Happy 4th of July: What demand forecasting and the land of the free have in common

The 4th of July ranks as one of my favorite US Holidays – on equal footing with Thanksgiving. Both commemorate uniquely American experiences and events and fundamentally celebrate what makes this a great country.

Coincidentally, I was reading an interesting article from Niall Ferguson, the Scottish Historian who is a professor at Harvard and fulfills fellowships at Stanford and Oxford (yes I know, you are hugely interested – here is the link): http://www.thedailybeast.com/newsweek/2013/06/26/niall-ferguson-on-the-end-of-the-american-dream.html

While there are political undertones to the article, what struck me was the importance of remembering the fundamentals; not forgetting the critical focus points and capabilities that formed the basis of success for each of you.  Mr. Ferguson was focused on the United States as a country, but I am extending the key message to apply to individuals, associations and companies.

Huh?  How is relevant to demand forecasting?  To S&OP?  To anything involved with this blog or this industry or the people who may be so wise as to associate with Demand Foresight?

Well, it is a bit round about but here is my thinking.  Back in 2010, I wrote a piece about cloud computing.  The takeaway was that cloud computing would have an impact but real competitive advantage would go to those companies that utilized the cloud within the context of how it enabled their business strategy. Even more relevant today, the benefit of the cloud emerges through its application to the specific capabilities that make your company different, special and competitive:  for example, collaborating in real time with key customers on new product introductions.  These new product introductions have traditionally presented a challenge to demand forecasting, but are also critical to being a differentiator between companies and their competition.

However, the cloud as a technology disruptor is now joined by other disruptive concepts such as big data, in memory computing and causal analytics.  On the surface, each of these technologies can seem overwhelming and something that deserves huge attention and resources.  And they do, but only within the context of your vision and strategy for your company. You want the power of these technologies for when it’s appropriate, but be sure not to limit your enterprise and its ability to compete and thrive in a wholesale chase of technology for technology’s sake. The companies that outperform the competition over time are the ones that embrace their vision and ensure that everything in the enterprise, including technology, focuses on achieving that vision. At this particular point in time, with the advent of so many new technologies, what your company needs more than ever is a clear vision of what your competitive advantage is: decide what makes your company better, and find the right mix of technology (and ongoing adaptation/evolution, culture and people) that’s going to preserve and enhance that advantage.

And, in what should be no surprise to you at all, we maintain that those companies that designate demand forecasting and S&OP as a strategic capability will outperform their competition.

All of which brings me full circle to the start of this blog.  It is remarkable that we have the environment and the setting in which our focus can be topics such as the impact of big data on our ability to gain market share or fulfill a 5 year strategy. We have the freedom and the opportunity to concentrate on marshalling resources to compete and innovate and do good.  That is fantastic and is the result of the fundamentals on which this great country was founded – the land of opportunity and the land the free.  Happy 4th of July!

Ferguson, N. (2013, June 26). General format. Retrieved from http://www.thedailybeast.com/newsweek/2013/06/26/niall-ferguson-on-the-end-of-the-american-dream.html

Apple Feels Impact of Forecast Error | Demand Foresight Blog

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.


Is Improved Demand Forecasting an Opportunity in a Challenging Environment?

I was perusing through the usual financial and business sources when I came across this interesting article in the Wall Street Journal titled, “Trying Times for Forecasting”. The article focuses mostly on financial forecasts and I think we have written a fair amount about the importance of making sure financial results derive from the same sources of data, professionals, and market input as the S&OP forecast – in fact, with differences only in level of detail, all three should be the same forecast.

However, this article raises a couple of interesting issues from the macro level – i.e. the value of financial forecasts and the impacts of external forces that I thought would be fun to dig into a bit.

First, all the participants in this article, and I would probably argue all officers of public companies and some private companies, agree to the value of demand forecasting and guidance.  Specifically they list three specific areas of value:

  1. A less volatile and more fully valued stock prices (big value, sweet spot on the fiduciary responsibility component)
  2. Credibility with Analysts (never underestimate the importance of your reputation)
  3. Confidence of stockholders large and small (directly related to #1 above)

Yet at the same time the value of accurate forecasting was highlighted, concrete examples were showing where companies were sharing less information less frequently thereby making the guidance less useful.  Specifically companies are:

  1. Increasing the min-max ranges (revenue will be 100 give or take a 100)
  2. Discontinuing the more difficult yet more meaningful variables
  3. Minimizing specifics.

This somewhat contradictory dynamic (to put it as nicely as possible) probably explains the huge swings in stock prices we have seen recently when forecasts have been missed – and when I mention huge swings I mean large drops in stock prices costing shareholders potentially billions of dollars in value;  An interesting case study in how to manage shareholder value and the role of fiduciary responsibility.

