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Thursday, 09 September 2010
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Thursday, 09 September 2010
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Startup Nashville 8/15/2009 Read more |
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Our first KickStartz Weekend held June 18-20, 2009 at DeVry University in Miramar Florida netted 4 new businesses. Read more |
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This video will be up for the KickStartz 2009 Weekend to be held at DeVry University on June 18-20, 2009. You can view the video here: Or you can check it out here |
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| Business Fundamentals: Forecasting, Operations, and Planning |
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Robert Krueger, Knowledge Level: Moderate, Keywords: sales forecasting, business operations, business planning, business basics
Although knowledge of forecasting methods and applications is essential to all businesses, it is especially important in small and medium size companies. Smaller firms cannot afford to hire a trained forecasting staff. Software is expensive and management must be knowledgeable to insure the package is actually suited to the company. Developing its own systems may be a better solution. The total body of forecasting methodology is complex, but help is available through the literature. Research, analysis of sales, and model selection are within the grasp of smaller firms, perhaps with outside help. The following paragraphs are an introduction to forecasting, operations, and planning. One thought to keep in mind: are my forecasts the best possible and are they integrated into the operational and planning functions? Plans and budgets guide the company, operationally and strategically. Forecasts and sales are the raw materials from which planning and decision-making issue. More than one ���"type” of forecast is required, each based upon the purpose it serves. However, the sales forecast can be the basis for the others. Frequently, forecasts are not fully integrated into the planning system. They become lost in the details of the process or ignored because their accuracy is too far from reality. Because forecasts (sales estimates) are important, they need to be considered at each stage of planning. Forecasts may be categorized as short-, mid-, and long-range. The short-range forecasts support operations, to the immediate planning horizon, usually one to six months; and include such activities as planning and scheduling production and purchasing or buying product for resale or distribution. The mid-range forecasts, say, six month to one year in the future, assist in planning equipment purchases, marketing campaigns, manpower requirements, cash flow, budgeting, etc. It is also the window required to plan and execute longer-term raw material and component purchases in manufacturing or product purchase for resale. Short- and mid-range sales estimates are often combined into one forecast. Anticipating sales allows the company to systematically determine needs and allocate resources. The long-range forecast supports the strategic element, the long-term future of the company. Strategic forecasting is beyond the scope of this article. Forecasts come in several flavors: sales, revenue, and profit, for example. The primary forecasts are the sales estimates, with other forecasts typically derived therefrom. Operational forecasts permeate all company operations. Company operations encompass all departments that are consumers of forecasts. Consumers are Manufacturing, Materials Management, Master Scheduling, Purchasing, Sales and Marketing, Merchandising, and Finance. The same basic functions apply to retail and distribution operations with product purchasing replacing manufacturing. Sales forecasts are used to determine what materials and products will be needed and when they will be required. Other typical uses are establishing inventory and safety levels, estimating sales and planning marketing programs, projecting cash flow and financing requirements, planning capacity and manning levels, and planning distribution. Forecasting and planning are bound together. Before testing different forecasting models, it is a good idea to determine how forecasts will be used, what critical functions will the forecast serve. An integrated approach is appropriate. How will each department make use of the sales estimates? How will planning come together in a master plan? Although the sales plan and the production plan are different, for instance, they support the overall company goals. Shipments are often the raw data from which sales estimates are made. Better is to estimate demand (sales orders). Shipment do not necessarily reflect what has been ordered (think cancelations, etc.) nor the timing of when goods are wanted. The demand record (actual sales) with its estimates tells what is needed and when. Shipping data is collected and compared with demand by time period. It reflects how well the company is performing. A hidden, insidious problem in many companies is that data is not as accurate as it is thought to be. Even though this unrecognized problem is present, the company continues to function well; however, data inaccuracy may affect the sales estimates and other programs. Thus, a review of the data files is pertinent. Frequently, departmental objectives are in conflict. Sales, for example, wants to maximize orders whereas Manufacturing wants to minimize cost by optimizing throughput, which may not serve on-time delivery of customer orders or may inflate inventory above acceptable levels. Each activity may have its own estimates or criteria and may not understand the impact of its decisions on other departments. Ideally, these estimates are in agreement with the capabilities of the operational activities. If the forecasts exceed capability, it is a signal for examination. The literature is replete with a multitude of forecasting models, one or more of which will probably be suitable. At times it may be a little more complicated than selecting a model, but that is not an unsolvable problem. There are two basic statistical approaches to forecasting: time-series analysis and regression. (Econometrics is another possibility.) Time-series analysis uses demand history to estimate the future. There are many models. Regression mathematically compares demand with one or more outside influences. The outside influences (independent variables) may be economic in nature, for example. For operational purposes, a time-series model will likely be the best choice. The model selected must fit the historical pattern of sales. The pattern can be statistically determined. Assuming time-series is the way to proceed; the company should still collect certain outside series and compare them with company sales: economic factors that may influence sales, industry sales overall, etc. Regression or econometrics, however, is generally more suitable for strategic forecasting. In forecasting, objectivity is the key. This indicates that a mathematical model is more fitting than one of the methods dependent upon judgment. Historically, forecast accuracy must be established. During the development stage (when various models are being evaluated to find the most satisfactory, most accurate), the latest historical sales data are set aside and accuracy is calculated by comparing forecasts with the actual demands that were set aside. The accuracy determined by this test indicates, in general, the accuracy that may be expected in the future. The historical series used to develop the estimates needs to be of several years duration normally. The question arises, should a single-point estimate be provided or should a range of possibility be given? The point estimate can be flanked by high and low forecasts. This allows a ���"what-if” scenario. There are several methods to calculate a range forecast. Standard deviation is an excellent choice. Often forecasts are partially (at least) disregarded in formulating departmental plans. Departments do not coordinate with each other. They act independently. Managerial effectiveness, however, is dependent upon integrating forecasting and planning in a coordinated effort. The beginning is the sales projections (the forecasts). They are the basis for a combined planning effort because they indicate what can logically be expected. The idea is a master plan agreed to by all functional departments and approved by top management. A first-rate approach is a process called Sales and Operations Planning. The APICS dictionary defines S&OP as a ���"process to develop tactical plans that provide management the ability to strategically direct its business to achieve competitive advantage on a continuing basis….” Individual plans are integrated into one operating plan. Revision to individual plans may be necessary to achieve one overall master plan. The S&OP team develops demand and supply plans. Meetings begin with product group forecasts. Sales estimates are discussed to determine the impact upon each department���„�s activities. Realize that departmental objectives may be in conflict: Sales/Marketing wants to maximize sales but that sales level may not be sustainable by Production, for instance. Such issues are sorted out by the team. Statistically based forecasts are objective, however, it may occur that a modification is necessary, say, when there are unusual or one-time activities (think sales promotion). The forecasting model is modified to account for these conditions. Forecasts are the guiding light to planning; they begin the process of integrated planning and operational execution. A comprehensive text is a necessity, for instruction and reference. A good choice is one that is not only comprehensive but practical, that is easy to understand. You may wish to check out my book on Amazon: Business Forecasting: A Practical, Comprehesive Resource for Managers and Practitioners. Bob has more than thirty years experience in forecasting, operations, and planning at the managerial level and as a consultant. He is professionally certified by the Association for Operations Management. He is author of the book Business Forecasting: A Practical, Comprehensive Resource for Managers and Practitioners. See http://forecastingsales.blogspot.com as in sales and business forecasting.. Article on sales forecasting, business operations, business planning, business basics by Robert Krueger Read more: http://www.zeromillion.com/business/Basic-business-planning-operations-forecasting.html#ixzz0FsOfWSOM&B |
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