Businesses need to understand that when they decide to forecast an aspect of their business, they are neither setting a goal nor formulating a plan.  Essentially, forecasts are models based on a plan.  Companies can, in essence, change the future by changing this plan.  Forecasting is not entirely mechanical, because a certain amount of personal judgement goes into creating a forecast.

A forecast is something that is done with the thought in mind that there is to be a give and take relationship between the actual forecast and the company doing the forecasting.  It must be realized that as market trends, peak and low demand times, and consumer buying power fluctuates, alterations might need to be made to the forecast.  In the fast pace of the business world, change is something that will always occur.  That is one thing that a business can always count on.  It is also important that a business realizes that change occurs at all levels and in all departments.  For this reason, it is very smart for a business to involve all departments of its business in the development of the forecast.

Involvement can come in many forms, from gathering input from all departments and having them establish assumptions about where their department is headed in the forecasting time period, to having departments determine probable scenarios.  From the information that the departments provided, they could be asked to go over a preliminary forecast for their department, and give feedback as to how they will be used in their department, and what difficulties in implementation that might be encountered.

The sales department is a company’s link to the consumer.  It has hands on experience pertaining to what is happening in the marketplace better that any other division.  Sales has information about what products are selling well and which ones aren’t, as well as what the competitor is doing.  Marketing can provide information about what promotional strategies are the most successful.  The also know what new products will be introduced when.  Involving production is a vital element to forecasting.  A company must know if their expectations of production and delivery time can be met.
 

Reporting Results

In order for all departments in a business  to gain something useful from the results of a forecast, information needs to be relevant to all aspects of the business.  The Journal of Business Forecasting lays out a few guidelines on what details should be included in a forecast report to do just that.
 

• Give forecasts in only as much detail as needed
• Indicate assumptions made by all departments when preparing the forecast
• If parts of the forecast deviate from the norm, explain why
• Make sure the results are internally consistent, everything adds up correctly.  If one part is wrong, the whole thing will be viewed as wrong
• Give forecasts with actuals.  This shows departments where they are and where they are going.
• Standardize the report, each division can pick out what pertains to them (1)

Manner of Presentation of Results

The way in which a forecast is presented can greatly influence how results are perceived.  All divisions need equal, or as equal as possible, attention on what the forecast has done for their division.  Only stressing certain departments can lead to lack of motivation by some departments as well as internal friction that no business needs.  I again turn to The Journal of Business Forecasting for guidelines to presentation.
 

• Describe forecasts in jargon-free language, so that all departments know exactly what is being discussed
• Demonstrate graphically actual and projected numbers, especially where cause and effect relationships occur.  Examples of this would be in sales and advertising.
• Indicate whether the model will over or under estimate, and where
• Don’t stress problems in a certain division, but how problems will be dealt with
• Keep presentation as broad as possible, departments can scour their pertinent information at another time
• Be diplomatic, and keep a neutral stance where all departments are concerned (1)

Improving Involvement

Companies should always strive to find new and better ways to use forecasts within their company.  When Adam Pilarksi, Chief economist of Douglas Aircraft Company, McDonnell Douglas Corporation, told his purchasing department how they could use forecasts of foreign exchange and inflation rates of different countries in negotiating contracts for purchasing parts from abroad, they were mighty pleased.  Forecasts helped them to negotiate better deals with foreign sub-contractors and save millions. (1)
 

What Companies Need to Know in Advance
 

1. What will be forecasted

Forecasting can be applicable to many different variables in business.  Some examples of things that a business may have a need or desire to forecast are shipments, orders, cash flows, demand, sales, and revenue.

2. How the forecast will be prepared

The business needs to decide whether it will be forecasting in dollars, units, by percentages, etc.

3. How detailed the forecast will be

If a company is forecasting by product, results may need to be divided by category of products.  If a company is forecasting based on geographic location, results may need to be broken down into sales division, distributions center, manufacturing location, broker, or account.  Companies can also forecast on many different avenues such as trade channels, by mass merchandisers, by drug stores, by warehouse clubs, or by government unit.

4. What the time frame for the forecast is

This applies to how far into the future that the company wants its particular forecast to go; weeks, months, or years.

5. Other

What model type is to be used; assumptions about different components of the forecasting equation, like the advertising budget, price, competitive action, and the state of the economy, will change when the type of model used, such as time series or cause and effect, changes. (1)
 

What Forecasting Affects

     Profitability
     Production planning
     Material buying
     Inventory levels
     Customer service
     Cash flow
     Capital and revenue investment
     Employment policy

These above aspects are important bits of a company’s livelihood.  All of these aspects need to be understood by the company, as to how important correct assumptions about each of the elements are when information to be used for forecasting is compiled. (5)
 

Example

Cable & Wireless BARTEL Limited
http://candw.com.bb/pressinfo/clarke.html

CWBARTEL is a telecommunications firm.  Its challenge is not only to be able to keep up with the fast paced changes of today’s technology, but to be able to respond quickly to the change.  For this reason, CWBARTEL decided to take a structured approach to forecasting as a way of dealing with the future.  They decided to forecast on three levels within their company: Corporate, Departmental, and Marketing.

