What’s Wrong with Demand Forecasting?

There are two equally important outputs of demand forecasting and you may be focusing nearly all your energy on only one, and maybe even the wrong one.

Maybe you are doing your demand forecasting completely wrong.

To be more precise, there are two equally important outputs of demand forecasting and you may be focusing nearly all your energy on only one, and maybe even the wrong one.

And the impact is that you may not be getting the forecast accuracy you want.

Or even more important, that you may not be getting the service levels and inventory efficiencies that you need.

And if that’s true, you are not alone.

The number of companies is growing that are saying that their forecast accuracy, service levels and inventory efficiency metrics have hit a ceiling that they just can’t get past.

Whether you read the analyst reports or listen to planners talk about their jobs, it’s all the same: metrics and KPIs are stuck.

Here is the dilemma to consider. Demand forecasts should predict two outcomes: the expected demand and how much uncertainty there is in that prediction.

The need to predict demand is fairly obvious. It drives most supply chain planning activities. And you probably measure the efficacy of your tools and processes with well-known forecast accuracy KPIs.

But the need to predict forecast uncertainty is not nearly as clear, and you probably make some gross assumptions about demand uncertainty and just assume they are accurate. By the way, if you don’t know whether or not you are making these assumptions, then we can pretty much guarantee that you are.

So it comes down to this. If you have a lot of fast moving stock and unaggressive service level targets, then focusing mostly on expected demand and forecast accuracy is probably a reasonable approach. What we mean by “unaggressive” varies by industry, but for for example, for a fast moving consumer good company we’d say below a 96% line-fill rate.

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