Generating, understanding and properly applying market forecasts is no longer an activity just for the “number crunchers”; it is becoming a necessity throughout today’s businesses. A recent survey by theForecaster (forecastingexcellence.ning.com) reveals that scope of forecasting is changing rapidly with the business landscape.
The survey
The survey polled the views of nearly 250 geographically diverse executives either working in (70%) or with an interest in (27%) the forecasting field from companies generating revenues of less than $50 million to more than 6 billion. Survey participants hail from broad range of industries, including automotive, food and beverage, service, computer technology, financial services, pharmaceutical, telecommunications, healthcare, retail, transportation and consulting.
Forecasting nuts and bolts
According to survey participants, most forecasters still operate as part of their marketing (43%) or finance departments (21%), but many say that the forecasting function has become part of strategic planning (31%) or standalone departments (14%).
Despite the increasing need for and reliance on accurate and timely forecasts, most survey participants (55%) say their company has two or fewer full time forecasters, while some (26%) report from 3-10 full time forecasters on staff. And their forecasting programs are fairly recent ventures, with 33% having been in place for two years or less and 32% in existence just 3-6 years.
Most forecasters report having product/market expertise (62%), while many say their backgrounds include experience in marketing research (47%), statistics/mathematics (37%), sales (37%), accounting/finance (35%) and production/distribution/logistics (26%)
The companies participating in the survey report using a wide variety of forecasting systems and software, including Microsoft Excel (55%), SAP (21%), Cognos (10%), SAS (9%), and SPSS (9%).
The forecasting window
Although survey participants say they often are interested in the short term, with forecasts that focus just a month (15%) or a quarter (24%) out, they also put a great deal of emphasis on longer term forecasts of a year (50%) or more (51%). Most participants who say they look further out than a year, report considering 3-5 year, 5-10 year and even 10-20 year forecasts in their strategic planning.
The time frame of forecasts appears to correlate closely with production schedules. Production schedules are locked one month (18%), 3 months (37%) or more than 6 months (32%) out, according to survey participants.
According to survey participants, their companies’ forecasts are usually revised quarterly (38%) or monthly (33%).
The process
Forecast consensus meetings (which 67% of participants have), sales and operations planning processes (which 76% utilize) and collaborative planning, forecasting and replenishment programs (49% of companies report having) likely play a big part in setting and revising forecasts. The vast majority say they feel significant support from their company’s top management for the forecasting function, with 56% saying their management uses their forecasts regularly.
The majority (56%) of survey respondents report that their companies follow a “one number” forecast philosophy in which all departments use the same forecast number. And a wide variety of forecasting methods, including prediction markets (36%), regression (34%), simple (31%), exponential smoothing (28%), averages (25%), survey (24%) and analog (19%), are utilized.
The challenge
Although the overwhelming majority (76%) of those surveyed say they regularly monitor and document the accuracy of their forecasts, most (72%) say there are no incentive plans in place to improve forecast accuracy. One of the greatest forecasting challenges, some participants say, is communicating accuracy and educating end users in departments outside the forecasting function about accuracy.
“One number” forecasts are mentioned by many survey participants as being important for improving the application of forecasts, but are a struggle to “sell” to management in many cases.
Not surprisingly perhaps, most participants (72%) say conflicts of interest among different functional heads within an enterprise get in the way of forecast accuracy. According to several participants, challenges of who “owns” forecasts, managing internal conflicts of interests and gaining consensus among constituencies with differing agendas remain real hurdles for forecasters.
Survey participants also voice concerns about ethics and standards in forecasting, including expectations for “political” or “target” forecasts that “fit” management agendas. How to reconcile expectations with reality, avoid inflation of forecasts and rein in unrealistic assumptions remain significant challenges for forecasters, regardless of company size or industry.
Forecast accuracy is particularly problematic for new products, where it is difficult to account for new and unfamiliar market dynamics, events that may affect data and product lifecycle impacts. Long-term markets and technology adoption, such as for pharmaceuticals, as well as accounting for unpredictable variability in markets or internal sales strategies, also pose technical challenges for forecasters, survey participants say.
Forecasting in markets with extreme and dynamic political environments, such as Latin America, can also prove problematic, respondents point out.
The future
Survey participants also had a lot to say about the future of forecasting. Although some warned that “more non-forecasters are doing forecasting, due to the software availability,” many see less of reliance on statistics and a greater integration of sales and marketing knowledge as a key step toward improving forecasts.
“Forecasting is developing from an art to a science with the use of technology,” one participant says. “Although this is not a bad thing, the human element and perception are still important in the forecasting process.”
Another reminds us that “forecasting is not only a mathematical function … but needs a certain market knowledge and ‘gut-feeling,’ too.” This means that forecasters must become experts in many other areas, including brand and market awareness, modeling and financial analysis and building support for forecasts, one participant writes.
Survey participants predict there will be more emphasis on forecasts to effectively manage budgets and cost estimates, as well as stronger integration of the forecasting function with solid strategic planning within organizations. “The financial investments are huge and, therefore, forecasting becomes the most important tool to invest at the right time and the right place,” one respondent says.
By the same token, forecasting will continue to struggle with politicization of the function to support financial goals of the organization, participants warn. With the stakes higher for “getting it wrong,” one respondent says the need to be more “reality based” rather than “wishful thinking” grows.
Relationship management is becoming a key success factor, many participants stress. But as one respondent eloquently points out: “We must appreciate the fact that the future is uncertain. Our forecasting activities provide a sense of direction and help visualize the impact of future competitive factors.”
The bottom line, as one respondent says, is to establish good communication links among departments within an enterprise to assure process success. “More input from various working groups should be included in the process moving forward to get a realistic look at what’s achievable,” another agrees.
Forecasting, one respondent summarizes, allows companies to go from reactive to proactive and from proactive to predictive – and that is the “need of the day,” without which “strategic business advantages may not be realized.”
Author: Lisa Roner, editor, theforecaster
