Content area
Full Text
EXECUTIVE SUMMARY | This column discusses gauging how forecastable a product line is, and why it is important for forecasters to know. Since I first wrote about the concept over 16 years ago, in conjunction with discussing the importance of understanding demand variations, others have advanced the concept now termed "forecastability." Knowing it for your product line can help improve your forecasts over time, as well as your company's plans. However, another important reason is that someday it might help you keep your forecasting job.
I recently attended a John Galt Systems User's Group event to train and speak. Before leaving the next day, I attended a morning session where the company discussed its Forecastability Analysis that provides information on how well various methods are able to forecast items in a product line. The analysis, for example, identifies high versus low "forecastable" products. The presenter showed a two-by-two matrix that is similar to the Alan L. Milliken (from BASF) matrix described in my Fall 2009 Journal of Business Forecasting (JBF) column, titled "Volume-Variance Analysis." That column depicted a vertical axis labeled Sales Volume versus a horizontal axis labeled Variability of Sales (co-labeled: Coefficient of Variation = [(Standard Deviation of Period Sales or Forecast Error)/(Average Period Sales)]). BASF uses it to apply differing inventory management strategies depending on what quadrant a product falls into when the matrix is split into four High-Low quadrants.
Similarly, the John Galt presenter's matrix depicted a vertical axis labeled Value versus Forecastability (the latter is dependent on the forecast accuracies of specified forecasting methods, such as time-series and life cycle). The company stated that it could be used to make decisions on "forecast, production, purchasing, and inventory policies tailored to the needs of product groups." There were a variety of questions asked at the end of the presentation before I raised my hand to make a point. It was: "Forecasters also really need this type of information to keep their jobs!"
I went on to say that I overheard someone, the day before, mention that he was working with his boss to set his annual job performance review factors, which included a demand forecast accuracy target. I believe performance reviews based on achieving specific forecast error levels are generally...