MICHAEL GILLILAND THE...MICHAEL GILLILAND is Product Marketing Manager at SAS Institute and has...
Transcript of MICHAEL GILLILAND THE...MICHAEL GILLILAND is Product Marketing Manager at SAS Institute and has...
THE
BUSINESSFORECASTING
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Exposing Myths, Eliminating Bad Practices, Providing Practical Solutions
Michael Gilliland
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$49.95 USA / $59.95 CAN
THE BUSINESS
FORECASTING DEAL
Exposing Myths, Eliminating Bad Practices, Providing Practical Solutions
Business forecasting is the ultimate no-win game. You’re almost always wrong—except on those rare, random occasions where actual sales come in exactly on forecast—and you get beat up routinely for your “lousy forecasts.” Against this framework, The Business Forecasting Deal turns forecasting on its head. Instead of focusing solely on statistical modeling and forecast accuracy—accuracy being largely determined by the nature of the demand you are trying to forecast—Michael Gilliland turns your attention to forecasting process effi ciency and effectiveness. His unique perspective, utilizing the emerging method of Forecast Value Added (FVA) analysis, shows how organizations can meaningfully improve their performance by eliminating the “worst practices” that now sabotage and confound their forecasting efforts.
While predicting the future is a very diffi cult thing, there is no shortage of articles, books, consultants, and even software vendors willing to tell you (or sell you) their version of forecasting best practices. However, many of these purported “best practices” do not work—they fail to make the forecast any better. Through FVA analysis—a method that has been employed at several major corporations including Intel, AstraZeneca, Cisco, and Yokohama Tire (Canada)—The Business Forecasting Deal shows how to identify the waste and ineffi ciencies in the typical forecasting process. By eliminating those (surprisingly common) practices that make the forecast worse, FVA analysis is helping companies get better forecasts with less effort and less cost.
Written in a nontechnical style, this book provides practical solutions to a wide variety of business forecasting problems. It illustrates a new way to think about business forecasting in the context of uncertainty, randomness, and process performance, all within the internal political arena in which real-life forecasting is conducted. While there is no magic formula to guarantee perfect forecasts, this book will change your perspective—and improve your success—in dealing with the problems of business forecasting.
MICHAEL GILLILAND is Product Marketing Manager at SAS Institute and has worked in consu-mer products forecasting for more than twenty years. Prior to joining SAS in 2004, Mike held forecasting management positions in the food, electronics, and apparel industries and served as a consultant. He is a frequent speaker at industry events, has published articles in Supply Chain Management Review, Journal of Business Forecasting, Foresight, and APICS magazine, and was a columnist on “Worst Practices in Business Forecasting” for Supply Chain Forecasting Digest. Mike holds a BA in philosophy from Michigan State University, and master’s degrees in philosophy and mathematical sciences from Johns Hopkins University. Follow his blog, The Business Forecasting Deal, at blogs.sas.com/forecasting.
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Jacket Design: Michael RutkowskiCover Illustration: Jessica Crews
Praise for
THE BUSINESS FORECASTING DEALExposing My ths, El iminat ing Bad Pract ices , Prov id ing Pract ica l Solut ions
“Mike Gilliland’s new book is a breath of fresh air. It’s simple, straightforward, easy to read, insightful—and loaded with solid, practical advice on how to improve the forecasting process in your company.” —From the Foreword by Tom Wallace
“Into a market awash in forecasting texts, each promising to be the panacea for supply chain ineffi ciencies and sales shortfalls, Mike Gilliland’s The Business Forecasting Deal is a refreshingly objective assessment of the real costs and benefi ts of forecast process improvement. Above all, his book cuts to what should be at the heart of all our efforts: are the expenditures in time and money we are making in forecast improvement truly resulting in incremental profi tability?” —Jonathon Karelse, National Marketing Manager, Yokohama Tire (Canada) Inc.
“A great book, unique as well. Mike Gilliland is the fi rst person with a mission to bring ‘worst practices’ into the open so that forecasters can see what they are doing wrong and the price they are paying for it. Nothing can happen unless they recognize their problems, for which Mike has made a tremendous contribution.” —Dr. Chaman Jain, St. John’s University; Editor, Journal of Business Forecasting
“Mike Gilliland has captured the key issues in this book, and his work, particularly on volatility and Forecast Value Added, is to be applauded.” —Martin Joseph, Managing Director, Rivershill Consulting Ltd.
