Forecasting Models Management Considerations Reality vs. Theory -or- “What would I do if I really could forecast demand? Business Marketing 781 Spring.

Forecasting Models Management Considerations

Reality vs. Theory -or- “What would I do if I really could forecast demand?

Business Marketing 781 Spring 1999

Steven Robeano, BIE MBA

“Good Morning, you are on flight 142 to Nashville…”

First: Did you ever get on the wrong plane?Second: Don’t they look at your ticket when you check in?

You still worry about it until you hear the pilot’s confirmation.

Summary a.k.a “ What flight am I on?”

Formally or informally, the Forecast drives the firm

Techniques range…. From none-at-all or forecasting-by-desire, To complex sophisticated algorithms and models, Usually a mixture of dozens of methods and options.

What works and what doesn’t rarely depends on Time Money, or Other forms of business horsepower

It is an organizational problem, subject to a visible formal structure and an often hidden one as well.

This class will look at forecasting as a form of applied common sense.

In a commercial business setting, “simple”

doesn’t necessarily mean “weak”and

“advanced mathematics” doesn’t necessarily mean “accurate and timely.”

Sales, Marketing, Logistics, and Finance may use several methods in an effort to improve accuracy.

Each complains the other’s forecasts aren’t compatible with their own needs.

There is a lot of resistance to reconciliation. Often the cause is merely organizational inertia or simply N.I.H. syndrome. Other times, each area has good reason for being so parochial. We are going to look at ways to turn these conflicts into constructive cooperation.

Take a walk around the organization…..

What are we doing ??

Everybody has a PC.

Everybody has a spreadsheet program.

Everybody has inventory, sales, or financial management programs.

Everybody has a forecast program.

Everybody has their own personal forecast.

Whatever are we doing ??

The Obligatory Brief Case Study……

““He who lives by the crystal ball must learn to eat glass.”He who lives by the crystal ball must learn to eat glass.”

ForecastsForecasts

““Partly cloudy, warm and humid, high 83…Partly cloudy, warm and humid, high 83…

chance of afternoon thundershowers…chance of afternoon thundershowers…

The chance of rain is 20%. Winds from theThe chance of rain is 20%. Winds from the

West at 10 to 15 miles per hour. Sunset atWest at 10 to 15 miles per hour. Sunset at

8:43 P.M.”8:43 P.M.”

Marketing Forecast TraitsMarketing Forecast Traits Very broad, trend orientedVery broad, trend oriented Oblivious to geography or interested in large areas like Oblivious to geography or interested in large areas like

“The Southeast”“The Southeast” Forecasts demand, not sales ( as they should)Forecasts demand, not sales ( as they should) Strategies can influence demand and/or salesStrategies can influence demand and/or sales Competition sensitive (market share)Competition sensitive (market share) Time frame often quarters or yearsTime frame often quarters or years Horizon 3 to 5 years with bulk of effort 1 to 2 years out.Horizon 3 to 5 years with bulk of effort 1 to 2 years out. Penalty for over forecast much greater than underPenalty for over forecast much greater than under No incentive to over forecast but great pressure to do soNo incentive to over forecast but great pressure to do so Very goal orientedVery goal oriented Units are dollars, pounds, etc.Units are dollars, pounds, etc.

Sales Forecast TraitsSales Forecast Traits Broad, trend oriented. Performance oriented.Broad, trend oriented. Performance oriented. Geography very detailed for performance and Geography very detailed for performance and

compensation but for little else.compensation but for little else. Strategies influence demand as well as salesStrategies influence demand as well as sales Internal competition is highInternal competition is high Time frame is day, week, month, year Time frame is day, week, month, year Horizon month or quarter, year or two at most.Horizon month or quarter, year or two at most. Penalty for over forecasting is extremely highPenalty for over forecasting is extremely high Strong incentive to under forecastStrong incentive to under forecast Highly goal orientedHighly goal oriented Units are dollars, pounds, etc.Units are dollars, pounds, etc.

Finance Forecast TraitsFinance Forecast Traits Broadest of all areas. To prosper the firm needs to make a Broadest of all areas. To prosper the firm needs to make a

profit… “make plan”. Has greatest number of knobs to profit… “make plan”. Has greatest number of knobs to twiddle. Price can be changed, cost can be cut or moved twiddle. Price can be changed, cost can be cut or moved “elsewhen.” Product mix of little consequence.“elsewhen.” Product mix of little consequence.

Insensitive or even absolutely numb to geography.Insensitive or even absolutely numb to geography. Strategies influence demand as well as salesStrategies influence demand as well as sales Time buckets broad, quarters or years preferred.Time buckets broad, quarters or years preferred. Long horizons up to 10 years or more.Long horizons up to 10 years or more. Penalty for over and under forecasting is extremely high.Penalty for over and under forecasting is extremely high. May often have strong incentive to under forecastMay often have strong incentive to under forecast Highly goal orientedHighly goal oriented Units are dollars (profit, cost, capital,etc.)Units are dollars (profit, cost, capital,etc.)

