Sales Forecasting Unchecked – A Supply Chain Nightmare!

Sales forecast

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Great Sales people have wonderful characteristics and personality traits. They can light up a room, command your attention, bring big ideas to the table, and close deals with customers, all with unbridled enthusiasm. And this can be reflected in Sales forecasting.

Bringing these ideas to life and delivering on commitments made to customers most often requires different but just as impressive skills and effort from the Supply Chain and Operations teams within an organization.

But what happens if your Sales team is left unchecked, goes rogue and makes commitments that can’t be met at any cost?

Under Commit and Over Deliver!

Have you ever heard of the phrase “Under commit and over deliver”?

There is a lot of experience, good and bad, and wisdom that is embedded in that phrase. You never want to disappoint your customers, whether they be internal or external to your organization. So if you make commitments and then exceed those then you are most likely assured that you will have a happy customer on the other end.

The caveat here is that the level of commitment must still be reasonable, not just attainable and overly conservative. If you under commit to such a degree that the commitment does not even come close to meeting a customer’s requirement then the customer will be completely upset. This may cause the customer to take their business elsewhere. Or if they do keep their business with you even if you over deliver later on they will still be upset and scarred by the overly conservative commitment you gave them in the first place.

The Sales Mindset

Sales people want to sell. That is their motivation. That is how they are compensated. That is what makes them tick. And that is what makes their adrenaline rush.

The Planning and Budget cycle within most companies must start with a forecast of future sales and revenue. The Sales and Marketing team is usually responsible for pulling that forecast together.

They are likely to pull together several sources of data in order to create that revenue forecast. They will include existing business, with inputs from those respective customers, with future projections of volumes and revenues. They will include recently won, and contracted, business and end of life business with volume projections showing increases and declines in those volumes, respectively.

And to round out their sales forecasting the Sales and Marketing team will have to include some estimates of new, but as yet not closed, business.

With pressure from Stakeholders to show revenue growth, and to demonstrate the value of the Sales team they will work to create forecasts for new accounts they hope to win and speculate how much business that will entail.

Given their unbridled enthusiasm Sales teams will almost always be highly optimistic in their estimates on prospects for future growth and new business wins which makes unchecked sales forecasting problematic.

And you want your Sales team to be pumped up and enthusiastic for sure.

But in most every industry and for most any company the track record for forecast accuracy can often be rather poor. And the results of poor forecasting can be damaging in the least and catastrophic at its worst.

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What Happens When Forecasts Are Wrong?

Forecasts are generally notoriously wrong. Actual demand may be higher or lower than the forecast. And even if overall forecasts are correct the underlying predictions for specific products and materials are usually off of plan.

When demand is higher there is often a cry from Sales that this is good news. Customers want more products or services. And that is good news.

But from a Supply Chain and Operations perspective deviations from forecasts, whether they be up or down, are a call to action.

If demand is higher than forecast Supply Chain is often scrambling to secure more materials and arranging for expedited transportation and logistics, and sometimes even looking for more cash to fund all of this activity. Manufacturing and Distribution facilities are working to find more capacity, add staffing or equipment and working to reduce processing times.

This usually stresses business processes, and individuals. But again in the name of higher growth and customer satisfaction this can be a good thing.

However if demand is lower then forecast this can wreak havoc across an organization.

Lower demand can mean that companies are stuck with materials that they can’t use as quickly (if at all), there is excess capacity and resource throughout the organization, and cash is tied up in inventory and resources. There is not enough revenue coming in to fund the organization and all of the unrecovered expenses as well, which means that profitability will suffer.

Supply Chain will be called on again to try and mitigate any damage. They will work with suppliers to cancel or reschedule purchase orders. They may look for alternative channels in which to disposition inventory. And Operations will try to leverage their flexible workforce and take out any variable and discretionary expenses.

A Sales Forecast Gone Badly Wrong

If you have worked in most any function in Supply Chain you have certainly experienced the repercussions of dealing with forecast deviations. In some cases the impacts are minor. In others the impacts can jeopardize the survival of a company.

In one case study the result of over forecasting was catastrophic.

In their exuberance and excitement to win new business and grow the company the Sales team submitted a very aggressive revenue forecast for the coming fiscal year.

The revenue plan was made up of a combination of existing business (with volume input from existing customers), newly won business (also with volume estimates from customers), and business that hadn’t yet been won but were in some stage of the Sales cycle.

With intense pressure from the Board and CEO to grow the business the Sales forecast became the revenue plan for the year, upon which all budgets, expenses, capacity and investment plans were made. This was even though a significant portion of that forecast included business that hadn’t even been won yet.

To underscore the problem any attempts to scrutinize the revenue plan were squashed. We were to trust the Sales team to pull it off.

But given Sales’ enthusiastic nature the revenue forecast was highly optimistic in all respects. Projections from existing customers came from the customer’s Sales teams, who were also bullish. And most importantly the inclusion of business not yet won in the base revenue forecast meant that we were basically counting on winning all of that business with complete certainty.

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And so the next fiscal year began.

For the first month of the year the revenue was right on forecast. Then again anyone can forecast accurately only one month ahead.

But in the second month the revenue started falling short of forecast. Reviews in the Sales, Operations and Inventory (SIOP, or S&OP) planning meetings showed concerns for future revenue shortfalls. Sales dismissed the pessimism with the promise that they were going to win all of that new business.

In the third month the story got worse. The Sales team ignored the situation with the promise that new business wins were coming. The CEO told everyone to keep the faith. In the meantime they fell short of revenue plans, and cash flow and profit projections.

As the months continued the situation became irreparable. New business wins didn’t materialize. If we did win any new business it would not be sufficient to recover the lost revenue and lost profitability.

We would lose money for the entire year. We now had to take severe restructuring action to adjust the infrastructure and size of the organization to restore some semblance of profitability and viability.

But it didn’t matter what we did. The year was lost. And it was all because we included in our financial plans a level of forecast which was overly optimistic and unchecked.

Conclusion

There are many problems in this cautionary tale. But it all started with over enthusiastic and unchecked sales forecasting that was not tied to reality.

Any new business included in business plans should undergo deep scrutiny, with some level of judgement applied to de-risk the numbers.

All key functions in an organization should be a part of reviewing and agreeing on forecasts, with full transparency as to how these forecasts were created. Sales, Finance, Supply Chain, Manufacturing, Operations, Human Resources, I/T, and more will all have input that, if taken into consideration, will result in better forecasts and increased ability to “Under commit and over deliver”.

And while there are always opportunities to improve forecasting the reality is that believing in the ability to achieve perfect forecasting is a pipe dream.

If you accept the fact that sales forecasting will never be perfect than the next step is to figure out how to create a Supply Chain that acknowledges that reality.

As such I believe that the real answer to sales forecasting is to design, and implement, a lead time agnostic Supply Chain. A lead time agnostic Supply Chain is one in which it doesn’t matter what happens to forecasts. The Supply Chain is so flexible that it can respond up or down to extreme variations in forecast accuracy.

This does not mean just adding excessive amounts of inventory, capacity and resource to accommodate any and all changes in demand. Because you will never be able to out-guess demand and it is an unaffordable approach. This does mean constructing a Supply Chain wherein raw materials design and selection, supplier sourcing and location, inventory placement, and more are highly responsive to demand fluctuations.

Originally published on March 19, 2019.
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