“I have used Mike Gilliland’s Forecast Value Added (FVA) analysis for the past year, and it has made a big difference in understanding what steps in our forecasting process are worthwhile and what steps need to be improved or eliminated. His advice on the proper way to present FVA to upper management has helped gain the confi dence of the division in this analysis.” —Dave Wehling, Manager, Marketing Requirements, International Division, The Toro Company
“Mike Gilliland provides a unique perspective on the forecasting discipline. He presents sound quantitative lessons paired with pragmatic, realistic, and effective methodologies for applying his techniques. This book is an excellent and perhaps mandatory addition to the repertoire of demand managers and supply chain management professionals alike.” —Emily Rodriguez, Supply Chain Program Manager, Intel Corporation
The Wiley and SAS Business Series presents books that help senior-level managers with their critical management decisions
ADDITIONAL PRAISE FOR THE BUSINESS FORECASTING DEAL
“This book is a must read for demand planning practitioners and
for organizational leaders and management dealing with demand
forecasting. The book lays out the problem defi nition and issues
dealing with forecasting, and provides a practical approach for imple-
menting the demand planning process.”
—Shashi Tripathi, Vice President Product Management,
AGNITY Healthcare
“We had a few ‘Aha!’ moments when we fi rst came across Mike
Gilliland’s work through webinars and conferences. In this book,
Mike compiles and shares his insights of the realities of business fore-
casting and provides recommendations on how to navigate them.
Some highlights:
� Managing forecast accuracy expectations.
� Streamlining existing forecasting processes using Forecast Value
Added (FVA) methodology.
� Identifying erroneous “best practices” that contribute to fl awed
approaches.
The Business Forecasting Deal is well-written, easy to understand, and
intuitively appealing not only to practitioners but their business part-
ners as well. A must-read!”
—Kean Chew, Demand Planning Senior Manager & Brad Ragland,
Demand Planning Team Leader, HAVI Global Solutions
“This book effectively addresses the frequent challenge of understand-
ing and communicating the limitations of forecasting. I have learned
to view a forecast as a risk management tool, but it can only be used
to the fullest when we are able to leverage the forecast to make the
best supply chain decisions. Mike Gilliland has identifi ed ways for
corporations to become more knowledgeable about their performance,
be better equipped to manage expectations, and shown how to
improve forecast results where opportunities exist. This is an exciting
read for me as we are on the cusp of implementing a forecastability
analysis, utilizing FVA to assess our performance. This book equips
me to educate both internal users (our analysts), as well as external
customers of the forecast on this new information.”
—Mark Hahn, Manager—Sales Forecasting and Analysis,
Amway Corporation
“Truly exceptional in its simple and straightforward commentary on
forecasting as practised in several organizations. With valuable insights
on how to get the ‘bang for the buck’ in the intriguing world of busi-
ness forecasting and suggestions to improve the quality of forecasts,
the book is a must-read for all those involved in forecasting function
and responsible for supply chain effectiveness in organizations.”
—Suren Palakkal, Senior Solution Consultant,
MEB Consulting LLC, USA
“Insightful, entertaining, and a must for all planning professionals.
Mike Gilliland is able to take complex concepts and theories and
describe them for all to understand. This book should be read by
planners and executives.”
—Mary Côté, Senior e-Business Consultant,
DeltaWare Systems Inc.
The Business Forecasting Deal
WILEY & SAS BUSINESS SERIES The Wiley & SAS Business Series presents books that help senior - level manag-ers with their critical management decisions.
Titles in the Wiley and SAS Business Series include:
Activity - Based Management for Financial Institutions: Driving Bottom - Line Results by Brent Bahnub
Business Intelligence Competency Centers: A Team Approach to Maximizing Competitive Advantage by Gloria J. Miller, Dagmar Brautigam, and Stefanie Gerlach
Business Intelligence Success Factors: Tools for Aligning Your Business in the Global Economy by Olivia Parr Rud
Case Studies in Performance Management: A Guide from the Experts by Tony C. Adkins
CIO Best Practices: Enabling Strategic Value with Information Technology by Joe Stenzel
Credit Risk Assessment: The New Lending System for Borrowers, Lenders, and Investors by Clark Abrahams and Mingyuan Zhang
Credit Risk Scorecards: Developing and Implementing Intelligent Credit Scoring by Naeem Siddiqi
Customer Data Integration: Reaching a Single Version of the Truth by Jill Dyche and Evan Levy
Demand - Driven Forecasting: A Structured Approach to Forecasting by Charles Chase
Enterprise Risk Management: A Methodology for Achieving Strategic Objectives by Gregory Monahan
Fair Lending Compliance: Intelligence and Implications for Credit Risk Management by Clark R. Abrahams and Mingyuan Zhang
Information Revolution: Using the Information Evolution Model to Grow Your Business by Jim Davis, Gloria J. Miller, and Allan Russell
Marketing Automation: Practical Steps to More Effective Direct Marketing by Jeff LeSueur
Mastering Organizational Knowledge Flow: How to Make Knowledge Sharing Work by Frank Leistner
Performance Management: Finding the Missing Pieces (to Close the Intelligence Gap) by Gary Cokins
Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics by Gary Cokins
The Data Asset: How Smart Companies Govern Their Data for Business Success by Tony Fisher
The New Know: Innovation Powered by Analytics by Thornton May
Visual Six Sigma: Making Data Analysis Lean by Ian Cox, Marie A. Gaudard, Philip J. Ramsey, Mia L. Stephens, and Leo Wright
For more information on any of the above titles, please visit www.wiley.com .