I would argue it does not need to be this way. It seems to me that the answer is more information, and more of it with better quality.  Given the right tools, process and strategic objectives (oh I don’t know – make sure our stock price is fully valued), companies should be able to provide forecasts that are accurate on the bedrock variables – revenues, margins, yields, growth rates etc.  In addition, they should actually be able to provide detailed scenarios to showcase how much time, energy and thought goes into considering all the risks to the value drives of their companies – both within their industries and within the greater global market place at large.

Imagine the increase in credibility if, rather than stop reporting on yields or revenue growth, a company were able to provide detailed scenarios about what is impacting those yields or growth rates.  The global forecast for interest rates is between A on the high side and B on the low side.  If interest rates hit A, that will decrease our revenue within this range.  If interest rates hit B, that will increase our revenue within this range.  Same applies to growth rates in target markets. What happens if the Euro Zone implodes?   Exchange rates diverge from historic norms?  Sure this all complex and to a large degree inter-related but rather than give up, dive in and tackle them and use them to provide a richer context for the guidance provided.

This will improve your credibility with the entire investing community, ensure a fair value for your company, and help realize a further return on the strategic investment to improve demand forecasting.

Why Sarbanes-Oxley made forecasting more important than ever (Pt. 2)

In my last post, I discussed the critical reporting and accountability burden that the Sarbanes-Oxley Act of 2002 places on companies. SOX reporting affects forecasting and financial projections, including revenue, margin and market share based on volume. How much confidence shareholders have in the management team’s control and understanding of the business can make all the difference in how they react to these quarterly “surprises.” Herein lays the opportunity for supply chain managers to play a critical role in meeting SOX requirements.

Historically, one of forecasting’s major problems has been huge inaccuracies at the execution level. Put a different way, we’re good at making general forecasts, but lousy when it comes to predicting buying patterns at the SKU level, which is right where we can have the greatest impact on the supply chain.  For example, while it is important to know that we will sell 10 cars, it’s more valuable to know that five will be blue and five will be black, four will have automatic transmissions and six will have manual, etc.  These are the specific details from which raw material ordering takes place, production runs are scheduled, inventory is managed and customer service levels are set and managed.  Hence the term “execution-level forecast” and its importance to supply chain efficiency.

In most companies, this level of forecasting does not occur because they don’t have a system or process capable of making it work, and those that do often operate with a level of error that exceeds 50 percent when measured on an absolute basis.  The frustration for operations is that they will plan production runs and inventory rates to four decimal points and then have to scratch it all because the forecast from sales and/or marketing contains more than 50 percent error at the execution level.  The operations team’s response is to disregard the sales forecast and create their own; at least that way, they know where the numbers are coming from.

What does this have to do with SOX? It highlights the historical reason for the separation of data.  The same phenomenon that creates a disconnect between sales and operations also occurs within the finance side of the house. Since finance doesn’t trust the forecast either, they create their own. It is not unusual for companies to create, maintain and use three different forecasts that have little, if anything, to do with one another.  So, when the finance team is surprised by poor sales performance and then has to report a deviation to the Street and alter the forecast, their credibility is hurt. And squandered credibility is hard to earn back.

Why Sarbanes-Oxley made forecasting more important than ever (Pt. 1)

The Sarbanes-Oxley Act of 2002 was passed in response to several major corporate scandals — Enron, WorldCom and Tyco International, among others — that caused financial hardship to investors, retirees, and employees.

While this legislation was intended to protect public investors, it has placed a large bureaucratic burden on companies. For example, companies’ IT systems now must be configured to support the auditing and certification of financial data.  Some estimate the cost of SOX on U.S. businesses to be in the billions each year — not counting the opportunity cost of for companies who choose not to list on a US exchange because of the total expense.

The new legislation also created a high degree of liability for officers — they literally have to sign off on the financials as a way of accepting and acknowledging that they really are on top of what is happening and that subordinates are not running wild and hiding fraudulent activities. This adds considerably to the time and burden of creating and publishing information about corporate performance. Now your career, reputation and perhaps even your freedom are on the line.

So what does this have to do with Demand Foresight? SOX reporting affects forecasting and financial projections, including revenue, margin and market share based on volume.  Without exception, companies report their surprises — good and bad — every earnings period, along with their possible impact on future performance. A company that’s squeaking by on quarterly numbers and facing a projected downturn can easily lose 10, 20 or 50 percent of its market share in a matter of hours or days.

How much confidence shareholders have in the management team’s control and understanding of the business can make all the difference in how they react to these quarterly “surprises.” Herein lays the opportunity for supply chain managers to play a critical role in meeting SOX requirements. I’ll connect more of the dots in Part 2 of this topic.