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Forecasting is a key building block to improving profits, interdepartmental communication, understanding tasks, planning and budgeting, according to Dave Merkel in Get Better at Forecasting. But oftentimes, sales are forecast from the top down, which is often based on management judgment, internal historical data and department manager projections using staff input. This model can be prone to bias and compensation incentives.
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Instead, Merkel argues that bottom-up forecasting, especially among small and mid-sized companies, is a better approach to forecasting. Bottom-up forecasting has many benefits, among them improving communication between sales and operations.
The idea behind bottom-up forecasting is that the marketplace and salespeople know more about the short-term sales and revenue drivers of your business than do most managers. And according to Merkel, with time and conscious effort, such a forecast can be highly reliable, which means fewer surprises and fewer costly mistakes.
More distributors and their suppliers are thinking harder about better forecasting, said Jon Schreibfeder of Effective Inventory Management in Channel Choke: Demand Spikes Create Product Shortages. He said that methods of forecasting that rely heavily on past history are no longer as effective as they once were.
“[Distributors] are paying much more attention to forecasting, using more comprehensive forecasting tools, planning tools, and carefully evaluating every purchasing opportunity. They're going to make sure that their inventory investment is working as hard as possible," Schreibfeder said.