Recently on Procurementtips.com (SmartProcurement’s forum for procurement professionals) the following question about forecasting procurement requirements was asked. We received a useful and in depth reply from David van der Walt in Australia:
Q: We all know how important forecasts are for us (buyers), to insure
accurate flow of items and does indeed have a direct role in
controlling inventory .. At the moment, no forecast schedule has been 100% accurate- at least
those I experienced. My question is: what is in your opinion the best
forecast schedule and plan, procedures formulas best proved their
efficiency for you so far.. Any advice in this matter will be highly
appreciated!” “(Hassan Dhainy – Lebanon)
A: David van der Walt replied:
“You are correct in saying that no forecast or demand plan is 100%
correct. Forecast error represents an area where the improvement
potential is generally very significant, typically between 30 to 60%.
It is a crucial process because it directly drives all subsequent
supply planning activities. If a demand plan is inaccurate, no matter
how perfect the supply planning process, it will inevitably generate
the wrong results, as it
will not be aligned with actual demand.
No matter how sophisticated the algorithm used to generate statistical
forecast, there are two major reasons why the result can prove
unrealistic and misleading:
• First of all, historical sales data often if often heavily polluted. Such
pollution comes from different factors, such as promotions which are
not explicitly recognized, abnormally large customer orders, stock-out
situations during which demand existed but could not be fulfilled, and
acceleration in the
sales volumes at the end of the quarter because of heavy discounts
granted to customers. If the impacts of these causal events are not
taken out of the historical data, then the resulting forecast will
obviously be wrong.
• Secondly, many future events are likely to influence the demand
pattern — a price increase targeted for a certain date, a promotion
that is not comparable to ones performed in the past, and changing
market conditions.
The difficulty is that all this information on future events or trends is not the
property of a single department within the company, but rather comes
from a large number of different individuals belonging to different
functions and regions….
