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Selling anything, from widgets to wide-load trucks, isn’t an exact science. There are fluctuations in demand, in supply of raw materials, in shipping and more. That said, getting as close to reality as possible in sales forecasting is how you can control and increase your profit margins. After all, the forecast is what can help you be proactive in working with issues in revenue numbers, rather than reacting to a problem in the supply chain.
There are plenty of ways to improve your sales forecasting techniques, but this post will highlight the most common, and therefore costly, mistakes that manufacturers tend to make in sales forecasting.
Hunches, guesses and crystal balls are the least effective ways of forecasting future sales and yet so many companies continue to rely on these methods. While it’s true that all sales forecasts and demand plans are, to some extent, based on unknown factors, it is possible to limit those unknowns so as to get as realistic a set of data as possible. Forecasts that are based on current data, known influencing factors and historical patterns will always be closer to reality than those that aren’t.
Newer businesses might not yet have historical data to draw on but any business that has been a going concern for some years should have reams of it. Unless the company has restructured recently, altered its product lines significantly or gone in an entirely different direction, there should be historical data that reflects discernable demand and sales patterns. These patterns are the best predictors of the future, because while they don’t necessarily take into account current changes and/or possible impacts to the supply chain, they give you a baseline against which you can build accurate numbers.
Spreadsheets were a fabulous invention but when it comes to looking at data these days, they are manual, clunky and only represent the data at one point in time, and from the point of view of a specific business silo. Imagine sitting in a forecasting meeting and looking at six different sets of data. There is no chance that the resulting forecast will be remotely accurate. “Static monthly forecasts can’t account for these fluctuations. Manual sales forecasts or siloed inventory planning lags behind what is actually occurring. Forecasting without accounting for projected capacity can lead to not enough or too much inventory.” (Source)
Instead, a good sales forecasting tool will enable you to engage in “what if” scenarios using real-time data, transparent across the entire supply chain and factoring in different informational needs. In this scenario, the key performance indicators (KPIs) that are used to look at future sales possibilities will be limited to a maximum number and be the same across the chain, so everyone is looking at the same data, resulting in the same forecast.
Looking at sales forecasts as static objects is part of why they don’t help in planning everything from available resources and supply to operations to sales and ultimately delivery. It’s why they often don’t help with the bottom line. Instead, you need to go with the flow. A major change in your supply chain warrants a review of the numbers and appropriate adjustments to ensure you are properly supplied or that you have the inventory you need, such as for a big sale that was not anticipated but is coming! In this way, a sales forecast can become a living document that more accurately reflects your business reality.
There is no better way to set up your entire time, from end to end in the supply chain, for failure than holding up the sales forecast as some kind of divine prophecy. It might be inflated because the figures from past years were higher due to a change in the marketplace. It might be underwhelming for the same reason. You need to see the sales forecast as a guideline for action but also a target that is not stuck in cement but moveable.
With these common mistakes in mind, review your sales forecasting processes to ensure that you are not making them. Combining these with forecasting and data plan best practices is essential for your bottom line.