Excess stock is bad for business. It takes up valuable warehouse space and costs you a lot of money while it becomes obsolete. And, 10% of the items in your warehouse will never be sold, according to Slimstock inventory analysts.

These items are unlikely to bring in revenue, so why are you holding on to them?

ELIMINATING EXCESS STOCK TAKES COURAGE!

The problem is that removing these items from your operation is easier said than done. Given that you have made a financial investment in these products, accepting that they no longer have value for your business can be a hard pill to swallow.

Writing off obsolete inventory will come at the cost of your margins. This won’t amuse the finance director or the board, but it is totally necessary. The original investment in these items has already been lost, and continuing to let them take up space in your warehouse will only make these losses worse.

4 Steps to "Painlessly" Remove Excess Stock

So, what can you do to eradicate surplus inventory from your operations while still keeping the potential financial impact to a minimum?

We at Slimstock have outlined 4 simple steps to help you eliminate the excess stock that is holding your business back. By following these tips you will be able to minimize inventory costs and free up working capital, both of which will be music to the financial director’s ears!

Step 1) Physically Remove the Stock

Before you can take excess stock off the books you first have to take it out of your warehouse. You could store it in a container or an unused basement closet - it doesn’t matter so long as it’s out of sight.

Although it might seem odd to effectively “hide” obsolete stock, this step is necessary. As long as it’s in the warehouse, this stock is taking up valuable space that could be used by other items that are actually going to make your business money.

Step 2) Remove from the Administrative Process

Once you have identified the excess stock, the last thing you want to do is order more. Ensure that the obsolete articles are removed from your ERP as well as any other transaction system. If that’s not possible, at the very least make sure that purchase and sales orders for such items can no longer be placed.

Step 3) Financial Devaluation

Now comes the hardest (but unavoidable) step: re-valuation of the stock. Although painful, you cannot afford to postpone this. If you do, sooner or later you will have to go back to the same old conversations with your sales and finance teams. And as we said at the start: obsolete stock isn’t making your business money, instead it’s costing you more the longer it remains.

Step 4) Damage Control

What do you do with your excess stock once it has been identified and removed, and the appropriate administrative and financial actions taken? It may be possible to find a buyer for it. Some of our customers have had good luck with identifying the last customer who ordered it and making them an offer they can’t refuse. You can also ask the supplier if they offer a buy back, or want to take their old stock back. Depending on your business, another idea is to see if it can be donated to a charity or non-profit.

You might be asking yourself at this point: “Why not take these actions while the stock is still in the warehouse?”

Based on our experience, trying to remove obsolete stock while it remains on premises often results in it remaining on your balance sheet at the end of the year.

Prevention is the Best Cure!

After going through the often difficult process of removing your existing excess stock, the last thing you want to do is the same thing again in 6 months. Ask yourself how the stock became obsolete – was their problem in forecasting that led to delays? Was demand or availability affected by seasonality?

If you’d like a hand in figuring this out, Slimstock’s focus on optimizing stocking policies, services levels and product lifecycles has helped hundreds of businesses just like yours put in place the right processes, tools and knowledge to minimize the risks of excess.

Talk to us about your excess stock challenges!

Andrew Thomas, founder of Skybell Video Doorbell, reports that it takes roughly 40 positive customer experiences to undo the damage of a single negative review. With stats like that, it’s easy to see why customer satisfaction influences customer loyalty, retention, and even your ability to attract new customers. If one element of a business’ product or service dissatisfies a customer, the rest of the business can suffer, majorly impacting your bottom line.

Though it’s often overlooked as an element of customer satisfaction, procurement is an essential component for delivering that satisfaction. Procurement involves buying goods and services that keep an organization operating; it ensures warehouses are well-stocked with the proper supplies at all times. Procurement can be responsible for up to 70 percent of a company’s revenue, so small changes in procurement functions can have a major impact on profitability.

Procurement tasks traditionally include ordering, sourcing, and contracting. In simpler terms, it provides an organization with the right goods and services, at the right time, in the right place, for the right price.

