Should forecast accuracy be a stretch goal?
Should forecast accuracy be a stretch goal? Many businesses are struggling with demand visibility and low SKU-level forecast accuracy - something in the 20% range - signaling fundamental business and process issues. Is there a best-in-class? Are you putting your business at risk through poor demand management?
Although where you are at today may provide a baseline to set the target, a stretch target may not be the right thing for the business.
Saying we should go to 40% accuracy because currently, we are at 30% accuracy is like making an ineffective process more efficient. This makes you complacent and just to continue to do the same things you have done in the past.
We have seen some businesses do not even forecast at the right level or the right variable.
- Some businesses forecast at the brand level or at the family level but their item level forecast is completely messed up. The Sales order comes at the item level.
- Even the Sales Managers talk to the buyers at the item level. Some even carry a Notebook that contains the list of items taken by the customer...
- Some forecast the sell-through forecast and send it to the supply chain to be used directly in their production planning process without any conversion of the same into a shipment plan.
One of our clients, a division of a Fortune 100 company, had a calculated forecast accuracy of 50% when we started our work in 2015. We refined their process and re-implemented their forecasting tool including methods for data harmonization and cleansing and leveraging stat models.
At the end of year 1, their forecast accuracy jumped to 75% and last year they consistently reported close to 90%. This is at the SKU-DC level with a WMAPE of 10%.
Is there a best in class? Yes, there is a best-in-class by industry.
Should you aim for the right target? Absolutely.
Should you use just a stretch target? Maybe. But only when you have already achieved the best-in-class forecasting the right variable at the right level.
Demand Clarity and Demand visibility will help you transform the entire organization and help your SCM process run efficiently.
How do you take the first step to refine your demand planning process?
First, you need to diagnose where you are today. Valtitude offers the Demand Planning Diagnostic service that studies the end-to-end demand generation process in just about six weeks and helps you uncover the roadblocks that inhibit your planning process. We provide the recommendations for transformation - provide the key building blocks to improve the process and implement the right toolset.
You can learn more about our diagnostic service - download the Demand Planning Diagnostic Brochure. This is just an eight week engagement that gives the full insight into the gaps in your current process and comes up with the recommendations.