The Business Forecasting Deal
Exposing Myths, Eliminating Bad Practices, Providing
Practical Solutions
Michael Gilliland
John Wiley & Sons, Inc.
Copyright © 2010 by SAS Institute, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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Library of Congress Cataloging-in-Publication Data
Gilliland, Michael. The business forecasting deal : exposing the myths, eliminating bad practices, providing practical solutions / Michael Gilliland. p. cm. Includes bibliographical references and index. ISBN 978-0-470-57443-0 (cloth) 1. Business forecasting. I. Title. HD30.27.G55 2010 658.4′0355—dc22 2010007796
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
To my parents, Dennis and Joan Gilliland — much nicer people than I am.
Contents
Foreword—Tom Wallace xiii
Foreword—Anne G. Robinson xv
Acknowledgments xvii
Prologue 1
Chapter 1 Fundamental Issues in Business Forecasting ..........................................5
The Problem of Induction 5
The Realities of Business Forecasting 6
The Contest 7
What Is Demand? 10
Constrained Forecast 13
Demand Volatility 15
Inherent Volatility and Artifi cial Volatility 17
Evils of Volatility 19
Evaluating Forecast Performance 22
Embarking on Improvement 24
Notes 26
Chapter 2 Worst Practices in Business Forecasting: Part 1 .................................................................29
Worst Practices in the Mechanics of Forecasting 30
Model “Overfi tting” and “Pick-Best” Selection 32
Confusing Model Fit with Forecast Accuracy 41
Accuracy Expectations and Performance Goals 43
Failure to Use a Naïve Model or Assess Forecast Value Added 47
ix
x ▸ C O N T E N T S
Forecasting Hierarchies 48
Outlier Handling 50
Notes 54
Chapter 3 Worst Practices in Business Forecasting: Part 2 .................................................................55
Worst Practices in the Process and Practices of Forecasting 55
Politics of Forecasting 57
Blaming the Forecast 60
Adding Variation to Demand 61
Evangelical Forecasting 64
Overinvesting in the Forecasting Function 66
Forecasting Performance Measurement and Reporting 69
Forecasting Software Selection 74
Editorial Comment on Forecasting Practices 76
Notes 78
Chapter 4 Forecast Value Added Analysis.........................81
What Is Forecast Value Added? 82
The Naïve Forecast 83
Why Is FVA Important? 90
FVA Analysis: Step-by-Step 92
Further Application of FVA Analysis 101
Case Studies 102
Summary: The Lean Approach to Forecasting 107
Notes 108
Chapter 5 Forecasting without History ...........................111
Typical New Product Forecasting Situations 111
New Product Forecasting by Structured Analogy 114
Organizational Realignment 120
Summary 131
Notes 132
C O N T E N T S ◂ xi
Chapter 6 Alternative Approaches to the Problems of Business Forecasting ..................................133
Statistical Approach 134
Collaborative Approach 136
Supply Chain Engineering Approach 142
Pruning Approach 145
Summary 149
Notes 150
Chapter 7 Implementing a Forecasting Solution ............151
Why Do Forecasting Implementations Fail? 151
Preproject Assessment 153
Requesting Information or Proposals 154
Evaluating Software Vendors 155
Warning Signs of Failure 157
Notes 159
Chapter 8 Practical First Steps ........................................161
Step 1: Recognize the Volatility versus Accuracy Relationship 161
Step 2: Determine Inherent and Artifi cial Volatility 165
Step 3: Understand What Accuracy Is Reasonable to Expect 166
Step 4: Use Forecast Value Added Analysis to Eliminate Wasted Efforts 167
Step 5: Utilize Meaningful Performance Metrics and Reporting 168
Step 6: Eliminate Worst Practices 169
Step 7: Consult Forecasting Resources 170
Notes 173
Chapter 9 What Management Must Know About Forecasting ..........................................175
Aphorism 1: Forecasting Is a Huge Waste of Management Time 175
xii ▸ C O N T E N T S
Aphorism 2: Accuracy Is Determined More by the Nature of the Behavior Being Forecast than by the Specifi c Method Being Used to Forecast It 177
Aphorism 3: Organizational Policies and Politics Can Have a Signifi cant Impact on Forecasting Effectiveness 179
Aphorism 4: You May Not Control the Accuracy Achieved, But You Can Control the Process Used and the Resources You Invest 180
Aphorism 5: The Surest Way to Get a Better Forecast Is to Make the Demand Forecastable 182
Aphorism 6: Minimize the Organization’s Reliance on Forecasting 183
Aphorism 7: Before Investing in a New System or Process, Put It to the Test 184
Notes 185
Epilogue 187
Glossary 189
Appendix Forecasting FAQs 193Accuracy Expectations 193
Performance Benchmarks 196
Performance Measurement and Reporting 198
The Naïve Forecast 208
Forecast Value Added Analysis 211
Forecast Modeling 220
Politics and Practices of Forecasting 224
Demand Volatility 227
Forecasting Process 230
Judgment 237
Forecasting Organization 238
Low Volume/Intermittent Demand 239
New Product Forecasting 241
Forecasting Hierarchy 242
Software Selection 245
Index 247
xiii
Many years ago, when I was young, I got promoted into a job that
involved sales forecasting. When I told a friend of mine about it, his
reply was, “ Gee, that ’ s too bad. What did you do wrong? ”
After a short while in the job, I began to understand what he
meant. Forecasting is most often the ultimate no - win game. You ’ re
almost always wrong (except on those rare, random occasions when
actual sales come in exactly on forecast); you get beat up routinely
for your “ lousy forecasts ” ; and, unlike another nonfun activity — the
annual budgeting process — you must go through the forecasting cycle
at least every month, perhaps more often.
