Forecasting

Forecasting with be presented in three sections: 1) Forecasting Process, 2)  Forecasting Models, 3) Forecasting Applications and 4) Introducing an OIS to the forecasting process.

FORECAST PROCESS:Beyond Budgeting Roundtable (BBRT) is an international shared learning network of member organizations with a common interest in transforming their performance management models to enable sustained, superior performance.  For more details, see BBRT.

One of the central performance management BBRT tenants is that a quality forecast process is essential.  Steve Player, chairman of BBRT NA and co-author of  Future Ready: How to Master the Business Forecast, has very succinctly described just such a process.  Included are the important distinctions between strategic, business and execution forecasts as well as clarifications between goals, budgets and forecasts. Elaborating, “Business forecasting takes place when it is possible to steer the business within the constraints of existing goals, scope and structure of the business,” ibid.

Further, a forecasting process approach the BBRT has emphasized is that of the Rolling Forecast.

Another forecasting process is described in Demand-Driven Forecasting, ibid, page 58. This process has the advantage of including Finance and Operations in the development of the forecast. It is described below.

1.Demand Sensing: Uncover market opportunities and key business drivers (sales and marketing)
2. Demand Shaping: Using what if scenarios, demand planners shape future demand based on sales/marketing plans
2 a) optimize sales and marketing tactics and strategies (sales and marketing)
2 b) assess financial impact (finance)
2 c) finalize unconstrained demand forecast (sales and marketing)
3. Demand shifting: match unconstrained demand to supply
3 a) consensus planning meeting (sales, marketing, finance and operations)
3 b) rough cut capacity planning review (operations)
4. Demand Response: Constrained demand used to develop supply plan
4 a) revised demand response (sales and marketing
4 b) create supply response (operations)

Demand-Driven Forecasting Process

Our concern here is with business forecasts.  “We chose this name, business forecasts, because business forecast, because, while short term or execution forecast primarily concerns those that are required ro deliver goods and services, and strategy is primarily the job of senior management, the business horizon usually involves the entire organization in some fashion.” ibid

FORECASTING  MODELS:  Given a high quality forecasting process, what are the various techniques by which a forecast can be created?  Referencing Future Ready, Chapter 4: “Mastering Models; Mapping the Future, pages 87-124. “There are are three types of models can be used to produce a forecast…

  1. Despite the disapproval of professional forecasters in academia, the majority of business forecasting and budgeting processes rely on judgment techniques.
  2. The second type of forecast model is the  mathematical model…Many businesses use sophisticated mathematical modeling to forecast volume,  perhaps factoring in the effect of weather on the size of the market or advertizing on market share…
  3. Given a reasonable amount of historical data, we can use the third type of model: the statistical model.  Statistical models employ extrapolation techniques to generate forecasts”

Confirming the difference between mathematical models (i.e., explanatory) and extrapolative (i.e., statistical) models, quoting from  Hanssens, Parsons, Schultz, Market Response Models, pages 377-378, 386-389  “Extrapolative forecasts use only the time series of the dependent variable. Thus, a sales forecast is  made only on the basis of the past history of the sales series…Explanatory forecasts go beyond extrapolative by including causal factors thought to influence the dependent variable of interest.“  One of the most important casual factors in explanatory models is sales and marketing expenditures.

This discussion focuses on the mathematical or explanatory models.

FORECASTING APPLICATIONS:  It is certainly no surprise to the reader, statistical or explanatory forecasting techniques have been used for decades for the purpose of developing business forecasts.  Business forecasting is described by Morlidge and Player:, ibid, page 67 as : “Our concern is the medium term, which we call the business forecast.  We chose this name because, while the short term or execution forecast primarily concerns those that are required to deliver goods and services, and strategy is primarily the job of senior management, the business horizon usually involves the entire organization in some fashion.”

Explanatory or mathematical forecasts have also been used for decades within the sales and marketing silos to size and allocate their resources, optimally.

A comparison of these two different forecasting models (i.e., explanatory and extrapolative) and the various forecasting applications indicates very clearly the shortcomings of current explanatory forecasting applications; most significantly, the absence a forecast that is:

1) enterprise-wide and

2) truly optimized both

a) financially (i.e., profit as the objective function = maximally profitable forecast) and

a) operationally (i.e., supply chain both optimally feasible and sustainable).

INTRODUCING an OIS: There is a simple solution to these traditional forecasting limitations, however; simply add an OIS to the existing annual planning process.   By maximizing the ROI of its sales and marketing expenditures, an OIS simultaneously creates a new enterprise-wide optimized forecast  that is maximally profitable and designs the optimally feasible supply chain to make and fulfill it. In that regard, an OIS can be conceptualized as the firm’s “master plan.  That is, all relevant annual  enterprise planning applications, including S&OP, FP&A and marketing-mix modeling are aligned with maximum profit and the optimally feasible and sustainable supply chain.  See OIS Application Schema and OIS Practitioner Schema for illustrations of this point

Finally, all these planning applications remain in place; an OIS operates in the “background” and neither displaces any currently installed applications nor introduces a new application interface to the end users.

For a description of the product, INSIGHT Enterprise Optimizer which creates an optimized OIS, see IEO description on the INSIGHT web site: How to Maximize corporate profitability.

NEXT STEP: GET A FREE OIS PROPOSAL

  1. Call Jeff Karrenbauer, President, INSIGHT, 703.956.1423 or 703.999.1259 (cell)
  • Jeff will describe how an operational activity-based calibration model will be built of last year’s income statement.
  • It will show how much revenue and profit was “left on the table” because total sales and marketing expenditures were not maximized.

2. He will schedule a meeting (web or on site) to describe the process in more detail.

  • He will also get a feeling for the complexities of your business.

3. In discussions with his partners, he will develop a FREE proposal.

FINALLY, ACCEPT JEFF’s PROPOSAL

  • And, get to work implementing OIS’s unique financial and operational modeling analytics to maximize your profit.