While one might assume that procurement is worlds away from the services driving customer satisfaction, creating value in a product or service starts from the very beginning. It’s time to redefine procurement’s traditional role with a singular mission: to directly support the overarching goals and objectives or the company. Doing this will make companies more customer-centric and orient them toward higher levels of customer satisfaction.

4 Ways to Improve Procurement

Maintain Good Supplier Relationships
This might seem like a simple and obvious way to improve your procurement operations, but maintaining a positive supplier-buyer relationship is a vital component in ensuring good delivery, service, and quality.

As international supply chain executive Sara Ireton indicates in Industry Week, it’s important to recognize “the success of one partner helps the success of the other.” You need to be dedicated to growing your supplier relationships through trust, honesty, open communication, and ethical business practices, especially the basic practice of paying in full and on time.

Building and maintaining supplier relationships can streamline processes and improve your overall efficiency. It also helps pin down which vendors can deliver on short notice, or which will offer better pricing so you can schedule production in advance to ensure on-time and in-budget deliveries for your customers. In return, your customers can receive better service, lower prices and greater innovation, all at lesser risk.

Improve Inventory Insights
Procurement professionals have great analytical skills. They must juggle the planning and execution of multiple projects, deal with multiple vendors, and negotiate the best deals for their business. To make the most of these skills, procurement professionals need to incorporate technology into their data-driven decision-making processes.

An in-depth understanding of quantitative data is essential for making the best financial decisions for your company. Technology solutions like enterprise resource planning software can provide greater visibility into myriad areas of your business critical to meeting customer needs. They provide procurement insights and inventory management functionalities to ensure you have the materials your business needs, when you need them, and at the optimal cost.

Take Corporate Social Responsibility Seriously
Taking on green initiatives and ensuring your carbon footprint is as small as possible are no longer niceties, they’re necessities. As previously mentioned, consumers take environmental impact and social responsibility into consideration when making purchase decisions. In particular, Millennials - now the largest segment of consumers - are most interested in the social good behind the products they buy. A study by Nielsen indicates "Despite the fact that Millennials are coming of age in one of the most difficult economic climates in the past 100 years, they continue to be most willing to pay extra for sustainable offerings — almost three-out-of-four respondents."

For this reason, businesses should refocus their procurement processes to operate responsibly. It might seem intimidating to assess the social and environmental impacts of hundreds of different suppliers, but it’s often best to trace your way back to original equipment manufacturers and raw material producers. Assessing businesses at the very beginning of the distribution chain helps determine important factors about your supplier network, including the primary energy resources it uses or its home country’s corruption levels and labor practices, to name a few.

Increase Employee Training and Development
A study by The Hackett Group found 77 percent of chief procurement officers consider aligning procurement skills and talent with changing business needs to be of “high” or “critical” importance. As businesses continuously work to optimize their value and efficiency, procurement organizations have begun looking to diversify their workforce’s talent and skills, seeking out educational and professional experience ranging from physicists to data scientists.

Innovative training solutions are increasingly being adopted by leading procurement organizations. For example, eLearning solutions, combined with webinars and workshops, can allow professionals in the field to further their learning. This can be considered an investment in the company, by empowering its employees to make the best decisions to advance and improve its procurement processes.

Customer satisfaction can make or break a business’s future, so adopting a customer-centric approach throughout all operations is vital. From sourcing materials to after-sales service, all business functions play a role in creating customer value. Your procurement operations can play an integral role in your customers’ satisfaction, so taking time to improve your capabilities wherever possible will benefit you in the long run.

Slimstock has been helping companies like yours lower inventory costs while increasing customer satisfaction for 25 years. Our inventory management software is used by over 900 customers worldwide to free up capital and simplify the ordering process. Chat with one of our friendly customer service reps today to learn how we can help optimize your inventory.

Thanks for asking, but it’s classified...