After more time in the job, I concluded that whoever called
economics the dismal science never had a job doing sales forecasting.
It was not a lot of fun. And things aren ’ t much different today, 30
years later.
Well, why not? After all, there ’ s a great deal of forecasting soft-
ware now on the market and that should certainly help, right? And
we ’ re better educated today than back then, with many more MBAs,
MSs and PhDs available. Plus we ’ ve had all those years to learn from
our mistakes. Things surely should have gotten better, right? It hasn ’ t
happened; we haven ’ t learned much from our collective mistakes over
time. A contributing factor is the unfortunate tendency to seek “ the
silver bullet ” — to search for the best forecasting software in the belief
that it will solve our forecasting problems.
Complexity and rate of change in most of our businesses has
increased sharply over the years. It ’ s tougher out there today, and
that ’ s not going to change.
Against that backdrop, Mike Gilliland ’ s new book is a breath of
fresh air. It ’ s simple, straightforward, easy to read, insightful — and
Foreword Tom Wallace
xiv ▸ F O R E W O R D
loaded with solid, practical advice on how to improve the forecasting
process in your company. To me, the most valuable section is
Chapter 4 on forecast value added (FVA). This is a method to evaluate
(a) which parts of a forecasting process are adding value, (b) which
elements are not cost effective, and (c) which parts of the process are
making the forecasts worse. Parts b and c should be eliminated.
Gilliland poses the question, “ How would you like to get better
forecasts for free ? ” He then shows how to do this and relates the
experiences of users of the FVA method: Intel, AstraZeneca, Tempur -
Pedic and others. FVA is the lean manufacturing mind - set applied to
forecasting, and that ’ s great.
To those of you whose job primarily involves forecasting, I say
simply: You owe it to yourselves to read this book closely, carefully,
and cover - to - cover. To others of you — in marketing, sales, supply
chain, general management, and so on — I say that you also should
read it, perhaps not as intently or completely as the forecasters but
being certain to hit the high spots. There are value - adds in every
chapter.
My prediction is that this book will come to be regarded as one of
the very best in the fi eld of forecasting literature. It ’ s a potential game
changer; it may move forecasting into a space that ’ s more productive,
more respected, and — dare I say — more fun. That would be huge.
In conclusion, let me pay Mike the biggest compliment I can: I
wish I had written this book. Thanks, Mike.
T OM W ALLACE
Sedona, Arizona
xv
We do not live in a boring world.
Companies do not operate the same, markets do not respond the
same way, and all customers defi nitely do not want the same things.
It ’ s this inexhaustible variability — and the careful blending of histori-
cal data, market trends and domain expertise it requires — that makes
demand forecasting such an interesting art.
But forecasting is not for the faint of heart. If you choose this
profession prepare yourself for continual disappointment. Reality will
never match your prediction — you will always fi nd yourself ahead
of — or behind — the true curve.
Fortunately, forecasting experts like Mike Gilliland generously
share their expertise, allowing us quantitative analysts to narrow that
gap and deliver better - than - average forecasts. Through his many con-
tributions in the forecasting community, Mike has introduced the
concept of forecast value added (FVA), a metric that enables us to
measure the relative value of a forecast.
I work for a prominent high tech company. For several years, my
team and I were responsible for creating and delivering the statistical
forecast for the supply chain. Challenged by complexities due to a
wide breadth of products, varying customer lead times, and high vola-
tility in demand, we went beyond the boundaries of our statistical
software to create analytical models more relevant for our industry.
Additionally, leveraging best practices in consensus forecasting, we
partnered with our marketing and planning counterparts to include
domain expertise and market trends and collectively deliver a fi nal
forecast.
