The Forecasting Function: Critical Yet Misunderstood

Among other things, business knowledge, and interpersonal and communication skills are important pre-requisites for a forecasting function ... it is not necessary for a forecaster to be a statistician, with proper training one can learn the discipline... approach to forecasting is the major cause of misunderstanding. Let's begin with by stating the obvious. Forecasting is probably one of the most important functions in an organization. It has a direct impact on strategic planning, and acquisition and allocation of resources. Many argue that forecasting is also one of the most misunderstood functions in corporate America. How can such an important business function be misunderstood? This is the question often raised by many practicing forecasters. This paper provides specific points of view on this matter, as well as a road map to make the forecasting function successful. WHY IS THE FORECASTING FUNCTION MISUNDERSTOOD? Part of the answer lies within the forecasting profession itself itself. The traditional forecaster is a technical individual who can build complex models to determine trends and casual relationships in the data. This is important in business forecasting but it is only a part of the total equation. The other more important parts are business knowledge, and inter-personal and communication skills. Sales and Marketing professionals, who collectively play a large role in shaping the demand for a product, generally do not understand the forecasting function, nor do they have any interest in understanding the technical lingoes (R square, Durbin Watson, etc.). Therefore, the forecaster must be able to communicate to the management in nontechnical terms. The forecaster must describe the specific products and account strategies that are to be used by different functions. This is essential because forecasts that do not account for such strategies (promotions, price structure, competitive activities, etc.) will be of little value. Furthermore, forecaster must communicate the impact of a strategy on the forecast, given trends, seasonality and other causal variables. If the forecaster does not communicate to the management in simple terms, all the hard work will be mostly wasted and credibility will be lost. It is that simple! Communication is the cornerstone of successful forecasting. The forecaster obtains information from Sales and Marketing, as well as from models about seasonality, trends and causal relationships. The forecaster then communicates all the information to management, thereby closing the communication loop. Unfortunately, this loop is the exception rather than the rule in many of today's forecasting functions, especially within the consumer products industry. Often the emphasis is placed on one dimensional black box forecasting process. This is typified by a system with historical shipment data going in and some sort of forecast report coming out, without any business input. This practice adds little value to the organization, and perpetuates the obscurity surrounding the forecasting function. In fact, the black box approach to forecasting is probably the principle cause of this misunderstanding. This has resulted in many failures in forecasting, making management increasingly reluctant to invest in or promote forecasting as a function. Although management generally agrees on the positive value of developing forecasts based on facts and causal data, only marginal and usually inadequate resources are committed, often ensuring failure from the start. The above comments seem to paint a negative picture of the forecasting profession, but don't be discouraged. Forecasting professionals can add enormous value to the business in terms of higher customer service levels, substantial inventory cost reduction, and market-place knowledge. We just need to make some adjustments. HOW TO STRENGTHEN THE FORECASTING FUNCTION How can the organization reap tangible benefits from the forecasting function? …