Value of a more accurate forecast


Sales velocity is influenced by price, promotion, seasonality, availability, cannibalization, affinity, and many other demand influencing factors such as weather. How much value can a retailer create by leveraging a more accurate store-level forecast?

Price Optimization
Promotion Planning
James A. Sills, Ph.D.
49 months ago

4 answers


The value of good store level forecasting cannot be overestimated. From a sales perspective under forecasting has an obvious effect on the top line however the bottom line effect of over forecasting tend to be less well understood, especially if the product is a perishable one.
Distribution of product through a supply chain into local warehousing is planned based on forecasts. If the forecasts are wrong you have out of stocks in one region resulting in lost sales, overstocks and potentially out of date product in another region. The costs to relocate product or discount heavily when close to date are significant, not to mention the cost of write the off of out of date product. In addition poor forecasting will impact the efficiency at the factory. Stock out situations are likely to result in the need for an unplanned product change or short production run resulting in increased production cost. An overstock in one product may well be at the cost of an out of stock situation on another product as the production time could have been utilised producing the other product.
The combination of logistical, discount, product loss, production and opportunity costs that result from poor forecasting can make the difference between being profitable and losing money as a business. The people who generally have the best information to build the forecast are the sales people, and after basic sales skills, forecasting is in my view the next most important skill set for a retail sales rep to develop

Aubrey Dyer
49 months ago

An accurate store-level forecast helps to increase confidence and evaluate the sales process. Don't get too complicated and be flexible with your forecast, to be good with this you need to have a successful sales strategy too.

Paolo Beffagnotti
49 months ago

The value potential in increasing store-level forecasting accuracy is somewhat threefold:
First, there is incremental topline sales value, the max potential of which can be assessed as average time out of stock for a given item, over a given time period, multiplied by average (or seasonally adjusted) sales rate.
Second, there is a net value growth potential that can come from reduction in inventory where items are overstocked. This could be assessed in improved GMROII for the retailer.
Last, and as a product of inventory reduction, is the freeing of capital for investment in other opportunities, which would otherwise be prevented by the capital tied up in inefficient inventory management.

Patrick Kinnamon
49 months ago

I'm sure that a more accurate forecast is super valuable for a retailer. The closer that they can have Just In Time inventory positions means that they don't have to tie up free cash in inventory. However, the wrinkle comes in when you calculate the lost sale due to out of stock vs. the inventory carrying cost. If I'm a manufacturer paying for a big promotion, I don't want any lost sales! Kind of like eggs on easter - easter saturday you can't have enough. Monday after easter, it really doesn't matter. For manufacturers, the accurate sales forecast at the retailer is less important because my goal is to maximize sales, not manage inventory carrying costs.

Bryant Ison
49 months ago

Have some input?