The accuracies of our forecasts across product lines, however,
varied greatly. Given the complex nature of our business, this was
Foreword Anne G. Robinson
xvi ▸ F O R E W O R D
expected. The true value of the forecasting process came from its
relative contribution against doing nothing. Based on Mike ’ s experi-
ences, we successfully introduced the forecast value added metric
(along with forecast accuracy and bias) at the executive level. The FVA
gave management a way to recognize and appreciate the value that
was being delivered as a result of our forecasting process.
Throughout this book, Mike Gilliland explains the FVA method as
well as many other tips and tricks to creating a competent forecasting
capability — and avoiding some of the potential disasters along the way.
Enjoy the journey! I ’ m certainly glad the world isn ’ t boring.
A NNE G. R OBINSON , P H D
Sr. Manager, Information and Data Strategy
Customer Value Chain Management, Cisco
xvii
I started this book during a mid - career “ test retirement ” in early 2004,
while trying to unwind and decompress from the labors and indignity
of 18 years at publicly held American corporations. In April of 2004
the book was put on hold, however, when I accepted an offer to join
SAS Institute, the world ’ s largest privately held software company. I
had been a long time user of SAS software (since 1985) and a huge
fan, having built forecasting, planning, and reporting systems in SAS
for Oscar Mayer Foods as an Operations Research Analyst fresh out
of graduate school. I had no idea what I was getting myself into — but
in a good way.
In January 2010 SAS was named #1 on the Fortune magazine list
of “ 100 Best Companies to Work For ” — an honor much deserved. SAS
founders Jim Goodnight and John Sall have nurtured an environment
where employees can be focused on one thing — helping customers
solve their business problems — and not wasting time catering to the
misguided whims of Wall Street. My everlasting gratitude goes to Good-
night and Sall for creating this environment, and to Shiva Kommareddi,
Director of Solutions Product Management, for hiring me on.
My experience at SAS has made this book much better than it
would have been before. I ’ ve had the opportunity to work on fore-
casting problems with an array of exceptional SAS colleagues: Michael
Leonard, Udo Sglavo, Jim Ferris, Charlie Chase, Chip Wells, Snurre
Jensen, Jack Hymanson, Ed Katz, Rob Stevens, Phil Weiss, Pete
Dillman, Andy Waclawski, Sam Guseman, Allan Manning, Bob Lucas,
Terry Woodfi eld, Paddy Fahey, Mark Little, Tonya Balan, Mary Grace
Crissey, Rajesh Selukar, Michele Trovero, Jerzy Brzezicki, Mahesh
Joshi, Bob Davis, Evan Stubbs, Robin Way, Gul Ege, Tammi Kay
George, Brenda Wolfe (now at ESRI), and others. Particular thanks to
Charlie for his review of the manuscript, and to Tammi Kay for her
boundless creativity in promoting the book.
Acknowledgments
xviii ▸ A C K N O W L E D G M E N T S
Outside of SAS, I ’ ve had the good fortune of knowing and learning
from a wide network of industry professionals, many of them met
through association with the Institute of Business Forecasting (IBF),
the International Institute of Forecasters (IIF), and APICS. My thanks
to IBF ’ s Anish Jain and Constance Korol for providing numerous
speaking opportunities at their conferences and webinars, and to
Dr. Chaman Jain, IBF founder and editor of The Journal of Business
Forecasting , for his manuscript comments and allowing use of my pre-
viously published work.
Many other friends and professional associates were able to review
the manuscript, or have applied (and expanded on) the method of
Forecast Value Added (FVA) Analysis at their own companies. These
include Debbie Blackburn and Robert Bloomer of BB & T, Emily
Rodriguez of Intel, Jack Harwell of RadioShack, Mark Hahn of Amway,
Mary C ô t é of DeltaWare, Scott Roy of Wells Dairy, Dave Wehling of
Toro, Jonathon Karelse of Yokohama Tire Canada, Eric Wilson of
Tempur - Pedic, Curtis Brewer of Bayer CropScience, Shashi Tripathi
of AGNITY Healthcare, Kalyan Sengupta of Chevron, Kean Chew and
Brad Ragland of HAVI Global Solutions, Drew Prince of NCR, Suren
Palakkal of MEB Consulting, Richard Herrin of Tredegar, Andrew Leu
of USDL, Sharon M. Powell of RTI, Karen Miracle of Masonite, and
Evelyn Jarrett. Thanks also to Len Tashman (Editor of Foresight: The
International Journal of Applied Forecasting ) and Jennifer Proctor (Editor
of APICS Magazine ) for providing access to previously published mate-
rials, and to Rob Miller of Covidien for use of his “ Comet Chart. ”
Several of my SAS colleagues have been involved in the produc-
tion and marketing of the book, or otherwise have helped publicize
my work to a broader audience. These include Julie Platt, Shelly
Goodin, and Shelley Sessoms in Publications, Kristine Vick and Buffi e
Silva in Field Marketing, Faye Merrideth in Public Relations, Sara
Smith in Analyst Relations, Alison Bolen and Diane Lennox in External
Communications, and Blanche Phillips in Online Marketing. Jerry
Oglesby, Larry LaRusso, and Carrie Vetter have given me speaking
exposure at the annual F20xx Business Forecasting Conference held
at SAS corporate headquarters every June. Sam Guseman, in addition
to being a co - inventor of the structured analogy approach for new
product forecasting, prepared the screen shots in Chapter 5 .
