A Forecast By Any Other Name

What’s in a name? That which we call a rose
By any other name would smell as sweet. – William Shakespeare (1564-1616), Romeo and Juliet, Act 2 Scene 2

Scenario 1: A store associate walks down the aisles. She sees 6 units of an item on the shelf and determines that more is needed on the next shipment, so she orders another case pack of 12 units.

Scenario 2: In the overnight batch run, a centralized store min/max system averages the last 6 weeks of sales for every item at every store. This average selling rate is used to set a replenishment policy – a replenishment request is triggered when the stock level reaches 2 weeks’ worth of on hand (based on the 6 week average) and the amount ordered is enough to get up to 4 weeks’ worth of on hand, rounded to the nearest pack size.

Scenario 3: In the overnight batch run, a centralized store reorder point system calculates a total sales forecast over the next 2 shipping cycles. It uses 2 years’ worth of sales history so that it can capture a trend and weekly selling pattern for each item/store being replenished and calculate a proper safety stock based on demand variability. On designated ordering days, the replenishment system evaluates the current stock position against the total of expected sales plus safety stock over the next two ordering cycles and triggers replenishment requests as necessary to ensure that safety stock will not be breached between successive replenishment days.

Scenario 4: In the overnight batch run, a centralized supply chain planning system calculates a sales forecast (with expected trend and weekly selling pattern) for the next 52 weeks. Using this forecast, merchandising minimums, store receiving calendars and the current stock position, it calculates when future arrivals of stock are needed at the store to ensure that the merchandising minimums won’t be breached over the next 52 weeks. Using the transit lead time, it determines when each of those planned arrivals will need to be shipped from the supplying distribution centre over the next 52 weeks. The rolled up store shipment projections become the outbound plans for each item/DC, which then performs the same logic to calculate when future inbound arrivals are needed and their corresponding ship dates. Finally the projected inbound shipments to the DC are communicated to suppliers so that they can properly plan their finished goods inventory, production and raw material procurement. For both stores and DCs, the plans are turned into firm replenishment requests at the ordering lead time.

With that out of the way, let’s do some audience participation. I have a question for you: Which of the above replenishment methods are forecast based? (You can pause here to scroll up to read each scenario again before deciding, or you can just look down to the very next line for the answer).

The answer is… they are ALL forecast based.

Don’t believe me?

In Scenario 1, how did the store associate know that a visual stock position of 6 units meant they were “getting low”? And why did she order a single case of 12 in response? Why didn’t she wait until there were 3 units? Or 1 unit? And why did she order 12? Why not 120?

For Scenario 2, you’re probably saying to yourself: “Averaging the past 6 weeks’ worth of sales is looking backward – that’s NOT forecasting!” Au contraire. By deciding to base your FUTURE replenishment on the basis of the last 6 weeks’ worth of sales, an assumption is being made that upcoming sales will be similar to past sales. That assumption IS the forecast. I’m not saying it’s a good assumption or that it will be a good forecast. I’m just saying that the method is forecast based.

Using the terms “trend” and “selling pattern” in Scenarios 3 and 4 probably spoiled the surprise for those ones.

So why did I go through such pains to make this point?

Quite simply, to counter the (foolish and naive) narrative that “forecasts are always wrong, so you shouldn’t bother forecasting at all”. 

The simple fact is that unless you are in a position where you don’t need to replenish stock until AFTER your customer has already committed to buying it, any stock replenishment method you use must by definition be forecast based. I have yet to run across a retailer in the last 28+ years that has that luxury.

A forecast that happens in someone’s head, isn’t recorded anywhere and only manifests itself physically as a replenishment request is still a forecast.

An assumption that next week will be like the average of the last few weeks is still a forecast.

As the march continues and retailers gradually transition from Scenarios 1, 2 or 3 to Scenario 4, the forecasting process will become more formalized and measurable. And it can be a lot of work to maintain them (along with the replenishment plans that are driven by them). 

But the overall effort pays off handsomely. Retailers in Scenarios 1, 2 and 3 have experienced in stock rates of 92-93% with wild swings in inventory levels and chronic stock imbalances. This has been documented time and again for 30 years.

Only by formalizing your forecasting your forecasting process, using those forecasts to drive long term plans and sharing those plans up and down the supply chain can you achieve 97-98% in stock while simultaneously reducing inventory investment, with reduced overall effort.