FAQ - Why bother to forecast sales when you know it will be wrong?
- for ERP (enterprise resource planning) and MRPII (manufacturing resource planning) systems in particular.
"Forecasting is difficult, particularly about the future" so why bother?
The fact is that every company needs to forecast such things as how many people they need, the resources they need, how much space they need, profit / return on capital, cash flow and, if a manufacturing or distribution company, the material and products they need to maintain the desired level of customer service. If there is not a formal agreed sales forecast then everyone will guess a forecast and it is the lowest common denominator that they can deliver. Everyone except the finance department need the forecast in the product or service the company sells. The finance department need to know the cash value of sales but they have the tools to convert a quantitative forecast into cash, converting a financial forecast into units of production is much more difficult in most cases.
If there isn't an agreed company sales forecast everyone will do their own forecast. Purchasing will forecast the material they need to purchase, production will forecast the equipment they need and the people and skills needed to operate it, planning will forecast safety stock levels, finance will forecast cash flow and profit, sales will target sales people and territories, design will forecast new product requirements and so on. The problem is all these forecasts will be different and what will happen is the lowest common denominator satisfying nobody and frustrating everybody.
Contrary to popular opinion, the sales forecast does not have to be that accurate (see FAQ on forecast accuracy).
Every company should have one agreed forecast that everyone works to and this should be prepared from the people with the best information about your customers which is, or should be, your sales and/or marketing people.
For more information see also extract from "Business Excellence" or you can purchase the book "Business Excellence" (click for more details and how to order).