Demand Classification is a systematic, logically founded method of ascertaining and clustering the characteristics of sales history into groups, before applying the most appropriate forecasting techniques automatically. Classification enables a significant improvement in forecast accuracy with significantly less effort and is lightyears ahead of the traditional ‘pick best’ approach.

New, in-life, seasonal, and end of life products must be all treated differently, and most demand patterns change. New products may move from a growth phase into the mainstream, lose their upward trend and become more stable. Others may exhibit stable demand patterns and begin to trend downward toward the end of a product’s lifecycle. Along with sales velocity, frequency, and magnitude, demand can be different in every case. Planners quickly begin to recognize the daunting task of just knowing where to start, followed by where to focus their priorities. Not only are forecast accuracy goals negatively impacted by their follow on action and decision, but downstream activities can be adversely affected too. Very quickly inventory and replenishment planning begins to suffer and an extremely costly situation ensues.

With so many planning decisions pending a forecast, many practitioners have been tempted to rely on their computer system to select, for them, the best prediction model from a wide range of techniques. Compared to more scientific approaches, this might only be a little more advanced than the random movements of a laboratory rat seeking to exit a maze. The forecast models in a pick best approach can produce wildly divergent results. Different samples of history will influence predictions, and performance is often negatively impacted by significant fluctuations in the data. The technique usually creates endless hours of model tweaking and data manipulations to gain only slightly less dubious confidence in the forecast. Fitting a forecast based on how tightly it fits the past, does not guarantee a better alignment to the future, and it’s very often the root-cause of kneejerk planning.

A more rational approach to the problem is to include statistical recognition of different types of demand before precisely applying the right technique. Failure to recognize the differences in demand characteristics can result in the application of inappropriate planning techniques and create undesired fallout like excess inventory, wild swings in replenishment plans, late promotional deliveries, and more frequent stock-outs. Slimstock’s Slim4 Inventory Optimization software automatically recognizes what stage of lifecycle a product is in, and systematically analyzes demand history or replenishment challenges before scientifically applying the optimal planning strategy.

Slim4 seamlessly integrates with any ERP system and applies academically supported statistics to test trends across each product/location combination, identifying the appropriate classification for items that contain seasonality, irregular or lumpy demand, new activity, declining sales, and many other observations. This technique dramatically reduces the amount of effort from traditional forecasting and planning techniques alone, allowing planners to engage in additional activities that drive even greater business improvements. The result is more accurate and consistent forecasts, and inventory replenishment plans based on scientific intelligence, with far less effort. Demand Classification is a significant leap forward from the traditional ‘pick best’ approach. The obvious benefit is a dramatic improvement in the overall confidence of an inventory planning strategy. Companies that have relied on Slim4 to help manage their supply and demand planning process experience:

Better stocking levels, and increased stability and accuracy in planning, which results in further optimized inventory.
• A higher degree of confidence in the planning strategy and the manner in which it’s being applied.
• Significant reduction in the time and effort dedicated to forecasting and managing supply plans, allowing the business to focus on what matters most; - not the statistics and especially not administering system parameters.

At Slimstock, we believe a significant opportunity exists in releasing a tremendous amount of kinetic energy (cash-flow) from the inventories of most companies. The way we help our clients capitalize on this idea is deigning software that becomes the ‘central intelligence’ of your inventory planning organization and helps pre-empt threats on your supply chain objectives. At Slimstock, we don’t just replicate ideas; we are advancing supply thinking and helping our clients achieve extraordinary results from near ‘mission impossible’ scenarios.

The time to expand your business is now

“As levers of financial management go, none bears more weight than working capital. The viability of every business activity rests on daily changes in receivables, inventory, and payables.” -S.L. Mintz

Whether selling a revolutionary product or essential service, the challenges of gaining access to the working capital necessary for production capacity expansion, marketing initiatives, or fluctuating inventory needs affect nearly all businesses.

In fact, more than two-thirds of business owners said they faced challenges growing their businesses over the past year, with more than 12% not understanding how to obtain the working capital necessary to facilitate expansion.1 With increasing frequency, business owners are turning to external funding sources to secure capital to fuel growth as opposed to exploiting the potential capital they have tied up in inventory.

