Best practices for forecasting procurement requirements

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forecasting.jpgRecently 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....

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