Demand Forecasting

Demand forecasting is the activity in a company that predicts the level of demand customers will have for a company’s products.  This activity usually garners very little attention from outside the company.  For most job seekers, demand forecasting is far from their thoughts, and yet, a close look into the metrics of demand forecasting uncovers an important lesson for resume writing and interviewing.

Companies are supposed to make what customers want.  The challenge is significantly greater than most realize.  As we move towards the holiday season, manufacturers and retailers have established their forecasts, and products are moving through the supply chain.  Lead times for many products are several months, especially if a product is a big holiday seller.  Invariably, we will have a story about the “hot toy” this year that catches all the retailers off guard.  They will have far less inventory than they need and manufacturers won’t be able to respond fast enough.  By the time we know what is hot; it will be too late to respond by making more.

Although missing sales on one hot product can be a major mistake for a company, consistent demand forecast errors can be even more crippling.  Making too much of one product is costly as the inventory sits, or worse, has to be discounted to move.  Missing sales on a wide range of products by under forecasting demand will mean lost sales, and in some cases, the loss of major customers.

This was the discussion in one of the sessions I attended at the APICS conference last week.  The speaker showed techniques he had used to improve demand forecasting.

Improving demand forecasting can be a significant driver of profitability for a company.  Forecasting errors produce waste and lost sales.  Any improvement will improve sales and reduce waste.  To measure the effectiveness of a company’s demand forecasting, several key performance indicators (KPI) can be used.  A few of the KPI’s mentioned were:

  • MAPE – Mean Absolute Percent Error
  • ONIF – On Time In Full
  • SLOB – Slow Moving and Obsolete Inventory

Each of these KPI’s is critical to a business.  There are lots of metrics companies can use to measure performance.  KPI’s are the critical metrics that do the best job of capturing the performance of the business, and if improved, will drive overall improvement in the overall business.

For individuals in roles developing demand forecasts or contributing to the demand forecast, changes which improve the KPIs can be significant.  They are the type of accomplishments that should be highlighted in a resume and discussed in an interview.

Most people, if they include accomplishments, list very general accomplishments and only focus on cost savings.  Cutting costs is critical to a business’s long term success, but it is only one element of performance.  Discussing other KPIs that drive performance can also make a strong impression on a resume.  Discussing the accomplishments in detail, where it is clear what you have accomplished and how you did it, can help set you apart from your peers.

If you are the manager of production planning or demand forecasting, focusing on these measures makes a lot of sense.  There are others in the organization who influence forecasting accuracy.  The sales department needs to give quality customer forecasts to the planners, otherwise, the planners will be guessing.  Marketing needs to provide the planners with their plans for major promotions.  The speaker told a great story to illustrate this:

A major car company had forecasted a product mix with a lot of green cars.  Manufacturing produced the cars and the new model was rolled out and shipped to dealers.  The cars painted green sold below other colors, leading to high inventories.  Marketing and sales quickly heard from the dealerships and responded with a large promotion to discount the green cars.  Sales went through the roof and the inventory was cleaned out.  At the same time, demand planners saw the increasing sales of the green car, but knew nothing of the special promotion.  They responded by ramping up production to keep up with demand, flooding the supply chain with even more green cars.

This is an obvious mistake, but it is far from uncommon.   Communication within companies can be challenging.  If you are in sales or marketing, changing your communications with the planning department can make a significant improvement in the business and affect measures such as MAPE and OTIF.  If you have implemented a change like this, you should mention it on your resume.  Not only does it show an example of a contribution you have made, it shows a broader understanding of how your role can drive performance of the company.

Bottom Line:  Look beyond simple cost savings and revenue generation metrics to show how you impacted the overall performance of an organization.  Use the metrics that are true key performance indicators to demonstrate your performance.


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