Distribution Forecast TraitsDistribution Forecast Traits Most disaggregated of all areas. Most disaggregated of all areas. Product mix and time critical.Product mix and time critical. Geography vital.Geography vital. Strategies influence demand as well as shipments.Strategies influence demand as well as shipments. Time buckets range days, weeks, months. Time buckets range days, weeks, months. Short horizons days to months.Short horizons days to months. Penalty for under forecast greater than over forecast.Penalty for under forecast greater than over forecast. May have strong incentive to under forecast for budgetsMay have strong incentive to under forecast for budgets Among least goal oriented (relative to forecasts)Among least goal oriented (relative to forecasts) Units are dollars, units, weight, cube, etc.Units are dollars, units, weight, cube, etc.

Other Areas that may have ForecastsOther Areas that may have Forecasts Executive Management (Divisional, Corporate)Executive Management (Divisional, Corporate) OwnersOwners Production Planning / SchedulingProduction Planning / Scheduling Strategic Planning / Long Range PlanningStrategic Planning / Long Range Planning Competitive / Market AnalysisCompetitive / Market Analysis Consultants (IRI, Neilsen, etc)Consultants (IRI, Neilsen, etc)

ISSUES WHEN PICKING A METHODISSUES WHEN PICKING A METHOD ScopeScope GeographyGeography SurrogatesSurrogates InfluenceInfluence HorizonsHorizons Goals vs... PredictionGoals vs... Prediction PoliticsPolitics VolumeVolume Unit of MeasureUnit of Measure DependencyDependency AggregationAggregation Data Availability / Quality / TimelinessData Availability / Quality / Timeliness Miscellaneous IssuesMiscellaneous Issues

CONCLUSIONSCONCLUSIONS Having everyone singing off the same sheet is a Having everyone singing off the same sheet is a strategy.strategy.

It need not, and probably should not be completely attained. It need not, and probably should not be completely attained.

The answer is to:The answer is to:

Determine where needs are similar and where they differDetermine where needs are similar and where they differ

and thenand then Form logical nodes that do use a common forecast or a Form logical nodes that do use a common forecast or a

translation of one.translation of one.

Sample Logical NodesSample Logical Nodes OPERATIONSOPERATIONS

Production PlanningProduction Planning Inventory PlanningInventory Planning PurchasingPurchasing DistributionDistribution ManufacturingManufacturing

MARKETINGMARKETING MarketingMarketing SalesSales Product DevelopmentProduct Development DistributionDistribution PricingPricing Business ModelingBusiness Modeling

FINANCIALFINANCIAL Financial Planning / Long Range Planning / Strategic PlanningFinancial Planning / Long Range Planning / Strategic Planning EconometricsEconometrics Business ModelingBusiness Modeling

Sample Logical Nodes (cont....)Sample Logical Nodes (cont....) FINANCIALFINANCIAL

Financial Planning / Long Range Planning / Strategic Financial Planning / Long Range Planning / Strategic PlanningPlanning

EconometricsEconometrics Business ModelingBusiness Modeling

An Opinion…..An Opinion…..

““Managerially, the point is simply that Managerially, the point is simply that reconciliation is a means…. reconciliation is a means…. not an endnot an end. .

The examination and discussion process The examination and discussion process itself will create more integration than itself will create more integration than forcingforcing the group members to adopt a common the group members to adopt a common forecast ever will.” forecast ever will.”

The [ Im ] Possible Dream…The [ Im ] Possible Dream…

The overall strategy is to:The overall strategy is to:

Identify the demand variables you can Identify the demand variables you can control. control. Control them!Control them!

Identify who or what controls what’s left. Influence them!Influence them!

Identify whatever is left

forecast it!forecast it!

The [ Im ] Possible Dream…(cont....)The [ Im ] Possible Dream…(cont....)

If the functional teams are stable, there is a If the functional teams are stable, there is a real opportunity between them for a real opportunity between them for a clearinghouse or “traffic cop.”clearinghouse or “traffic cop.”

The cop can be an individual, an independent The cop can be an individual, an independent group, or made up of members of the group, or made up of members of the original groups.original groups.

The [ Im ] Possible Dream…(cont...)The [ Im ] Possible Dream…(cont...)

Regardless of the structure, the cop’s job is to:Regardless of the structure, the cop’s job is to:

Translate definitions and dataTranslate definitions and data

Warn of dissension adverse to the wholeWarn of dissension adverse to the whole

Reconcile disagreements when necessaryReconcile disagreements when necessary

The Payoff is subtleThe Payoff is subtle Effective organizations are more efficientEffective organizations are more efficient

Service can improveService can improveCosts go downCosts go down

Profit goes upProfit goes up

As professional forecasters and predictors, we are not victims As professional forecasters and predictors, we are not victims of the unknown. We can change the future. of the unknown. We can change the future.

CARPE DIEMCARPE DIEM