The two most common errors that many companies make in demand forecasting are in:
- The basis for forecasting
- The confusion between demand and targets
Many product based companies tend to forecast based solely on SKU. The true demand for any product or service is for the features that a product or service has. Each SKU needs to be regarded as a particular combination of features that define the product. The forecasts must therefore be based on combination of features and only then, linked back to SKU.
It is not uncommon to find many companies adopting the old ‘forecasting’ approach of 5% increase on the same month for last year, and add in any corrective factor for the current economy. This just doesn’t make sense. You may want to set your targets on this basis – if one of your corporate objectives is to increase sales volume by 5% over the whole product portfolio, but it is no way to forecast.
This raises the second fundamental error. Earnings targets are NOT forecasts. Forecasts are driven from the market up. Targets are driven from the boardroom down. They tend to collide in marketing with an alarming confusion of terminology. The demand from the market has nothing to do with the demand from your boardroom. Forecasts are demand planning, and it is hoped that the marketing tactics deployed generate sufficient demand to meet or exceed boardroom demand.