast a number that can be used for planning and against which actual results can be measured so that the accuracy of this number can be improved over time.



In a make-to-order business (as many small businesses are), your demand forecast is driven by your order book. However, with this, you have a fairly short planning horizon. So, how do you see beyond the order book to plan growth in your business? Find the demand forecasting technique that works for you and use it to plan your business; monitor actuals vs planned; and avoid surprises.

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