This blog is all about exploring the importance of reducing forecast error. It also explores the measurable impacts of achieving that reduction in error. We have explored certain details like impacts on working capital, customer service and production efficiency. We have pulled back and also discussed the more strategic bigger picture components of using forecast accuracy to drive important processes like sales and operations planning and financial reporting within the context of Sarbanes-Oxley.
However, I think we have been consistent that ultimately, improving forecasting is the first step in a long process of maximizing profitability and shareholder and stakeholder value. The more forecast error a company (either private or public) accommodates or allows to exist within its value chain, the less valuable the company will be.
Unfortunately, this lesson has been brutally reinforced through recent reporting about Apple. It was revealed that Apple had dramatically cut orders for iPhone components. It was reported that this was primarily because demand was softer than expected. In other words, the forecast was way off – it contained a lot of error. The result – an immediate 4% drop in the stock price worth billions of dollars.
Reducing forecasting error should be, consistently, one of the top 3 strategic initiatives of every leadership team of every for-profit company.