Reprinted from Portsmouth Herald / Seacoastonline.com – January 09, 2012
At year’s end, we are often caught up in thinking and planning for the current year. Did 2011 turn out the way you expected? Will 2012 be dramatically different? Are there other factors — things we are planning to do; things we think our competitors might do; outside forces such as changing tastes, demographics or economics — that might change the course of business in the coming year?
Most companies that do a formal forecast start out with a statistical projection of past sales patterns into the future. Your forecast model should detect and characterize any seasonality inherent in your markets and include that in the projection. But that’s just the first step.
The next thing to consider is product lifecycle. Nearly all products go through a predictable cycle of introduction, acceptance and growth, maturity (demand levels off), and finally decline to obsolescence. These cycles can be as short as weeks or as long as decades. Clothing fashions and consumer electronics would be on the shorter end of the scale, while products such as plumbing fixtures and construction equipment experience longer cycles. Nevertheless, the demand forecast should be adjusted to reflect increasing or decreasing demand according to the product’s position in its lifecycle.
Now comes the hardest part — predicting the unpredictable. In general, the future is likely to look a lot like the recent past in a similarity to Newton’s first law of motion: a body in motion tends to stay in motion unless acted upon by an external force. But it’s those external forces that can send your carefully calculated forecast right into the gutter. A competitor might slash their prices to take away some of your market share. New technologies might obsolete your product before the end of its expected life span. Changing tastes or new regulations might stop sales in their tracks.
But good things might happen as well. You might be the one to slash prices or improve your product and take away a competitor’s business. Your product may catch the fancy of the market and sales will skyrocket. A competitor may abandon the business or go bankrupt, leaving you with more opportunity.
Should you plan for these kinds of things? It would be nice if you could, but it’s virtually impossible since these kinds of developments are by nature unpredictable (if they are predictable, then of course, include them in your plans). The key to success is agility — the ability to adapt to changing conditions. Prepare the best forecast you can, build your plans around that forecast, and monitor sales and market conditions closely and continually for the earliest warning that things may be going in a direction other than you predicted.
You must be willing to recognize and adapt to changing conditions — in other words, don’t fall in love with your forecast and ignore evidence that it may be wrong. Pride of authorship in this case can be deadly to your business.
It is also important to have contingency plans in place so you will be prepared to make necessary changes to procurement, production and inventory to respond to the new estimate of demand. The best tools for this are the shortest possible lead times (both production and supplier), good supplier relationships, and a clear view of the world and your markets.
Forecasting is difficult mainly because people know it is likely to be wrong and nobody likes to be publicly and visibly wrong. Nevertheless, a good forecast is necessary to position the resources necessary to satisfy customer demands. Just be open to the first signs of change and be prepared to react quickly and decisively.
