by Robert D. Kugel CFA |
6/30/2008 | Article ID: V08-26 | Article Type: VentanaView
Summary
Ventana Research asserts that having accurate, timely and well-integrated forecasts and plans is more important to the success of any company than often is understood. The difference between doing forecasting and planning excellently and just doing it well enough may seem small but can have a significant impact on the company’s overall effectiveness, particularly when it comes to competitiveness and market share. Our research shows that only a minority of organizations have achieved a high level of maturity in this area. Our recently completed benchmark research on this topic was designed to find the most important mistakes companies typically make, the capabilities they lack and the obstacles executives encounter as they seek to improve sales forecasting and demand planning. Our assessments focus on the four dimensions of business that companies must address to improve performance: people, process, information and technology. When it comes to the “people” aspect of their efforts, we found three specific areas where companies fall short. First, only a handful of companies achieve sufficient accuracy in sales forecasting and demand planning. Second, too few of them collaborate adequately across business silos in their planning functions and therefore limit the effectiveness of the process. Third, a majority of corporations fall short in linking their strategic objectives with their planning activities.
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One eye-opening finding of our new benchmark research (sponsored by John Galt, Right90, Steelwedge and True Demand and media partners Intelligent Enterprise, Manufacturing Business Technology and Technology Evaluation Centers) is that few companies achieve high levels of accuracy in their sales forecasts or demand plans. We assert that improving accuracy here should be a priority because doing so is likely to have a positive impact on a company’s performance. Only 35 percent of the organizations that participated in our research achieve better than 80 percent accuracy in sales forecasts, and just 26 percent do so in demand planning. We find a correlation between the accuracy of a company’s sales forecasting and the accuracy of its demand planning: Those that do one well are likely to do the other well also. We suspect that leadership and business culture affect this: For organizations that plan and forecast well, either senior executives make it clear that this is important, there are processes and attitudes in place that encourage people to do better jobs, or both happen. “Gaming” the sales forecast is a business culture issue that adversely affects the accuracy and effectiveness of the planning processes. Half of all participants (and two-thirds of those from larger companies with 1,000 or more employees) reported that gaming is rife in their sales forecasting process. Gaming makes it difficult for the entire organization to respond to markets in a coordinated fashion because the manipulated information is simply wrong.
The research confirms that improving the accuracy of demand plans is important to a company’s success. For example, among companies that sell into the retail sector, only one-fourth that have accuracy of more than 80 percent in their demand plans have orders cancelled frequently or sometimes. In contrast, more than half of those that have a less accurate demand planning process experience cancellations at higher rates. We think that several factors link accuracy in demand planning to reduced likelihood of order cancellation. They include having more up-to-date information about the production, operations and supply chain and logistics aspects of the business, superior process design, better process controls and deeper understanding of customers and the market. Companies that address these issues also are more likely to have greater credibility with customers in predicting when they actually will ship orders. Customers that have been burned by overly optimistic ship dates in the past are more likely to cancel an order when a slip occurs.
Our data confirms also that effective planning requires the ability to collaborate. A key issue companies face is ensuring that the information one part of the business collects is available to and usable by other parts. The research shows that companies do a reasonably good job in integrating their sales forecasts with manufacturing and other operating departments (although many companies can improve in this area). However, they do less well when it comes to integrating them with distribution and procurement and fall short even farther in areas such as finance and marketing.
A third area for improvement is the connection between strategy and planning. Our research has shown repeatedly that forging stronger links is possible for most companies. To do that, they must address ongoing disconnects between their strategic objectives and how they execute their planning and forecasting activities. In particular, the research shows that many need to enhance the integration of their sales forecasts with the demand planning activities performed by manufacturing, operations, operations management and the supply chain. We also found that this integration is poor when it comes to distribution, logistics, customer service and field service, and even more poorly integrated with the plans created by the finance and marketing functions and by senior executives.
Assessment
Many companies have people who understand the importance of improving their sales forecasting and demand planning to enhance profitability, improve customer satisfaction and gain competitive advantage. Unfortunately, this doesn’t mean that most organizations take a strategic, enterprise-wide approach to their forecasting and planning activities. We have identified several steps companies can take to increase accuracy of planning and forecasting. One that a majority of corporations seem to overlook is the commonsense approach of measuring accuracy and providing rewards for employees who meet or exceed their targets. Improving collaboration starts with changing expectations to stress its importance, and that requires change management efforts to encourage more interaction. A first step is to enhance the links between strategy and planning by being able to measure whether and to what degree the actual plans a company develops are in line with its strategic objectives. Addressing the people factors is only one element of enhancing the effectiveness of sales forecasting and demand planning, but it often is a critical one.
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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