Understanding Forecastability Analysis: How Does It Benefit Your Business?

For inventory-based businesses, forecasting is a mission-critical tool which can help optimize your enterprise, make it more profitable, and reduce excess and inefficiencies. But when it comes to inventory forecasting, there are many different approaches you can take, and not every approach will be well-suited for every need. For this, you can turn to forecastability analysis. 

What do we mean by forecastability analysis? When it comes to forecasting, certain questions often arise. 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? By understanding forecastability, you can determine the answers to these questions, and forecast in a way that leads to vital insights. 

The truth is that accurate, comprehensive forecasting can be a make-or-break for most inventory-based businesses. Today’s $15.85 billion global supply chain market is incredibly complex and vulnerable to risks. Supply chain disruptions are often present, consumer habits can change at a moment’s notice, and unexpected events (such as the coronavirus pandemic) can exacerbate supply chain issues.

Every forecaster understands that there isn’t any one-size-fits-all approach or generic “best practices” when it comes to forecasting the sale of a product. But if various products have different “forecastability” attributes, you can infer different practical approaches to predicting future demand. This is typically the best way to enhance your forecast accuracy and impact.

Forecastability is a term that we’ve coined, and it refers to whether an item’s sale can in fact be forecasted, and how accurate those forecasts will be. You can only determine this through a detailed forecasting analysis process, and by understanding forecastability.

Why Is Forecastability Analysis Necessary?

Before we dive into understanding forecastability, it’s important to first discuss why it’s so crucial in the first place. Forecastability analysis’ primary objective is to make your demand planning process more accurate and efficient. Proper forecasting doesn’t just leave you with numbers and data: it provides you with tangible takeaways that you can use to take real-world action in your warehouses. For example, forecasts help you understand how much product you’ll need to order, how you can avoid costly overstocking, what seasonal shifts are coming, and what stockouts you need to be aware of.

But to get those actionable takeaways from your forecasting, the proper methods need to be used on the correct products.

Forecastability analysis is something that many inventory-based businesses miss, and oftentimes, companies don’t realize that they need it.

How can you know if you should be deploying forecastability analysis practices in your next demand forecasting? Some of the indicators include. 

• Lack of precision – If you continuously experience low forecast accuracy and your forecasts are not matching up to the actuals, it’s a sign that you need to conduct forecastability analysis. 
• Tedious forecasting – If you’re going through a long and cumbersome process to achieve your forecasting goals, it’s likely that you need to conduct an analysis, to see how you can optimize your forecasting.
• Too much inventory – Excess inventory can be costly for warehouses, but it can be tricky to understand exactly how much stock to order. Forecastability analysis can help you use models properly, so you always have your target stock on hand.
• Stock-outs – Frequent stock-outs are also an indicator that your forecasting needs a detailed forecasting analysis.
  

The reasons to conduct forecastability analysis are numerous and 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.

The Steps of Forecastability Analysis

Forecastability analysis assesses the challenges you face with demand planning, and helps you arrive at the most accurate and useful forecasts possible. The insights gained could help your business address the hurdles of focusing your demand planning approach and effective use of stakeholders’ time.

Here are steps to follow to execute forecastability analysis:

Step #1 – Demand History Analysis

This initial step involves evaluating your actual sales history for each product. How have certain products moved in the past? What is consumer interest like? During this step, you’ll also begin segmenting the products based on their relative value. Analyzing your demand history will also reveal the varied 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 for the data that you’re focusing on. The process entails checking out statistical and non-statistical methods, various product hierarchies, promotion/event modeling, and product lifecycle curves.

During this stage, you can consider some of the top forecasting strategies, and their respective advantages:

• Top-down forecasting:  This forecasting approach starts with the broadest factors, such as market research data, and the largest product categories or families. This method can often be quicker to execute than other strategies and can supply insights into big-picture demand and needs.

• Bottom-up forecasting: This approach starts from the bottom of the inventory chain, using the smallest subsets of individual items. It can be more time-consuming to put together, and it creates a focused forecast.

• Middle-out forecasting: This approach takes one of the middle tiers of the product hierarchy and executes the forecasts from here. It can provide more details than top-down forecasting and doesn’t consume as many resources as bottom-up forecasting, but sometimes this data can become murky. 

Step #3 – Quadrant Analysis

This final step gets to the actionable results of the analysis. The various 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 beable to use 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.

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How Forecastability Analysis Benefits Your Business

The ultimate result of executing and understanding forecastability analysis 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 managing complex items like newly acquired products or those that portray intermittent demand.

The ability to classify products and items based on their “forecastability” attributes can benefit your business in many ways. For instance, you’ll easily pick the forecasting approach that works best for each item, and you can quickly identify products which can be automatically forecasted. It’s also an excellent way of measuring how difficult it is to predict assorted products.

Company staff and stakeholders without direct responsibility for forecasting may have unrealistic expectations of the process’ 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 challenging to forecast.

Key Takeaway

Forecastability analysis is a novel approach for those in inventory-based businesses to enhance their forecast accuracy and improve the forecasting process. Still, these aren’t the only impressive results that you’ll achieve from this 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 can 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.