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The value of good forecasting

Updated: Apr 25, 2023

What is forecast accuracy in simple terms?

It's a measure of your ability to estimate your sales accurately in the near future at a granular level.

As an example, if you were in the business of selling gourmet sandwiches, how many sandwiches will you sell in the next week? Why is this relevant you may ask?

If you knew you can sell 100 sandwiches, you buy raw materials at a cost-effective shipping rate to make exactly 100 sandwiches, bear in mind sandwiches go bad after a day, at the end of the week, you only sell 60 sandwiches.

This means you need to sell the remaining 40 sandwiches at a discount or even at a loss. Alternatively, had you bought raw materials for 60 sandwiches upfront, you would be discounting nothing at the end of the week.

Hopefully, this is not making you hungry but the point is simple, forecast accuracy leads to better bottom-line performance in any business of any scale and industry.

Our personal experiences have seen significant value-driven in businesses by better forecast accuracy, the benefits can go on but here is a short and summarised list:

1) As mentioned above, bottom-line financial benefits, improved gross and net margins for a business through better cash-flow management. This is one of the many reasons Apple is so good as a global business.

2) Needless to say, reduced inventories and stock obsolescence by better forecasting of future requirements.

3) Ability to shape demand : In the sandwiches example above, say you bought 60 sandwiches, however, the market looks interested in one specific sandwich and you don't have enough of it. You have a lot of other sandwiches, so you need to think of how to make the other sandwiches more attractive, perhaps train staff to offer the abundant sandwich at a discount, or sell that sandwich with an add-on like a free drink. This is demand shaping and all businesses of all sizes do it. This leads to further improvement in gross margins.

4) Ability to project commercials into the future and plan on how to close any commercial gaps versus your budgets. In supply chain, the S&OP framework would cover this.

So there are plenty of benefits for forecast accuracy and we have tools that would help commercialise forecast accuracy for you. If you want to show the rest of your business the value of a technology, nothing says it better than dollars saved by investing in it. Reach out to us for a conversation on this and let us work out how best to help your business.

There is substantially more on this topic on the internet, we are happy to share a link we found effective here. An article by Relex Solution also dwells on the theory that you can have the greatest tools in the world but they cannot do anything without the right masters.


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