Accurate Forecasting

Why can’t we get a more accurate forecast from sales?
Manufacturing managers the world over have the same complaint.

Maybe the word “forecast” is tripping everyone up.

A forecast is a prediction. Maybe it is based on some kind of market analysis, maybe even asking the dealers what they think they will sell. It could be based on a lot of things.

Once a forecast is complete, it is regarded as the best guess for how things will pan out, but those things are (felt to be) largely beyond our influence.

We forecast weather. How many hurricanes will we have this season? Will it rain on the outdoor wedding? Tides are forecast (accurately, but we can’t change them).

A competitor’s sales might be forecast, because we really don’t know their plan.

A sales forecast gets put together, approved, agreed, and entered into the data system.

Then two things happen.

Manufacturing bets the farm on it. They order long-lead parts, establish production plans, set factory capacity. They decide, based on that forecast, how much money is going to be spent, whether anything is actually sold or not. Those decisions often have to be made months in advance.

Meanwhile, all too often, sales has forgotten about the forecast, except perhaps, the top line sales figures. They work hard to sell whatever they can. They push for the big order. They offer the world to prospective customers. They will offer discounts, then push for higher unit volumes to close the dollar targets. Many times they operate on a quarterly (or worse) cycle.. as long as they have a great June, then April and May don’t matter so much.

Meanwhile, back in the factory, when April and May have been dry, they get slammed on June 4th, and end up expediting in parts (at great expense), and working overtime (at great cost), to make product that was sold at a discount.

This is no way to make money.

Let’s get back to what I think is the original issue – the word “forecast” meaning “prediction” (or “educated guess”).

Let’s change one word.
Sales Forecast Plan

That changes the entire meaning.

A “forecast” is a prediction of some event we have little or no control over.

A “plan,” on the other hand, is a set of actions which, if carried out as intended, are predicted to give a specific result. This is a different kind of prediction. This is the kind of prediction that an engineer makes. She analyzes her design, applies her considerable understanding of materials, structure, load transfers, then she predicts at what point that design will fail. If it is a brand new design, it is often tested to destruction (like a new airplane wing). This isn’t to test the design so much as to validate the models used for the prediction.

Sales isn’t engineering, I know that. It involves the most complex thing we know about – human psychology.

The sale planning process goes roughly like this:

• Financial, margin, volume targets to hit the higher level strategy for profit and growth.
• What must be sold, when, where to hit those targets. There may be more than one set of options.
• What must be done to achieve those numbers. This includes consideration for:
  • Unit volumes and mix. (Which are really the only thing the factory cares about.)
  • Total profit targets.
  • The margins that have to be held to hit those profits, at those volume and mixes. (Yes, sales is responsible for margins and profit.. how much money the company can actually keep, not just top line results. “We’ll sell it at a loss and make it up in volume” is not a long-term strategy to stay in business.)
• Then a process of looking realistically at what must be done, what can be done, deciding on a course of action, and producing a detailed plan to carry it out.

That sales plan then plugs into a production plan. Where there are planned fluctuations, we can apply planned levels of buffer inventory – FIFO inventory, not just make-to-stock inventory, to allow a small time disconnect between when it is made and when it is shipped. This is part of heijunka. (This works in both make-to-order and make-to-stock models, only the mechanics differ.)

Now the entire organization can carry out PDCA.
Are the activities in the sales plan being carried out, as planned, when planned?
If not, why not?
Are they producing the results that were intended predicted? (One-by-one confirmation.) No? OK, what have we learned that we can apply to making a better prediction next time? AND, most critically, What else are we doing to do, because we still have to hit the numbers!

And hit the numbers we must. Not by the end of the quarter. By the end of the month to start. Then in two week increments. Then in one week increments. (And all of this assumes you are making and selling something that doesn’t spoil if it is sitting on the lot for a week.)

The sales plan is the production plan for sales. It is not a guess at how well they will do Just like the manufacturing production plan, it is a firm commitment on how they will support the organization’s overall goals. Yes, reality intrudes and plans rarely get carried off exactly as written. But the thinking that went into making the plan, and the commitment to deliver the results, means the organization, as a whole, is prepared to deal with the unexpected and still stay on track.

Is this idealistic? Absolutely. It is pursuit of perfection. But until the thinking is in place, we will be stuck where we are… waiting for something outside of our control and hoping.