The Cash Can Come From Inside The Business

The importance of cash flow in a healthy business cannot be overstated. More cash on hand provides the following benefits:

• gives businesses a competitive advantage
• fuels growth stages;
• improves shareholder value
• contributes to the viability of a business

Businesses rarely go bankrupt because of a lack of earnings, but a lack of cash on hand can be the kiss of death.

The crucial truth that most business owners remain unaware of is that they already have access to the capital they require, and it doesn’t involve cold-calling relatives or meeting a single loan officer. For most businesses, simply optimizing inventory control, cash flow, and operational processes can give them access to ample capital they can use to expand, without having to make compromises or sacrifices on initiatives that will yield positive ROI.

So how can businesses access this untapped reserve of cash to fuel growth, boost profits, and increase viability? It starts with examining the financial supply chain.

The Financial Supply Chain, Explained

The problem with any organization is that as it grows, it has an increasing requirement to raise more working capital. Often, that working capital will come either from shareholders, or out of the asset base of the company. Ironically, most companies constrain their ability to grow by limiting their working capital in two primary areas.

The first area is Accounts Receivable, where companies struggle to reconcile how fast they pay with how fast they collect. The delta between Days Sales Outstanding and Days Payables Outstanding usually contains working capital that can be relieved without shareholders digging into their pocket for more equity.

The second area that holds the highest amount of promise is the area of inventory. If your company makes, manufactures, or distributes goods, the chances of having inventory on your shelves longer than required, or turning over more slowly than required than you need, are staggeringly high. The single biggest opportunity to improve working capital is in the area of inventory reduction.

By fine-tuning each of these areas, organizations can significantly boost their cash flow, giving them access to previously untapped resources that can be funneled back into the business. Sounds easy? With the right tools, processes, and people in place, it can be.

Free Your Cash, And The Rest Will Follow

When it comes to generating more working capital, SMEs continue to take the ‘easy’ route and amass mind-boggling amounts of debt rather than improve their own internal processes. In fact, a 2015 working capital survey from CFO Magazine found that companies continue to take on “alarming amounts” of debt. Corporate debt rose by over 9% in 2014 to nearly $4.6 trillion, with companies leveraging low interest rates to fund increased investment activities.

According to the same survey, “companies once again made almost no improvement in working capital management, doing little to generate cash internally by optimizing how they collect from customers, pay suppliers, and manage inventory,” a finding that echoed survey results from previous years.3 Companies that saw their debt double since 2007 had their working capital performance worsen dramatically, while companies that decreased their debt over the same period saw significant improvement.

Most eye-opening was the finding that companies in the study could improve cash flow to the tune of $1 trillion simply by matching the performance of top companies in their industry, with inventory optimization representing the lion’s share of the opportunity.

$1 trillion is a lot of cash to leave on the table while seeking out record-setting levels of debt. So why are SMEs continuing to ignore the clear benefit of inventory optimization?

First, let’s look at the culprits responsible for eroding your cash flow.

Mismanaged Inventory

As a high-velocity cash generating machine, the last thing you want is inventory sitting around a warehouse collecting dust. A large part of inventory optimization lies in increasing inventory turn and converting products into cash sooner. So why is your inventory turn failing?

You may be:

• selling the wrong inventory at the wrong time
• carrying slow moving inventory
• carrying seasonal stock early, before peak season arrives
• struggling to gain access to best-selling inventory from vendors and suppliers
• scrambling to fulfill orders to high-priority customers
• failing to optimize purchasing conditions

All of these issues can result in a dramatic decrease in sales, and occupy valuable real estate preventing you from acquiring more viable products.

So how can SMEs address these issues?

1) Inventory visibility: Market-leading businesses not only track stock on hand meticulously, they have comprehensive visibility into the entire supply chain, with advance knowledge of when goods will arrive.

