A View from Here

Bill's Sisson's weekly Trade Only blog

How Accurate are Your Demand Forecasts?

You forecast future demand of products and services.  Your business model is based on these forecasts.  But have you ever stopped to determine the accuracy of your demand forecasts?  In a recent study we conducted for the National Association of Wholesale Distributors we found that the average forecast error (i.e., the difference between the forecast and actual sales or usage) was more than 300%!  In order to make the most of your people, machinery, inventory and other resources, calculate your forecast error for every stocked product by using the equation:

[Absolute Value of (Forecast – Sales or Usage)] ÷ the Lower of Sales or Usage

For example if there is a forecast of 100 pieces and corresponding actual sales equal 50 pieces the resulting forecast error is 100% [Absolute Value of 100 - 50) ÷ 50]. 

Acceptable forecast errors will vary from company to company and even from product to product.  But you should always be concerned with forecast errors that exceed 100%.  Pay particular attention to the forecast error for products that are sold or used on a regular basis.  If the forecast error is too high, you are forced to overstock in order to maintain your desired level of product availability.

Jon Schreibfeder
Effective Inventory Management, Inc.

Comments

3 comments on “How Accurate are Your Demand Forecasts?

  1. Andrew Whittington

    Forecasting useage by the majority of boat builders to their suppliers is virtually non existent in the marine industry. With the majority, it is necessary for suppliers to drive builders to provide any form of projection and a few others it is merely a crystal ball with a bit of academic history. Due to the cyclical nature of the marine industry, this usually results in significant problems for high volume and long lead-time items. Is it the builders fault? No!

    Is it the distributors fault for not stocking more SKU’s? No!

    Is it the dealers fault for not stocking more? No!

    If dealers knew what, when and how many of specific product consumers would buy, the flow chart and process would be significantly more simple. If only it were that easy… However, there are methods presently available to determine this information accurately? And yes, with a relatively predictable margin of error. Most smaller dealers cannot afford the capital expenditures needed to ascertain this information for their direct markets. One can see those that can and do! However if manufactures took a more vested interest in all their dealerships, this cost could be minimalized across the board. Hence a more predictable and accurate supply chain forcast could result.

    At some point, and hopefully in the near future, a basic industry standard needs to be established in the marine industry that affords the supplier chain the information to become the most efficient. We can look at the automotive industry as a stake in the ground.

    At the end of the day, there is always a risk for some party. In the past, it was forced upon the dealer, in too many cases without mercy.. Their are those in the industry that have begun to realize this is/was not the BEST answer.

  2. J. S. Cole

    You think like Henry Ford or Brigham Young; Build and they will buy OR Talk and they will come. If the industry would only learn there is a way to MARKET and a way to SELL.The builders have to both market and sell their boats to the dealers and market them to the public. The builders also have to train or teach the dealers how to SELL. SECOND SUBJECT; I disagree with your “determine this information accurately” ;whether, it is “crystal ball ” or “statistical analysis”, none of it is accurate. It is the best guess at the time. Hey, HAVE A GREAT DAY.

  3. Noel Osborne

    Projecting your sales and your needs should be part of every dealers Business Plan. We have been stressing the importance of business planning for marine dealers at the Yamaha Symposiums for many years. Some listen and some do not. If I was a manufacturer I would be demanding sales projections from my dealer network. Again some do and some don’t. It is interesting to note that the most succesful dealers and manufacturers recognize the need for good planning. Hopefully the rest will join their ranks and everyone will prosper as a result.

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