A few years ago we assisted a major sporting goods company with their inventory strategy. Based on my observations of their inventory and supply chain I made a strong recommendation to them to implement forecasting. The CIO interrupted my presentation and strongly disagreed. He said, “We are not going to do forecasting!” I was taken aback by the interruption and forcefulness of his rebuke. I asked him, “Why are you not going to forecast?” He said, “Because the forecast will be wrong.” I wanted to say “Duhhhh.” But I restrained myself and said. “You are right. There is only One Source of perfect forecasting Who I know, but He does not work for most supply chains. However, wouldn’t you like to know how far off your forecast is, in what direction, and if it is getting better or worse?”
The CIO’s strong reaction to my recommendation that they implement forecasting may sound unusual. Unfortunately, I don’t find it that far from the norm. The vast majority of organizations either don’t forecast at all, forecast at such a high level that it is practically irrelevant for inventory planning purposes, and/or don’t hold anybody accountable for it; which is tantamount to not forecasting at all.
Forecasting plays a pivotal and vital role in determining required inventory levels. Forecasting also influences nearly every supply chain decision. As a result, the degree to which forecasting is in error foreshadows the error in all supply chain decision making.
Even a small improvement in forecast accuracy can yield big inventory savings. In a recent project with a major engine manufacturer we found that every 10% improvement in forecast accuracy yielded a 5% reduction in inventory (Figure 1). In that particular case the reduction was worth more than $5,000,000 in safety stock inventory.