by Robert D. Kugel CFA |
6/30/2008 | Article ID: V08-25 | Article Type: VentanaView
Summary
Accurate and timely sales forecasting and demand planning (SFDP) are important to the success of a company. Doing these activities excellently rather than doing them adequately can make a significant difference in a company’s competitiveness and market position. We recently completed benchmark research on how companies perform SFDP. The research was designed to uncover and highlight the most important mistakes companies make, the capabilities they lack and the obstacles executives encounter as they seek to improve their sales forecasting and demand planning efforts. Although many companies do one or the other well, not enough excel at both – and fewer still combine the two into one core business function. It is this integration of the two forward-looking functions that differentiates truly innovative companies from the rest of the pack. Moreover, we found numerous areas where companies limit their own effectiveness.
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One of the basic issues we found in this benchmark research (sponsored by John Galt, Right90, Steelwedge and True Demand and media sponsors Intelligent Enterprise, Manufacturing Business Technology and Technology Evaluation Centers) is that few companies look at sales forecasting and demand planning as two pieces of an interrelated set of actions. Yet information technology has made it feasible for them to share sales forecasting and demand planning information and for sales and manufacturing/operations to collaborate more closely in forward-looking activities. IT enables these two groups to collect, analyze and distribute a much greater variety of information than ever before, but as our research shows, processes have not been improved to make use of this technology.
Ineffective use of technology has tangible impacts. Companies find that inaccuracy of sales forecasts contributes to decreased performance. For example, retailers are pressuring consumer product goods companies to minimize stock-outs, and pricing pressure and markdowns force net reduction in gross margins. Shorter life cycles are shrinking the time products have to succeed in the market. Inefficient trade promotions also dampen performance. Our 2006 benchmark research on scorecards and dashboards and sales and operations planning (S&OP) revealed that companies place high priority on optimizing their sales and revenue and profit attainments but give too little attention to these elements of production, logistics and fulfillment, which are vital to long-term success.
Ventana Research contends that, to be effective, the demand planning process must span the enterprise and cross functions. Yet it is not always easy (or even feasible in some cases) for companies to integrate plans across sales pipelines, demand forecasts, revenue expectations and products. To assimilate and plan with external and internal information is one of the most difficult challenges facing operational management. However, undertaking efforts to change the focus on sales demand planning can yield a framework within which to improve financial performance.
The research shows that many companies are unable to execute sales forecasting and demand planning well enough to operate as effectively as they could. They fail to achieve strategic benefits from increasing collaboration and broadening communications across business units. Most also fail to take advantage of the advances that information technology can provide in their sales forecasting and demand planning activities. Their view of what’s possible is mired in the past and so they miss the opportunity to make better use of information and collaboration to improve the effectiveness of sales and operations.
Assessment
Our research confirms that many companies are looking to improve their sales forecasting and demand planning to enhance profitability, improve customer satisfaction and gain competitive advantage. Unfortunately, most do not take a strategic, enterprise approach to their forecasting and planning activities. Typically that’s because they are missing some of the pieces related to people, processes, information and technology that if present would support better execution and performance. The first step in addressing SFDP issues is to recognize the important of managing these as integrated processes, making that a management priority and identifying the key issues that would prevent the organization from successfully implementing an effective SFDP program.
Related Research Notes:
Sales Forecasting Remains A Challenge
Lack of sales and demand forecasts holds back good revenue planning
Upgrading Technology to Tackle S&OP
Innovative companies use more than dedicated software to support sales and operations planning
Supply Chain Performance Management Research Agenda for 2008
Focus Is on Planning, Outsourcing, Performance Measurement and Information Management
Benchmark Research Finds Companies Struggling with Product Information
Help available from product information management processes and technology
Supply Chain BI Struggles To Realize Full Potential
Multiple source systems create problems for business intelligence about the supply chain
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