How do you determine whether the forecasting approach you’re using is the right one for your business? Which is the appropriate product hierarchy level to begin forecasting? Which products demand the most significant attention and focus? Forecastability analysis has the answers to all these questions.
Every forecaster understands that there isn’t any standard approach or “best practice” to forecast the sale of a product. But if different products have different “forecastability” attributes, you can infer different practical approaches to predict. This is the best way to enhance your focus accuracy and productivity.
By “forecastibility” (you won’t find this term in the dictionary!), we basically refer to whether the item’s sale can be forecasted. You can only determine this through a detailed forecasting analysis process.
What Is Forecastability Analysis?
In essence, this refers to appraising your company’s demand scheduling challenges while helping employees focus on addressing demand variability. This process entails segmenting items in various unique ways so that you can establish and apply the appropriate supply chain policies for production and inventory management and inventory planning.
You can also use this process to evaluate how profitable the company’s products and product segments are. The result is a set of defined rules to be applied to accomplish dramatic improvements in the bottom line.
Why Is Forecastability Analysis Necessary?
Forecast analysis’s primary objective is to make your demand planning process more accurate and efficient, but most companies still don’t know that they need it. Some of the key indicators that point to the need to conduct this analysis in your demand forecasting include:
- Lack of precision – If you continuously experience low forecast accuracy, or the precision gets worse by the day, it’s a sign that you need the analysis.
- Tedious forecasting – Sometimes, you may realize that you have to go through a long and cumbersome process to achieve your forecasting goals.
- Too much inventory –When the inventory levels get too high, it’s a red flag
- Stock-outs – Frequent expedites or stock-outs are also an indicator that your forecasting needs a detailed forecasting analysis.
The reasons to carry out demand forecasting analysis are vast and not only limited to the above. For instance, a recent divestiture or acquisition may necessitate a shift in your forecast focus. There may be a change of staff that calls for training new employees on its forecasting methodologies. Also, market shifts or competitors may transform the landscape for your current products to reveal improvement opportunities.
All these scenarios call for a detailed forecastability analysis. But how does it work? Read on to explore.
The Steps of Forecastability Analysis
Forecastability analysis assesses the challenges you face with demand planning. The insights gained could help your business address the hurdle of focusing your demand planning approach and effective use of stakeholders’ time.
Below are the three crucial steps that you must cover to achieve a good forecastability analysis:
Step #1 – Demand History Analysis
This initial step involves evaluating your actual sales history for each product. You’ll also begin segmenting the products based on their relative value. Analyzing your demand history will also reveal the different factors that affect the demand in your company.
Step #2 – Selecting a Practical Forecast Strategy
At this stage, the different approaches you use in forecasting will be evaluated to determine the ones with the highest accuracy. The process entails checking out statistical and non-statistical methods, various product hierarchies, promotion/event modeling, and product lifecycle curves.
Step #3 – Quadrant Analysis
This final step gets to the actionable results of the analysis. The different products will be grouped and segmented based on their relative value and ease of forecast. You’ll end up with a final set of practical policies for driving inventory, capacity building, and prediction.
For instance, if you have products with higher forecastability, you’ll require an automated forecast, and responsible staff should be there to monitor any exceptions. On the other hand, those with low value and low forecastability require management with inventory policies instead of wasting time carrying out direct forecasting.
How Forecastability Analysis Benefits Your Business
The ultimate result of the process is it allows you to generate a detailed segmentation of products using precise, practical inventory and demand planning policies that attach to each segment. The process delivers an inclusive report that covers the following details:
- Segmentation with insights to drive calculated decisions on forecasts, purchasing, production, and inventory policies tailored to address product groups’ needs.
- Historical data classification for a vivid understanding of demand drivers like outliers, trend, lifecycle, and seasonality.
- Coverage of the forecast approaches and accuracy alongside the recommended course of optimizing the overall precision
- Practical approaches to handling complex items like newly-acquired products or those that portray intermittent demand.
The ability to classify products and items based on their “forecastability” attributes benefits the business in many ways. For instance, you’ll easily pick the forecasting approach that works for each item, and you can quickly identify those that can be automatically forecasted. It’s also an excellent way of measuring how difficult it is to predict different products.
Company staff and stakeholders without direct responsibility for forecasting may have unrealistic expectations of the process’s accuracy. Measuring “forecastability” will give them a deeper understanding of the different issues in an objective, data-driven way, especially for items that are “lumpy “or almost impossible to forecast.
Key Takeaway
Forecastability analysis is a novel approach for entrepreneurs to enhance their forecast accuracy and improve the forecasting process. Still, these aren’t the only great results that you’ll achieve from the process. Conducting this exercise also helps you develop an excellent road map demand and inventory planning.
The improved policies and enhanced accuracy will optimize your production and inventory execution strategy. Consequently, you will reduce your inventory levels while increasing your customer service. Of course, the overall business outcome for these improvements is an improved margin.
StockIQ offers a reliable planning software solution for efficient supply chain operations and accuracy with your demand forecasting. Not only do we help you manage your inventory, your clients and shippers will also benefit a great deal from the exceptional experience and unmatched service.
Contact us today so we can begin finding the right inventory solutions to improve your bottom line.
