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4 Causes of Forecast Error and How Distributors Can Avoid Them

Forecast error — the difference between forecast demand and actual demand — can negatively impact cash flow at a time when distributors want to conserve cash while dealing with coronavirus fallout. Reconsider relying on sales history alone, pre-determined inventory agreements, keeping rare items in stock and depending on sales reps to report market changes.

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When demand planning, distributors may assume that the same demand for the same items will occur at the same time in the same quantity each year. This type of complacency can result in forecast error, which can have a negative impact on both the company and its customers. And when there is an external shock which dramatically shifts demand — such as the global COVID-19 pandemic — reducing forecast error is of even more importance. Now more than ever, distributors can’t rely on historical sales as a basis for future sales.  

Forecast error is the difference between the forecast demand and the actual demand. The greater the difference, the greater the impact on your cash. The negative impact could include overstocking inventory in a distribution center or a customer’s warehouse, running out of stock completely, letting inventory go obsolete while sitting on a shelf or lagging on fulfillment. Any of these can push customers away. 

Most distributors are looking for ways to reduce forecast error so that they can save cash immediately and reduce annual inventory carrying costs. They also want to improve order accuracy so that their customers benefit from higher service levels and reduced inventory carrying costs. 

Here are four common reasons for forecast error — and how to fix them:

1. Relying on sales history alone.

Basing all future inventory purchases on what your customer purchased in the past 12 months seems like a good approach, but it doesn’t account for frequently hidden shifts in your customers’ businesses, let alone once-in-a-lifetime events. Suddenly, forecasting based on sales history alone is no longer useful.

How to fix it: The quality and relevance of the data is important. Communicate with customers about their business goals, changes and needs on a regular basis, and leverage new apps that help you track actual usage, so that you can detect short-term shifts that may not show up in annual aggregated past data.

2. Pre-determined inventory-level agreements.

Distributors often have agreements with customers that require them to keep a certain level of inventory in stock. Unfortunately, this number is often far more than what the customer actually needs. These kinds of agreements can skew forecast accuracy. Without some sort of compensation, distributors often face high carrying costs for stocking these items.  

How to fix it: Use inventory usage data collected at the point-of-use to evaluate existing agreements with customers, and regularly assess whether the forecasts are still accurate and benefiting both parties.

Also see: “COVID-19: Distributors Work to Keep Pace with Demand.”

3. Keeping rarely used items in stock.

Even if they only need them once or twice a year, some customers are always going to want certain items in stock. These “safety items” can mean the difference between business as usual and a production line going down. Still, these items are used so infrequently that they may go obsolete before they get used. And too often, they’ll be restocked simply because of the large part sales history tends to play in many distributors’ forecast. 

How to fix it: Don’t stop stocking these safety items for customers, but don’t rely solely on sales history, either, to forecast inventory needs. Check the latest actual usage data first and communicate with your customer about actual usage and need, and adjust as needed.

4. Sales reps keeping quiet about market or customer changes.

Distributors tend to work in silos when it comes to data within the organization. Even though sales reps usually have great insight into customers’ day-to-day challenges and successes, they aren’t always forthcoming with the intel. That may be because many sales reps are compensated based on volume, so paring down a customer’s inventory doesn’t work in their favor.

How to fix it: Today’s technology has transformed visibility into inventory usage. You are no longer reliant on sales rep reports, which tend to be biased. Balance human insight with analytics that can drive more reliable inventory planning.

Distributors have a lot of opportunities to improve their sales forecasts, but this usually requires looking beyond traditional data. Improve communication within your organization and with your customers, and you’ll see the benefits reflected in greater efficiencies, huge cash savings, and cost savings across the board. 

Rock RockwellRock Rockwell is CEO of eTurns, a point-of-use inventory replenishment app used by distributors to automate replenishment and optimize inventory in their customers’ stockroom and service trucks. Contact Rockwell at rock@eturns.com.

 

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