The fallacies of demand forecasting – Part 1

For those of you don’t know there are two critical functions that often fall under the direct purview of a marketer – Pricing and Demand Forecasting.

In this series, I am going to focus on Demand Forecasting. I’ll cover Pricing later. The reason I bring up Demand Forecasting is because, often the 4P/4C framework or the Pragmatic Marketing framework that marketers often use or at least know about, does not even touch Demand Forecasting….even tangentially.

While in many firms, forecasting demand is a supply chain (SCM) function with marketing barely involved, in many others marketing has large stake in this process to the extent that they actually drive these forecasts.

Quite obviously, these forecasts are relevant to industries where either products are manufactured or moved (in full or part). The software industry is exempt for the most part from the vagaries of the supply chain centric demand forecasting.

IMHO, demand forecasting is neither an art or science. It’s somewhere in between.

In an ideal world,

Forecast = Demand

The market wanted 10 paper cups and you (the marketer) supplied 10. Boy, what a deal!!

Everyone wins!

Unfortunately, we don’t live in a petri dish! Here are a few scenarios….

How do you really know that the market wanted only 10..what if they wanted 15? Sure, you forecast 10 and sold 10..but in this scenario, you may have left some money on the table for competition to grab – right?”, asks your CEO.

What if the forecast was for 10 paper cups, but supply chain was only able to give you 5.

Whoa! Wait a minute, I told you to make 10 and you only give me 5? What the heck? I thought we had a deal?” you ask the SCM manager.

Yes, but we had material shortages and at the last minute a larger customer needed a few extra. The CEO ok’d the diversion of these extra units. Sorry, buddy!. I’ll take care of you the next time“, says the SCM manager.

Or here’s yet another scenario.

You forecast 10 paper cups, and SCM provides you with 10 in record time. The SCM manager took care of you and moved mountains to make it happen. And, you were only able to sell 4 !!! All your marketing programs with your banner ads, spot promotions, back-end rebates, SPIFF’s, sales bonuses, social media push etc, was just not enough to create that pull you were seeking.
What now?

Inventory is now sitting in the warehouses (yours or your distributors) and it is aging really fast. Nothing you do is helping create demand. You ask sales to call their choicest customers and offer a sweet exclusive deal. You get push back from sales as they are focused on other deals and other products with better incentives.

Rough eh! Welcome to the marketers worst nightmare.

And this is only part of your product line. You still have to market and sell the spoons, plates, napkins, forks, knives and create forecasts for them.

And this is why, many marketers are very happy to put a lot of distance between themselves and demand forecasting. They don’t want their names to be associated with this process, let alone drive it. It can be very risky as glory is hard to find at this intersection.

In my next post, I’ll touch upon what factors are typically considered during demand forecasting and suggest ways to improve. While I am cobbling up my next post, if you have any thoughts you’d like to share, please share.

This is going to be fun…

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One Response to The fallacies of demand forecasting – Part 1

  1. Pingback: The fallacies of demand forecasting – Part 2 | Pixel Ballads

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