A mountain of research today shows that improving forecast accuracy delivers a high ROI. Improved forecast accuracy, when combined with software that translates the forecast into demand-driven events, will decrease inventory and operating cost, increase service and sales, improve cash flow and GMROI, and increase pre-tax profitability.
Lowering Inventory and Raising Sales at the Same Time
Many people are conditioned to accept mediocre demand forecasting accuracy. The most common excuses I hear for keeping inaccurate forecasting include: “We paid a lot of money for the software” and “The software does a good job with other operations.” The irony is that the same people when asked if they shopped for better software, will respond no. The explanations range from they do not see the value to disbelief – there isn’t a better demand forecasting solution in their market. Businesses have reacted for the last 20 years by placing more value on the plan, a top-down approach that costs more money and has lower returns.
How Accurate Demand Forecasting delivers Higher Returns
- Grows Revenue – Fast with Higher Service Levels
- Increase Sales: Better in-stocks of right products
- Decreases ‘Show-rooming’ effect: Available to buy with no wait
- Improve Customer Opinion: Better in-stock sends message to consumers
- Improve & Increase Social Media: Consumer tweets their success at your store
- Focus Marketing: Dependable Forecast help marketing channel consumer into the business goals
- Lower Operating Cost and Improve Working Capital Use
- Inventory Lowers: Only own what we will sell – often 15% or more.
- Flat line Accounts Payable: Less spot buying at beginning and end of month.
- Decrease Acquisition Cost: Plan buying with greater accuracy, less rush orders also.
- Decrease Carrying Cost: Knowing when it will sell and how long to receipt more units.
- Shareholder Value – higher sales and lower cost deliver more together
- Improve Turns: More sales and less inventory on hand.
- Improve GMROI: Gross Margin Return on Investment.
- Improve pre-tax profitability: Higher sales and lower costs.
- Improve Street Confidence: Investor confidence in management and management messages.
Results and mileage will vary for every company based upon the software that is used, the forecast, and the company’s unique situation. However, a good basis, from our experience, is that a 15% forecast accuracy improvement will deliver a 3% or higher pre-tax improvement.
The Research: Improving Forecast Accuracy delivers Higher Profits Two resources, both widely held to be knowledgeable in this field, are the Gartner Group and Dr. John Mentzer. Their research consistently shares the same message – accurate forecasts deliver increased profits.
The Gartner Group has a host of seasoned and practiced supply chain professionals that include: Steve Steutermann, Tim Payne, Janet Suleski, and Mike Griswold. In the last two years, they have presented and published a number of articles and research highlighting the returns for companies that use accurate forecasting and run Demand Driven supply chains with a demand forecast.
Gartner’s measurable successes from more accurate demand forecasting include:
- Inventory reduction greater than 15%
- Service Attained improves more than 10% (order fill rate increases more than 20%)
- Average 2% revenue increases
- Gross Margin increases 3 – 5% range
To say this differently, Gartner found inventory decreased while sales increased at the same time. With improved demand forecasting, the companies bought less of the products that were low selling and kept pace with customer demand for what was selling. This leads to better GMROI, higher profits, lower inventory. Gartner analyst Mike Griswold recently released a paper on the subject: “Research Roundup for Demand-Driven Retailers.” From Gartner: “Demand-driven retailers balance operations and innovation excellence, while, at the same time, delivering exceptional and profitable customer experience. Use this research to identify the demand-driven retailing strategies and capabilities retailers need to initiate a transformational journey.”
Dr. John Mentzer
Dr. John T. Mentzer (bio) was one of the foremost authorities on supply chain management. Among his popular writings is a three-page abstract titled ‘The Impact of Forecasting on Return on Shareholder’s Value.’ He opens the article sharing that “high-level executives are more concerned with the impact of forecast accuracy on shareholder value than forecast accuracy per se ” Dr. Mentzer also shares that it is not enough to just have forecast accuracy, you must also have the software and processes that use the accurate forecast to achieve bottom-line improvement. It is of interest to note that, while this paper was written several years ago, Dr. Mentzer is lifting up the merits of Demand Driven business models. While the technology and software have only improved in the last 5 years to make this priced right for the mid-tier and smaller companies, the concepts have remained the same: accurate demand forecasts that are applied to software and business process will improve the business.
- Dr. Mentzer’s research lifts up an astounding fact:
- Improved Forecast Accuracy will deliver an increased shareholder value of 15% or more
Sources: The Seven Keys to Forecasting and The Impact of Forecasting on Return on Shareholder’s Value
How to Start Improving your Demand Forecast Accuracy
There is no need to settle for poor forecasting. Today’s new technology and software can analyze a mountain of big data and deliver a demand forecast within 10%. A good first step is to measure your forecast accuracy. Capture the results weekly in rolling four-week buckets for a starting point. A simple way to measure forecast accuracy (not the only measure) is the following:
Forecast Accuracy 1 – (|Sls*-FCast|) / Sls Where Sls > 0.
*Sls = Sales or Demand You must avoid normalizing the data. Try using four-week buckets of sales and break the sales into meaningful product hierarchy groups (class, class-vendor). Look for patterns where the forecast accuracy is bad – seasonal products, new products, products in one certain hierarchy. Set a goal to work on the forecast of the worst 5 each day. If you need help, then contact us or visit a LinkedIn Group.
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