2) Forecasting: The ability to make proactive purchasing decisions is essential for companies to remain competitive and it doesn’t require a fortune teller or psychic. Modern inventory optimization applies a number of advanced forecasting methodologies to automatically forecast demand for countless items.

3) Timing: When it comes to proactive purchasing, however, there is such a thing as too proactive. Filling warehouses with out-of-season stock that will lie dormant for months can absolutely decimate your bottom line. The significance of not ordering the right product at the right time cannot be overstated. Due to the innate complexities of inventory management and ordering, whenever possible, it’s recommended companies automate this process via software so that automated daily order recommendations are provided when stock dips below a certain threshold or when your forecasting identifies spikes in demand.

4) Shorten your order to deliver period: Reducing lead time and optimizing logistics should be priority number one for companies looking to shorten Days of Working Capital.

There are three distinct touch-points that can be addressed:

• Pre-processing Lead Time represents the time required to release a purchase order (if you buy an item) or create a job (if you manufacture an item) from the time you learn of the requirement.
• Processing Lead Time is the time required to procure or manufacture an item.
• Post-processing Lead Time is the time to make a purchased item available in inventory from the time you receive it (including quarantine, inspection, etc.)

5) Shorten time to market of new products: From the moment resources are committed to a new product, you’re burning cash until you can capitalize on sales; therefore, it’s imperative that businesses make every effort to shorten the time it takes to get new products to market. Implementing or improving project management, improving oversight of manufacturing changes, and improving design team collaboration can help put cash in your hands quicker.

Become Your Own Personal ATM

Just how drastic an impact can small shifts in inventory optimization have on working capital?

In this example, we’re looking at a company with:

• $25,000,000 in annual sales
• $20,000,00 in annual cost of sales
• $3,424,658 in average A/R
• $1,500,000 in average A/P
• $6,000,000 in average inventory

Let’s look at two ways this situation can be handled.

Company B hasn’t invested in inventory management. Their sales agents are exaggerating forecasts to ensure there are products to sell. Production increases their production rates to meet the additional (nonexistent) sales demand. Their service department is too busy with customers to enter billable time, so invoices are created 2 weeks late. Concerned about causing downtime, Purchasing buys additional inventory, burying the old stock in the back of a warehouse. Receiving becomes overwhelmed and has difficulty reconciling supplier invoices to receipts, yet pays them anyway. Shipping subcontracts outside carriers based on the expectation that they’ll be able to meet the increased sales demand. And on, and on and on.

‘Company A’ shortens the sales cycle by 10 days, extends their days to settle AP by 10 days (to 40 days total, well within the realm of acceptability), and drops Days of Sales inventory from 110 days to 100 days by implementing software that gives them increased inventory optimization capabilities. By making these three small changes, they’ve managed to free up $1,730,386 in working capital and decrease the runway to convert cash to revenue from 190 to 180 days.

With an inventory optimization tool in play, improved forecasting and demand, increased stock turnover, and sustained sales due to improved inventory management, Company A decides they have the ability to cut another 10 days from DSI; shortening it from 100 days to 90 (from the original 110). By simply cutting 20 additional days from DSI, working capital improves to over $2.275m, and DWC is shortened 20 days annually, from 190 to 170. Remember that $1 trillion statistic cited earlier? When you scale this equation across the multitude of SMEs in the US, it’s easy to see how it can be achieved.

So How Can You Become Company A? Leverage a Solution That Pays For Itself

When it comes to the question of new systems versus new equipment, business owners frequently evaluate based on perceived ROI. The problem is that projects with solid ROI potential require capital investment, and for most businesses, cash flow is limited. And while the initial reaction is to choose the project that will yield the fastest, it’s imperative to consider what will yield the best. Examining the way each project will impact your business over the next 5-10 years will lead to a more sound business decision.

Cash flow doesn’t replace traditional ROI — it accelerates it. By implementing solutions and systems that generate additional cash flow, organizations are able to invest in multiple projects in tandem, boosting the profitability of the company, without making compromises.
For example, two projects are presented: a new system and new equipment, each requiring a capital expenditure of $200k. The equipment has an expected ROI of 2 years, while the system has an expected ROI of 4. However, the system is also expected to generate $500k in additional cash flow annually.