A C K N O W L E D G M E N T S ◂ xix
Special thanks go to a number of individuals who have had par-
ticular infl uence on my forecasting career, or on this book:
� John LaBella, VP — Application Delivery at Gap, Inc. John
gave me my fi rst full - time forecasting job at Oscar Mayer/Kraft
Foods in 1991. Many of the ideas in this book (particularly
the use of “ demand factors ” in Chapter 5 ), evolved from the
collaboration and visionary leadership he provided early in
my career.
� Joe Mazel of Mazel Associates. Joe is a fabulous writer and
editor who offered valuable comments on an early draft of this
manuscript. Since meeting at an IBF conference in 2002, I ’ ve
considered Joe my unoffi cial (and unpaid!) “ publicist ” for the
many writing, speaking, and professional association connec-
tions he has provided me.
� Martin Joseph, Managing Director of Rivershill Consultancy,
Ltd. I met Martin while serving together on the IBF Advisory
Board, when he was Head of Information Management and
Forecasting at AstraZeneca. We made an instant connection
through our mutual interests in demand volatility and the
application of statistical process control techniques in business
forecasting.
� Meredith John, Product Manager at SAS. Meredith has been an
invaluable ally in the development and marketing of SAS fore-
casting software since joining the company in 2007. Meredith
provided a full review of the initial completed manuscript, and
her feedback led to dramatic improvements in the focus and
organization of the fi nished book. In addition, with her past
publishing experience, Meredith helped me survive the annoy-
ances of book design and production, and she gets credit for
prototyping the layout of the cover.
� Stacey Hamilton, Acquisitions Editor at SAS Publications. Stacey
guided me through the writing process and kept me (mostly)
on plan. She also had to put up with my tantrums and appeals
for “ artistic integrity ” any time there was a disagreement with
the publisher. Stacey could defi nitely succeed as a hostage
negotiator if this SAS gig ever falls through.
xx ▸ A C K N O W L E D G M E N T S
� Jessica Crews, Graphic Designer. Jessica brought to life the dis-
turbing image in my head — that the practice of forecasting is not
so far removed from snake - oil sales and circus sideshows. In
addition to the cover art, Jessica has translated my other waking
delusions into the colorful images that periodically appear in my
blog, The Business Forecasting Deal (blogs.sas.com/forecasting).
� Anne Robinson, Sr. Manager — Information and Data Strategy
at Cisco. Anne has championed the application of FVA analysis
and helped expand my professional horizon through her lead-
ership role at INFORMS (the Institute for Operations Research
and the Management Sciences). Anne provided a valuable
second foreword describing the use of FVA at Cisco.
� Tom Wallace. I was truly honored by Tom ’ s willingness to write
a foreword for this book. He is a giant in the fi eld of Sales &
Operations Planning, and has made major contributions world-
wide through his teaching and consulting, and his books with
Bob Stahl. When the publisher asked me for Tom ’ s job title and
company, I was aghast — that was like asking Cher or Madonna
for their title and company! Most of us in the planning and
forecasting fi elds would agree that Tom is just as much a celeb-
rity as Cher or Madonna — even if he doesn ’ t have quite as
fabulous a wardrobe.
� Anne Milley, Senior Director of Analytic Strategy at SAS. As
my boss since late 2005, Anne has been a constant source of
knowledge, inspiration, and positive feedback. She paved the
way internally for me to write this book, and made many valu-
able comments on the developing manuscript. My best wishes
to Anne as she embarks on her new role as the public voice of
analytics at SAS.
The views expressed in this book are my own, and should not
negatively refl ect on the good taste and better judgment of the above
mentioned reviewers, or of SAS Institute. All inaccuracies, hyperbolic
claims, wild assertions, or outright lies, are my fault alone.
Lastly, I want to give very special thanks to Debbie Blackburn for,
among many other things, six years of gentle nudging to resurrect this
book project.
Forecasting is a huge waste of management time.
The Business Forecasting Deal 1 is written around this simple
premise. It doesn ’ t mean that forecasting is pointless and irrelevant. It
doesn ’ t mean that forecasting isn ’ t useful or necessary to run our
organizations. It doesn ’ t mean that managers should not care about
their forecasting issues, nor seek ways to improve them. It simply
means that:
The amount of time, money, and human effort spent on forecasting is
not commensurate with the amount of benefi t achieved (the improvement in
accuracy).