Corporate

Forecasting at this level is based on the mission and scope to their organization, and in accordance to the vision statement, which is “To lead the world in integrated communications.”  Forecasting in this category is usually qualitative, and techniques like Scenario and Delphi are used.  Scenario deals with the construction of several sets of circumstances that could arise in the future that form boundaries for contingency planning.  Delphi is based on panel members producing independent forecasts.
 

Departmental

Forecasting at this level is qualitative and quantitative and is designed to meet standards set at the corporate level.  CWBARTEL was asked to answer the following questions about their organization:
 

• What market segments should be targeted?
• What customers’ needs CWBARTEL can satisfy?
• What level of infrastructural development should be undertaken?
• In which geographical areas and in what time frame should this take place?
• What level of resource deployment is necessary by each department?
• What level of training is required?
• What teams need to be set up to accomplish these goals?
• At what level will these teams interact?

The outcomes of these questions were to help CWBARTEL to develop a market strategy.  The compiled information was also to be used to define objectives that will guide activity at the product and service levels.
 

Market

Forecasting at this level is primarily quantitative.  Forecasting at this level will identify and analyze CWBARTEL’s subscriber base.  It will also provide the foundation for forecasting in the areas of revenue, sales, inventory, and resource allocation.  This information will be obtained by CWBARTEL answering the following questions about their organization:
 

• What is the demand for each specific product and service?
• What pricing strategy should be used?
• How can the customers’ interest be stimulated?
• What are the competitive conditions in the market for each particular product or service?
• How can resource deployment be optimized for a given product or service?
• What is the return on investment for each product or service?
• At what phase are existing products in the product life cycle?
• Can further growth be stimulated and at what cost?
• What new products are successfully launched?

After compiling the information from the above-asked questions, a subscriber line demand forecast was outlined, based on user requirements.  The outcome is as follows:
 

1. 1. The demand variable would be subdivided into residential and business line demand.
2. 2. This process would involve micro- and macro-forecasting
3. 3. The macro-forecast would relate demand to some socioeconomic factors using a causal model
4. 4. The micro-forecast, though intuitively related to factors in the environment, should seek to provide spatial data necessary for network distribution, and involve both qualitative and quantitative assessments
5. 5. The output should be quantified where possible
6. 6. The forecast horizons are
a. A ‘five year’ demand forecast to determine the provisioning of plant on the exchange side, that is, distribution of cable plant between the exchange and the cabinet
b. A ‘twenty year’ demand forecast to determine provisioning of plant on the distribution side, that is, the distribution of cable and line plant from the cabinet to the subscribers’ premises
c. It was agreed that the building block for data acquisition was the development of a complete and accurate inventory of the network which currently existed

Implementing and Monitoring

CWBARTEL continues to strive to improve all the processes that help to achieve the “total customer satisfaction” goal.  They regard this as an uphill battle they continue to face and deal with daily. (3)
 

Want to Forecast, But Need Help

http://www.researchboston.com/services/process.htm

Research Boston is a company that specializes in demand forecasting.  They are an agency that walks companies through the process of demand forecasting.  They show companies that when customers want it now, and you don’t have it, they have three choices to remedy the problem.

1. Carry larger inventories; but this will add cost.
2. Hand the problem to your supplier; but this option is not available to all companies, especially if the supplier is overseas.
3. Improve your forecasting.

Number three is what Research Boston likes to recommend to its customers.  Research Boston provides companies with a win-win combination.  They will isolate the causes of uncertainty in your companies’ demand and help to address them.

First, Research Boston will want to diagnose the problem.
Diagnosis serves several purposes:
1. focuses on possible improvements
2. uncover inaccurate assumptions
3. identify information that can improve accuracy
 

Second, Research Boston will implement a solution
A plan will be tailored to each company’s individual needs.  Some examples are:
1. early warning systems
2. controlled marketing tests
3. statistical models
4. redesign ordering practices

.
Research Boston’s Bottom Line of Better Forecasting – You provide a better level of service, more efficiently (4)
 

References

“Ten Commandments of Selling Forecasts to Forecast Users”, The Journal of Business Forecasting, Winter 1998-99, pgs 2, 23-24.

“Forecasting Process at Cable & Wireless BARTEL Limited”, The Journal of Business Forecasting, Winter 1998-99, pgs 10-13.

http://candw.com.bb/pressinfo/clarke.html

http://www.researchboston.com/services/process.htm

http://www.almac.co.uk/personal/alastair/mm17.htm

For more information on Forecasting see the: Journal of Forecasting
 

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About Me

My name is Nikki Jones and I am a junior Management major at Emporia State University.  I am from Hillsboro, KS, and I lived there until I moved to Emporia.
I work in the School of Business in the Deans’ Office and in the MBA/Business Student Advising offices.
I have been married for one year, seven months to a fellow Management major at ESU.

 
Please send comments to Nikki Jones.
Page Created 7/25/99.

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