Marcus Aurelius is widely considered to be one of the wisest people of all time. His classic and colossal writings, ‘Meditations’, is a bible for crystal clear thinking, famously outlining the principles of stoicism.
In Meditations, he asks a profound question that all designers and implementers should ponder often…
”Is this necessary?”
Knowing what not to think about. What to ignore and not do. It’s an important question, especially when it comes to designing and implementing new ways of working.
As an example, consider the process of developing a forward looking forecast of consumer demand, by item, by store. Of course, loyal readers and disciples know that this is the forecast that provides a key input to allow a retail supply chain to be planned using Flowcasting.
You might get your knickers in a knot to learn that in one of our most recent and successful implementations of Flowcasting, the store level forecasting process uses only two key inputs:
- The actual sales history by item/store in units
- An indication if that sales history was during an abnormal period (e.g., a promotion, an unplanned event, a stock-out period, a different selling price, etc).
Now, I know what you’re thinking. What about all those ‘other’ things that influence consumer demand that many people espouse? You know, things like the weather, competitor activities and any other causal variables?
Counter-intuitively, all these additional ‘factors’ are not really required at the retail store level and for very good reasons.
First, did you know that for most retailers 50-60% of the item/store combinations sell 24 or less units per year. That’s less than one unit every two weeks. Furthermore, about 70-80% of the item/store combinations sell less than 52 units per year, or about 1 unit per week.
Consider the very slow sellers – selling 24 or less units a year. If the last 52 weeks sales was 24 units and so was the previous year’s, it would stand to reason that a reasonable forecast for the upcoming 52 weeks would be around 24 units.
Keep in mind, that as actual sales happen the forecasting process would always be re-forecasting, looking ahead and estimating the upcoming 52 weeks consumer demand based on most recent history.
Now, consider a 52 week forecast of 24 units. That breaks down to a weekly forecast of 0.46.
Factoring in additional variables is not likely to make actual sales of 30 units happen (assuming stock outs were not excessive) – which would be the equivalent of increasing previous year’s sales by 25%. A higher forecast does not mean sales will actually happen.
Even a 10% increase in the forecast would only increase the annual forecast by about 2 units, or about .04 units per week.
Is there really a difference between an average weekly forecast of 0.46 and 0.50 units? Isn’t that essentially the same number? In terms of a forecast, they are both reasonable (in reality, the forecast would also have a pattern to the expected sales and would be expressed as integers, but you get the point).
One of the keys of the retail Flowcasting process is using only a limited number of inputs to build the item/store forecast, while allowing people to easily understand and thus manage it – by a very limited number of exceptions that could not be automatically resolved using system rules.
Add some basic supply information (like inventory balances and ordering rules) to the forecast and voila – the entire supply chain can be calculated/planned from store to supplier – every day, for every planned inventory flow and projection for a rolling 52 weeks into the future.
What’s elegant and inherently beautiful about Flowcasting is that daily re-planning the entire supply chain provides the agility to adjust current and planned inventory flows and ensures everyone is working to a single set of numbers – based on the drumbeat of the consumer. It negates the need to find the ‘perfect forecast’ and, as such, allows us to limit our inputs to the bare essentials.
Marcus Aurelius was right.
Limit your inputs and always ask, “Is this necessary?”
It’s good advice in business, in life and especially store level forecasting.