We spend far too many organizational resources creating our
forecasts, while almost invariably failing to achieve the level of accu-
racy desired. The whole conversation needs to be turned around. We
should be focusing much less on modeling and forecast accuracy and
much more on process effi ciency and effectiveness. We must also
consider alternative solutions to the business problems that we, out
of habit, rely on forecasting alone to address.
This book aims to expose the myths and bad practices in business
forecasting, and to provide practical solutions. One such myth is that
the desired level of forecast accuracy is always possible . The practicing fore-
caster soon realizes, however, that there are limits to the accuracy he
or she can ever expect to achieve. This accuracy is largely determined
by the forecastability of the behavior being forecast. Consider the sim-
plest of examples — calling heads or tails in the toss of a fair coin. Over
a large number of trials we cannot forecast the outcome (call the toss)
correctly other than 50% of the time. Our accuracy has been deter-
mined by the nature of the behavior we are trying to forecast. As it is
with coins, so it is (to a less obvious extent) with the things we attempt
to forecast in business.
Prologue
1
2 ▸ P R O L O G U E
The reality is that smooth, stable, repeating patterns can be fore-
cast accurately with simple techniques and little effort. Wild, volatile,
and erratic patterns, however, may never be forecast accurately — no
matter how elaborate the process and statistical sophistication we
throw at the problem. In short:
We may never be able to control the accuracy achieved, or achieve the level
of accuracy desired. But we can control the forecasting process we use, and the
resources we invest.
This ties into a second myth , that the accuracy of our forecasts is pro-
portional to the extent of our forecasting efforts . “ If only, ” management
bemoans. “ If only we had more data, a bigger computer, a more
elaborate process, and better forecasters (or made the ones we have
work harder!), we could get better forecasts. ” But this is a false belief.
Curiously, there is often an inverse relationship between the
amount of management attention given to forecasting and the accu-
racy of the results. The more a forecast is touched, the more it tends to
go awry. Each process step, each opportunity to adjust a forecast, is just
one more chance for wishes and politics and personal agendas to con-
taminate what should be an unbiased best guess at what is really going
to happen. The purpose of this book is to explore why this happens —
why there is such waste and ineffi ciency in the typical business fore-
casting process — and to suggest how to stop this from happening.
A third myth is that improving forecast accuracy is the ultimate goal —
that improved accuracy is the best way, and perhaps even the only
way, to improve organizational performance. But this belief can focus
management ’ s attention on the wrong problem. Unless you work at
a consulting fi rm selling forecasts:
The goal of your organization is not accurate forecasts — it is to make a
profi t and stay in business.
Forecast improvements are only a means to this end. Unfortunately,
improvements may be impossible to deliver (when your demand is
unforecastable), they may be too costly to implement (not worth the
benefi ts), or they may even go unused — if management is unwilling
to accept the reality of what a more accurate forecast is telling them.
Focusing only on forecast improvements ignores other, nonforecast-
ing, approaches that may more effectively solve the underlying busi-
ness problem.
P R O L O G U E ◂ 3
The Business Forecasting Deal aims to treat a gap in the literature
by addressing the very foundations of business forecasting. Not in
the careless and dogmatic way that we normally approach things, but
critically, in a way to draw out all the subtlety and implication of our
assumptions and beliefs. 2 The book explores issues left unmentioned
in the traditional forecasting literature — unmentioned because we
assume to understand them, or don ’ t recognize them as issues at all.
For those seeking more advanced forecast modeling skills, there
are plenty of good books covering the mathematics of forecasting, but
these topics won ’ t be covered here. While advanced statistical and
forecast modeling skills are useful in forecasting research and practice,
these skills are neutralized when internal politics and personal agendas
dominate an organization ’ s forecasting process. These skills are also
neutralized when the behavior being forecast is essentially unforecast-
able. A big computer and fancy models aren ’ t going to help forecast
the toss of a fair coin.
While you won ’ t need advanced modeling skills to get through
this book, you should have a curiosity about why business forecasting
is so maddening and maligned, along with a willingness to consider
alternative solutions to the ensuing business problems. Forecasting is
not an end in itself — it is one of many means to running an organiza-
tion more effi ciently and more profi tably. In some situations forecast-
ing is not the answer, or it is only an answer of last resort. We shouldn ’ t
assume that there is always something we can do to improve a forecast.
However, there are always things we can do to address the business
problem — they may just not involve forecasting.
Although this book invokes a critical tone, it is not meant to dis-
courage forecasting practitioners or to stifl e innovation. Rather, it is a
critique of the bad practices and snake - oil solutions proffered by many
vendors of forecasting services and software. It is meant to expose
forecasting ’ s myths and many pitfalls, so that the same mistakes don ’ t
have to be repeated over and over again by each new practitioner.