Using the table below, it’s easy to deduce that the capital-freeing expenditure is the wisest investment out of the gate, freeing enough capital to invest in the necessary equipment in year 2, and both projects returning positive yields in the years following.

By rethinking how you invest in your business, and avoiding the common trap of opting for the fastest ROI, businesses can dramatically improve their overall operations. By choosing to invest in a system that helps generate capital, you’re better able to fuel the growth of your entire organization, including concurrent positive ROI projects.

The Metrics that Matter

When we talk about working capital, we’re speaking about the liquidity available to be used in day-to-day operations. For most businesses, this will be assets (receivables + inventory), minus liabilities (payables).

$1 trillion is a lot of cash to leave on the table while seeking out record-setting levels of debt. So why are SMEs continuing to ignore the clear benefit of inventory optimization?

• Has beginning Accounts Receivable of $3m
• Has ending Accounts Receivable of $1m
• Has beginning Accounts Payable of $3m
• Has ending Accounts Payable of $1m
• Purchases $5m from vendors annually
• Has $1m in beginning inventory
• Has $2m in ending inventory

Working capital = (Accounts Receivable + Inventory) - Accounts Payable

If your business has $3m in beginning A/R, $1m in beginning inventory, and another $1m in beginning payables, your working capital is $3m.

DSO (or Days Sales Outstanding) refers to the amount of time, on average, it takes a company to collect revenue after the completion of a sale.

DSO = Average Accounts Receivable / Total Sales * 365 For a company with $10m in annual sales and an average AR balance of $2m, DSO is calculated at 73.

DPO (or Days Payables Outstanding) is the duration it takes for a company to settle contracts with suppliers and vendors.

DPO = Average Accounts Payable / Total Annual Purchases * 365 If your annual purchases total $5m, with an average A/P balance of $2m, your

DPO is 146 days.

DSI (or Days Sales of Inventory) is the length of time it will take a company to sell all of its inventory.

DSI = Average Inventory / Annual Cost of Sales * 365

Inventory Turns = Annual Cost of Sales / Average Inventory For a company with an annual cost of sales of $8m and average inventory of $1.5m, it will take 68 days to sell all on-hand stock, necessitating 5 inventory turns in a calendar year.

DWC (or Days of Working Capital) measures how many days it will take for a company to convert its working capital into revenue. The faster a company does this, the better.

DWC = Working Capital/Sales * 365 If payables exceed the sum of receivables and inventory, DWC is negative.

If your company has $1m in A/R, $2m in on-hand inventory, $1m outstanding in A/P, $2m in working capital and $10m in annual sales, your DWC is 73.

DWC, as well as the other metrics discussed above, will vary depending on industry and sector. Wireless communications have an economy-leading DWC of negative 29 days (meaning they convert working capital into revenue nearly 30 full days in advance — if you’ve ever wondered why this is, just look at your cellphone bill.) Rounding out the top five industries for DWC are conglomerates, transportation, industrial transportation, and food retailers and wholesalers.

Regardless of your industry, there are simple steps you can start taking today that will shorten your DWC cycle and put more cash in hand immediately.

Say Goodbye to Cash Flow Hell

The numerous financial and organizational benefits of inventory optimization software can no longer be ignored by companies wanting to reclaim their piece of that $1 trillion pie. The single most important thing an organization can do is to carefully consider the significant way inventory optimization can transform their business. From improving cash flow to reducing dead stock, an inventory optimization solution can make the difference between increasing debt and fueling business growth.

At Slimstock, we enable our customers to outperform the competition. Our inventory management solutions are designed to perform structural optimization by utilizing readily available data, so you can reap the rewards of healthy cash flow and increased year-over-year revenue. All it takes is a willingness to accept that you can self-fund, and to give up the idea of increasing your debt.

Cash is king, and escape from cash flow hell is just a call away.

