A point I made earlier is worth repeating. The premise that I am challenging is a single forecast for all business processes, NOT the premise of a single forecast for a single purpose across the supply chain (which I think is a good idea, worth pursuing). The lack of clarity on this issue is what I am seeking to clarify here.
There are two problems with a single forecast that supports all business processes:
a) A single demand forecast for all business processes is sub-optimal
b) It is not possible to create such a single demand forecast (note that (a) trumps (b))
A single forecast for all business processes sub-optimal
When a business process requires a forecast, it has a certain expectation of forecast granularity and forecast horizon.
Forecast granularity: At what level of the business do you need the forecasts (to take the operational decision)? For most purposes in retail, the granularity is presented in terms of Merchandise – Location – Time.
Forecast Horizon: How far out do you want the forecast for, and how long do you need the forecast for. This is determined by the time it takes to act on a forecast, e.g., if you need to order an item from a supplier who has to make it, you generally need to send them a forecast way in advance in comparison to an item that the supplier keeps in stock.
Some examples in the table below:
Let’s consider the extreme examples here: Strategic Planning and Labor Scheduling. It is intuitive for managers to recognize that it is better to forecast at a higher level for strategic planning purposes rather than to roll-up hourly-item-store level forecasts to arrive at the forecast for the next four years. Intuitively we know that, while forecasting for the next 4 years, you need to consider the trends in your overall business, competition and macro-economic factors as opposed to your current merchandise mix, or last month’s hourly sales patterns. On the other hand, when you are doing labor scheduling for the next two weeks, it is critical for you to understand hourly sales patterns not only of similar time periods from past years but also of last week.
Beyond the fact that it intuitively does not make sense, it is mathematically sub-optimal. For more on this topic, read my previous post on this topic: Bottom-Up Forecasting: Be Wary of the Sophists.
It is not possible to create such a single demand forecast
Once again in our strategic planning and labor scheduling example, if the approach to a single demand forecast is roll-up the bottom up forecast. One needs to know the merchandise mix for the next four years at the store level. It is not possible. In many cases, you don’t know the precise merchandise mix that will be in the stores six months from now. So, it is not possible to create a strategic plan based on a roll-up of hourly forecasts. As a more practical example, it is not possible to create a merchandise financial forecast for the next 6 months based on hourly forecasts for the next six months.
In summary, the idea that a single forecast at a store-sku-week level will serve all business planning purposes is mis-conception. It intuitively does not make sense, mathematically incorrect and ultimately impractical.
Now that I have described what you should not ask for, I am sure you are thirsting to read what the solution is. We cover this in Part 4: What should retailers really ask for?