Forecast Or Fail: an indispensable skill for every business

Forecasting is one of the most misunderstood and poorly applied business practices in South Africa, and around the world, today. But, according to supply chain management industry association SAPICS, correctly understanding and applying its principles can dramatically boost profitability as a business’s supply chain becomes more efficient.
‘For instance, if a business improves its forecast accuracy by as little as 5 per cent, it’s likely to translate into an inventory reduction of between 10 and 15 per cent.’ That’s according to Businessix specialist consultant and SAPICS director, Liezl Smith. Smith was the first South African Certified Professional Forecaster (CPF), a certification that is awarded by the US-based Institute of Business Forecasting & Planning (IBF). Since then, it has gained momentum in South Africa as a valuable designation.

‘Accurate forecasting, based on available business data, is critical to enabling a host of decisions that impact the entire supply chain, from acquiring raw materials to sales,’ said Anish Jain, MD of the IBF.
‘It’s one of the things that businesses cannot afford to get wrong, yet so few get it right, which results in everything from lost sales to wasted resources, and ultimately, reduced profitability.’

Smith said, typically, only around one in five business people are able to say what their forecast accuracy is. ‘Even then, most struggle to explain how they get their figures, because they’re guessing,’ she said. Yet, when the numbers are correct, then it forms the benchmark for improvement.

The benefits of accurate forecasting are as numerous as the good business decisions it enables. ‘Accurate forecasting allows one to design a more effective distribution network, empowered by clear information on the location of demand for one’s product,’ said Jain.

‘This, naturally, impacts one’s transport and logistics plans as you now know how much of certain products to send to the locations where demand is – and at the right time.’

Another positive impact is on inventory levels. ‘By maintaining correct stock levels, one can save money spent on managing inventory,’ added Jain. ‘Plus, by knowing how much of a particular product you need to manufacture, you won’t waste money on purchasing too much raw material or investing too much in manufacturing capacity that isn’t needed.’

According to Smith, a classic error that forecasters make is using aggregates to arrive at their forecast accuracy. ‘Working on aggregates across products can lull one into a false sense of security as negative and positive numbers cancel each other out,’ she said. ‘This means, you could think you’re on an 80 per cent forecast accuracy, yet be way lower for individual products.

‘One scary fact is, if your forecast accuracy is 35 per cent, you’re out by an alarming 65 per cent – which potentially means lost sales, or money wasted on managing inventory and even wastage of old stock.’
One of the primary reasons for poor forecasting is a lack of customer knowledge. ‘There are two types of forecasts: wrong ones and lucky ones,’ said Smith. ‘But, by learning how to exploit the information available to you, it is possible to “improve one’s luck” consistently.’
SAPICS regularly hosts forecasting workshops where participants work through practical examples in an effort to hone their forecasting skills, effectively helping them to transition from ‘guessing’ to ‘knowing’. ‘And the more you improve your process, the “luckier” you will get.’

For more info on upcoming Forecasting workshops, please visit www.sapics.org.za
For more info on the Institute for Business Forecasting & Planning, visit www.ibf.org