Published by Slimstock, market leader in forecasting, demand planning, and inventory optimization

Since 1993, Slimstock has been synonymous with better demand forecasting, effective inventory optimization, clearer inventory analysis and continuous improvement of inventory reliability. Our customer base consists of over 650 companies worldwide, across a diverse range of industries, covering large, medium and small enterprises.
www.slimstock.com

An Adage For Improving Forecast Quality

A sales forecast represents many things in business, but is most universally understood as the pulse of a company. From an operations perspective, a forecast lets the supply team anticipate and quickly respond to changes in customer demand, and helps manufacturing and distribution companies optimize inventory levels, minimize stock-outs and improve production capacity. Conversely, a poorly developed and inaccurate forecast negatively affects operational performance of a company and can become a barrier to achieving strategic imperatives and fiscal goals.

Many surveys have shown that successful companies are able to analyze historical sales patterns and create an accurate baseline forecast, which, at least, includes seasonality, trend and some measure of forecast error. A good forecast lends itself to lower operating cost, making better purchasing decisions, improved manufacturing schedules, optimized product mix, and higher customer satisfaction. The intention behind improving a forecast is to support increased sales. So why do some companies fail miserably at forecasting?

Companies that struggle with forecasting likely fail at it because they do not provide sufficient organizational attention to the process. The typical result (in all but the simplest and most predictable businesses) is significantly higher costs and increased levels of inefficiency creating stress on the company. Such companies tend to be very reactive, and usually a little behind in meeting customer expectations.

The results of poor demand planning ripple through an organization and are often recognizable with low levels of confidence in the forecast, lack of process ownership, no measurement of quality, and reliance on inappropriate tools such as standalone spreadsheets. The product of which can lead to lengthy, and even confrontational discussion about whom in the organization has the correct planning numbers. It is not surprising that further lack of confidence in being able to make sound management decisions is inevitable.

Operating on an unreliable, or highly volatile forecast, frequently results in a greater inefficiency within supply planning. Keeping customers satisfied, and avoiding a ‘bull-whip’ effect on your supply chain, may require compensating with higher inventory. The financial impact could result in writing off and discarding of unused product later. An unreliable forecast can result in disrupted supply lines, and increases the need to expend more energy, and money, at the risk of still leaving many customers dissatisfied.

Contrary to the common statement that all forecasts are wrong; a more precise statement would be that all predictions about future sales contain some degree of error. The legendary Yankees Baseball Manager Yogi Berra once said, “If you don’t know where you’re going, then you’ll end up someplace else.” It would be a stretch to say there’s supply chain wisdom lurking in there somewhere, but if it were, it would suggest that setting a plan and executing to it while monitoring progress, improves the chance of a company achieving its goals. So what are some things that can be done to ensure that a supply chain forecast is less ambiguous and more reliable?

A good place to start is to accept that the forecast will likely contain a degree of error. Secondly, knowing if the forecast is too high or too low will begin to expose what needs to be done to improve it. A sound forecasting process seeks to find what is creating forecast bias in order to minimize errors. There are many ways to measure statistical forecast inaccuracy, but here I will examine that part of the process where hunches and gut feelings get introduced.

I’ve commonly witnessed many demand planners override a good forecast with different numbers obtained from sales and marketing people. Very often the changes do not include the underlying business assumptions to justify forecast modifications, or the change requests are vague and incomplete. Regardless of being void of any insight, the low quality changes are accepted and introduce additional forecast error.

I’ve commonly witnessed many demand planners override a good forecast with different numbers obtained from sales and marketing people.

The two most common reasons why sales inputs create additional error are because they are unmoored from proper historical analysis, or targeting a different goal. Ensuring that the sales person’s input originates from the statistical baseline, is the simplest way to correct the first problem. In most companies, the forecaster is a person using mathematical models to generate a detailed set of numbers that often represents a tenable estimate of the future demand. They usually perform extensive statistical analysis of sales data, accounting for trends, seasonality, and even changes in the product mix. Using the forecaster’s data as the starting point for a sales person’s input, will not only help to improve the accuracy of the forecast, but it will save sales people time as they will no longer have to compile their own statistics. Correcting the second problem requires a little more effort at uncovering the rationale behind a sales person’s request to change the baseline.

