Outstanding forecasting? Be Careful.

This is an excerpt of the original article. It was written for the July-August 2017 edition of Supply Chain Management Review. The full article is available to current subscribers.

July-August 2017

A few years ago, a Harvard Business Review cover posed the question: What’s the secret to winning in the global economy? The answer: Talent.

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I believe that planning and forecasting processes are cerebral, and in effect are both the brain and the heart and soul of a company’s strategic business model. Managers that participate in these processes are usually the smartest and most analytically minded in a company. Therefore, these processes should be outsourced very minimally—if at all.

However, I’ve recently had a couple of conversations about companies that are experimenting with partially outsourcing their demand forecasting processes to external consultants. Apparently these companies want to leverage Big Data to forecast customer demand and are having a difficult time finding, hiring and keeping “data scientists.”

Generally, I believe demand forecasting needs to be done internally for effective and efficient integration with planning processes such as sales and operations planning (S&OP). More importantly, it should be kept in-house for competitive and financial disclosure reasons. I would be less concerned with outsourcing some of the mechanistic aspects of running complex computer systems that support purely statistical forecasting processes. For example, generating the baseline forecast is an initial statistical forecast based just on historical demand data. (The baseline forecast is adjusted for factors such as future sales and marketing activities to collaboratively come up with finalized consensus-based demand forecasts.)

The forecasting process

A company’s S&OP team needs to work collaboratively with a professionally run and independent forecasting organization.* Forecasters and planners must work hand-in-hand to help a company navigate toward corporate financial objectives. However, because forecasters must be unbiased, they should be not be subject to the pressures involved in demand achievement. Their main job is to develop quantitative forecasts (often weekly and monthly) based on marketing and sales activities, as well as other factors that affect future demand. This requires continual collaboration among forecasters and marketing and sales management. And, this collaboration should not be outsourced to external consultants.

There are various ways to organize a forecasting function. Some companies have a single centralized forecasting organization, while others have forecasters distributed throughout them, for example among business units. The latter sometimes has a “center of excellence” group that supports the distributed forecasters. Centralized forecasting departments and centers of excellence might report into any of a company’s functional departments.

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