SCM Awareness: The Forecasting Process 1

SCM Awareness: The Forecasting Process 1


Now that you understand the basic concepts and elements of a forecast let’s look at the process for creating and maintaining such a forecast.

  • Determine what the forecast is for.
  • Determine how far out you will look and what the interval or buckets will be
  • Determine what level of detail the forecast will look at. Family or Item level
  • Choose what method you will use. Qualitative or quantitative or most likely a mix of both.
  • Gather the data you need.
  • Map the historical data and look for any trends, patterns etc.
  • Determine the historical accuracy of past forecasts. Look for bias, accuracy etc.
  • Create a forecast looking out to the end of the set horizon.
  • Review or sense check the forecast vs past sales and any known information (e.g. promotions etc)
  • Communicate the forecast once happy with it.  First to sales etc then to Operations.
  • Agree and implement a regular process for reviewing the forecast performance and adjusting/extending the forecast into the future.

Now over this post and the next few posts we will look at each element of this list

Firstly, Determine what the forecast is for.  We have already discussed the different types of long-term planning. Business Plans, Strategic Plans, S&OP are all long-term plans. In effect these are different from the short term plans we are now exploring the process of how to develop.  And because they are different then the forecasts require different things.  A long term forecast to determine required staff levels or equipment to purchase will suffice to have a forecast that is at a high family (or even above) level and the acceptable level of error could be relatively high as assuming that the business has plans for growth over the coming years then there will be greater scope to deal with inaccuracies. 

In contrast a forecast used to purchase raw materials, put finished goods stock in place or generate manufacturing orders will have to be far more detailed. The raw materials will vary from product to product and therefore you need to be far more accurate in the forecast to allow the MRP team purchase the required materials. Therefore, it is key to know what the forecast is for before you start the process.  You may have a forecast that combines the two.  This means there is one set of data from which everything flows be it short or long term.  

Also, it is important to be aware that a production forecast will be different to a sales forecast.  You need to factor in the production lead-time so that you can have the item produced in time to be ready for the customer. 

Determine how far out you will look.  This is linked to what the forecast is for.  If you have one forecast data file it is still important to know the forecast will be used and that will probably be determined by the nature of the review meeting you are preparing for. 

If you are preparing the forecast with a view to deciding what is to be made next week then you will be really focused on making sure the short term forecast is correct and you can afford to spend less time working on the numbers for three months’ time.  Often you will be working under pressure with a short amount of time to create and publish the manufacturing plan.  Therefore, you spend more time on what is important. When reviewing the forecast for the production plan you may only quickly glance at the numbers beyond the next few weeks.  Also, you cannot look out to infinity. You do not have the time or computing resources to do that. Even a few years in monthly buckets will make the data impossible to read an the further out you go the more inaccurate it becomes. So, focus on the important short to medium term time scales.

Determine what the intervals or buckets will be.  This will probably be determined by the needs of the business but as previously discussed it will most likely be weekly for the short term 8-12 weeks and then monthly after that.  This is important because there is little point in developing a forecast all in monthly buckets if it is to be used to decide next week’s production plan.

Determine what level of detail the forecast will look at. This will probably involve Family or Item level.  Family level is probably best for long term forecasts but short-term demand should be at a finished item level to allow for material and resource planning.  Sometimes you will also be asked to show the forecast by region, country etc. When designing the forecast system be sure to take reporting needs into account.  

So now you know what the forecast is for, how far out you will look, in what intervals and in what detail what will all that look like.  Well here we see a typical sort of graph you may see on your forecast system. In this case it is for Polo Shirts grouped together into the family “Polo”.  It is in weekly buckets for the next 8 weeks and then monthly buckets for the rest of a 12 month horizon.  The graph displays the trend for the overall polo family but within each bar the individual items are also displayed.