Decision-Making at the Executive Level
Demand forecasting is not an exact science. Even the best tools and software on the market cannot predict the future in precise detail. However, small improvements in forecast accuracy can have enormous impacts on customer satisfaction and net income. Because of this, measurement of forecast error is one of the most important KPIs of any demand planning team and, when monetized, can impact decision-making at the executive level.
In predictive analytics, forecast error is the difference between the predicted forecast value and the actual demand value. The problem is, many executives do not incorporate this metric into their supply chain management strategies. If your c-levels do not measure and invest in forecast accuracy, they could lose money, lose customers, and jeopardize the business. Monetizing forecast error helps leadership understand how important demand forecasting is, and improves their willingness to invest in its improvement.
The Challenges of Forecast Error Reporting
Even when demand planning leaders do measure forecast error, they find it difficult to communicate this metric to other senior members of the organization. They fear mentioning forecast error will upset potential investors or reduce the likelihood of executive buy-in.
This couldn’t be further from the truth. Reporting on monetized forecast error proves to investors and managers the significant dollar value that demand forecasting accuracy contributes, and that it is not an all or nothing game. Forecast error reduction drives dollar value even if accuracy never reaches 100%.
How to Improve Executive Buy-In
Forecast error scares executives. Perhaps because it includes the word “error.” However, executives who believe that demand forecasts are useless because they are never 100 percent accurate are living under a rock. Communicating forecast error in financial terms during S&OP meetings is a great way to point out the root causes of inventory and fulfillment issues. Doing so brings attention to this important function and could drive investments toward forecast improvement.
“Lost revenue due to forecast error is easy to identify,” Mariusz Lesiewicz, Demand Planner for Mondelēz International, told the Institute of Business Forecasting. “It’s easy to communicate and gets quite a lot of interest from other functions at the meeting. The agenda for the monthly S&OP meeting should include a presentation of KPIs, not only forecast accuracy but all financial KPIs affected by the forecast. Make sure to discuss the root causes.”
Monetize Forecast Error
Capitalize on forecast error measurement during Sales & Operations meetings by using it as a metric to drive future decision-making. Point out that last month’s inventory savings was a direct result of a 2% decrease in MAPE and that further improvements could save the company even more (try our Error Monetization Calculator). With time and investment, you can further improve your predictive analytics, reduce forecast error, and increase profit.
Forecast error might sound scary, but it is one of the most important metrics in supply planning and operations. Identifying and monetizing discrepancies between predicted values and actual values will help you improve executive buy-in and enhance supply chain methods. Need help? Use the Forecast Error Monetization Calculator to do the work for you.