The forecasting profession does not need another cheerleader. But
forecasting professionals, and those who rely on them, do need to be
realistic about the limitations of what forecasting can ever be expected
to achieve. There are no magic formulas and no miracle solutions, but
the truth can be a lot harder to sell than the fi ction.
4 ▸ P R O L O G U E
In writing The Business Forecasting Deal , I ’ ve pieced together self -
contained sections addressing specifi c business forecasting topics,
along with practical solutions. Throughout I advocate use of a simple
method called forecast value added (FVA) analysis. The FVA metric
allows an organization to identify waste and ineffi ciency in its fore-
casting process, and has been adopted at a number of major corpora-
tions. Some of these adopters have spoken publicly of their fi ndings,
and their results are shared in a series of brief case studies in Chapter
4 , Forecast Value Added Analysis. For those ready to apply FVA at
their own organizations, this chapter provides step - by - step details on
conducting the analysis.
In the narrow sense, the goal of forecasting is to generate better
forecasts. But a more accurate forecast, by itself, has no value unless
it is used to help an organization run more effectively. My objective
is to do just this — to help organizations run more effectively. First,
by offering an alternative framework for thinking about the problems
of business forecasting. Second, by providing specifi c methods for
addressing the challenges of business forecasting. And third, by
encouraging readers to consider new ideas and creative approaches —
but never to assume anything works until its effectiveness has been
demonstrated.
This book, alone, will not make you the best forecaster you can
be. But it will help you avoid becoming the worst forecaster you can be.
NOTES
1. The Business Forecasting Deal is intended for both the forecasting practitioner and for management overseeing (or dealing with) the forecasting function. Sometimes ter-minology or formulas may appear that are not familiar to the reader, and are not thoroughly defi ned at the point they are used. Refer to the Glossary for explication of any of these unfamiliar concepts (which are shown in bold italics the fi rst time they appear in the text).
2. For a major infl uence on this book ’ s approach to addressing the problems of business forecasting, see Bertrand Russell ’ s The Problems of Philosophy , Oxford University Press (1959). Russell delivers a concise and accessible introduction to methods of analysis that are too often ignored in the business world.
Forecasting is a diffi cult, thankless, and sometimes futile endeavor.
When accuracy is not quite where everyone wants it to be, we
react by making signifi cant new investment in technology, process,
and people to solve the business problem. 1 While we live in an uncer-
tain and largely unpredictable world, we prefer to operate under, as
Makridakis and Taleb suggest, an “ illusion of control. ” 2 We think a
bigger computer, a fancier model, and a more elaborate process are all
we need to get better forecasts, but the world doesn ’ t work that way.
THE PROBLEM OF INDUCTION
Scottish philosopher David Hume formed an early statement of the
problem of forecasting in his 1748 book, An Enquiry Concerning Human
Understanding . Hume was concerned with induction, the reasoning from
particular facts to general conclusions. Forecasting is an example of this.
Hume observed that when we eat a piece of bread, it nourishes
us. So we extrapolate our fi nite particular experiences to a general
belief that bread nourishes. When we do this, we are in fact creating
a forecast that the next piece of bread we eat will nourish us.
C H A P T E R 1
Fundamental Issues in Business Forecasting
5
6 ▸ F U N D A M E N T A L I S S U E S I N B U S I N E S S F O R E C A S T I N G
But Hume was a philosopher, so it was his job to be a critic and
to question everything that we blindly believe. He was compelled to
ask the question, What justifi cation is there for this belief that bread
nourishes? Just because bread has exhibited this nourishment char-
acteristic in the past, is that any proof that bread will continue to
nourish in the future? In the business forecasting world, just because
customer X has always ordered product Y in some particular pattern,
is that any proof that this behavior pattern will continue into the
future? Of course not! Hume came to the skeptical conclusion that
there is no proof that the future will behave like the past. He resolved
that, in fact, we have no justifi cation for our forecasts. Hume is correct.
It has been over 250 years, and there is still no refutation of Hume ’ s
argument, and no evidence that the business world is getting any
easier to forecast.
We should not let Hume ’ s ultimate skepticism completely ruin our
day, however. Just because we have no logical proof that our forecasts
will be any good doesn ’ t mean we never ought to try. This historical
perspective isn ’ t meant to completely discourage us. But it does
provide a valuable reminder that we aren ’ t gods, we don ’ t have special
powers of omniscience, and that we have no right to expect to con-
sistently predict the future very well.
THE REALITIES OF BUSINESS FORECASTING
The unfortunate reality is that investment in the forecasting function
is no guarantee of better results. There are often fundamental issues
that impact an organization ’ s ability to forecast accurately, yet these
are largely unrecognized or ignored. Until these issues are addressed,
however, further investment in the forecasting function may be
wasted. We begin by identifying several fundamental issues that must
be dealt with in pursuit of our objective:
To generate forecasts as accurate and unbiased as anyone can reasonably expect them to be, and to do this as efficiently as possible.