4 key impacts of Overstating forecasts in SIOP
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I was reading Arkieva’s Blog the other day (excellent article by the way) and had a good laugh at the comment “7 out of 10 forecasts for new products are overstated”. How true! This is a really common problem where over zealous sales teams over forecast sales which can then drive all manner of supply chain challenges if they get loaded as part of the SIOP process.
If you’re not aware of what SIOP is then I suggest you follow the link above as it provides a great introduction. SIOP should be seen as the gatekeeper of business processes, managing the heartbeat of the businesses Supply Chain.
SIOP’s will typically take in sales forecasts as part of planning data. Most of us would want to show confidence in our numbers when constructing a forecast (No sales team wants to show they are not going to do brilliantly), but when over zealous forecasts get injected into the supply chain they can cause trouble. Why is that you ask, well let’s take a look at 4 key impacts on supply chain with overstated forecasts.
1/. Forecast gets loaded in Master Production Schedule driving unnecessary procurement – At it’s worst case, where the SIOP process considers a forecast which due to Lead time constraints is loaded in MRP as forecast demand material purchases get driven, driving cost and cash flow implications.
2/ Sourcing uses SIOP information to share with suppliers (to negotiate) deals and resultant agreements are founded on incorrect assumptions – Procurement teams often use SIOP data to help drive supplier negotiations – in particular questions like “how much of the product do you think you’ll need and when will you need it”. Volumes often form a major part of pricing terms and if the data is wrong at the start then you’ll end up re-negotiating the deal at a later date – this can radically alter both the price and nature of the relationship.
3/ Resources planning gets out of whack – SIOP planning, in factory/assembly environments also drives resource planning, this can drive staff levels, training needs and all manner of associated actions. Incorrect numbers mean incorrect plans.
4/ Diminished confidence in the sales and planning process and lack of trust in the output. – Perhaps the key issue. If inaccurate data is used, then the effectiveness of SIOP as a process can be radically diminished. An important aspect of this is that it can reduce trust in the process and cause people to question its value. This is a huge backward step as if managed correctly SIOP can help your business excel.
I’ve faced many discussions with suppliers where you’ve had to explain to them that the forecast you’d been provided was wrong and that it’s now been revised and the forecasted usage is now much reduced. If this happens regularly then no-one will trust you and negotiations will be so much harder.
There are various methods that can be deployed to improve SIOP accuracy. Improved statistical techniques to start with, and at a basic level, just talking to the customer to get a more accurate view of sales can work wonders. What’s important for the business is to understand that it’s is just a forecast and no doubt it’ll be wrong to a degree but through some up-front work make it as accurate as you can. Ongoing forecast accuracy KPI’s can help as part of continuous improvement activities – if your sales forecasts are always radically out then going forward you can learn from this and tune them downwards.
Have some thoughts on SIOP forecasting? Use the comments section below.