During my previous experience as a Demand Manager, I recall that getting insight from sales and marketing about their intended demand generation activities can be a challenging task. While a forecaster’s function is to sense what demand might be statistically based on history, the role of sales and marketing is to understand and communicate how they intend to shape the future. Leading companies realize that forecasting error is partially the result of incorrect forecast models and partly the result of communicating unrealistic expectations from the sales creation team. This article discusses one method for creating more reliable inputs.

Since leaving the world of planning to become a sales person, I have recognized that I tend to be a lot more coin operated these days and more focused on tasks that generate my pay. In having to prioritize the worthiness of my own sales forecast, I stumbled on the following, extremely insightful method, of qualifying my own activities. After all, not all business interactions will result in additional sales and my goal as a commissioned sales person is to make money. To avoid expending too much time and effort in the wrong places, I implemented a set of questions to qualify the priority, timing, and potential of my sales opportunities. It struck me that these are the same questions that would have helped me qualify the sales forecast inputs I used to receive as a planner. The method can easily be remembered using the following acronym - B.A.N.T.E.R.

Now, as with most things, these observations may not be directly applicable to everyone. The goal here is to ignite some creative thinking on this insight so feel free to interpret specifics. Let’s examine the points individually.

• B – Budget
• A – Authority
• N – Need
• T – Timing
• E – Execution
• R – Requirement

Budget – These days, it goes without saying that a sales person runs the risk of wasting a lot of time and cost without knowing if a prospect has a budget. Without a budget, there is not much likelihood of a sale occurring because the prospect has no money to spend. Many inexperienced, hungry, and overly enthusiastic sales people believe a client will eventually purchase simply because the sales person is more accommodating than the competition. However, a lot of time and money could be wasted, juggling company resources while jumping through hoops for an opportunity that will likely never happen.

In my experience, non-buying prospects are not entirely forthcoming about their budget. I’m not entirely sure why that is, but suspect it’s for fear that the sales person will disengage from discussion upon discovering there is no money. It could also be because they feel as though the sales person will take full advantage of the budget information in order to maximize a commission. Often, buyers without a budget will proclaim that if the sales person presents enough value, there should be no problem obtaining financing for the purchase. However, to experienced sales people, prospects unwilling to discuss their budget may be sending the wrong signals to the sales person. It may be translated as the prospect is simply fishing for information, or more likely, they are not even in a buying cycle. The proverbial trust issues between buyer and seller begin to surface.

At the very least, establishing an estimated procurement budget ensures that both sides begin their interaction with the right expectations. Quoting an accurate price may be virtually impossible until the sales person has fully outlined requirements, but the buyer should expect the cost is within an acceptable range. Navigating this issue is an essential sales skill, but for the purpose of supply chain planning, budget insight will greatly help qualify the forecast input.

Another way to address budget is to clarify the prospect’s capital prioritization process. For example; ensuring the purchase will not get bumped in favor of a new forklift, may require adherence to a rigorous financial prioritization process. Understanding that a company has prioritized capital for the purchase is almost more insightful than knowing the budget limit itself. There is also the reality that some buyers manage a budget, but once spent, it‘s done – and they have no further budget to allocate. Others in organizations, usually the “C” suite, can reallocate more budget and make unplanned purchases if the business requirement warrants attention. With respect to budget, some important questions to ask a sales person when qualifying their forecast inputs are;

• Who is the person responsible and accountable for fiscal decision making?
• What is the customer’s capital prioritization process?
• What are the budgetary limits related to this purchase?
• What is the value proposition being placed in front of the prospect for our product?

In many cases, if the sales person is too low in the decision tree, they may not be able to answer these questions. The sales person may be talking to people who are completely unable to establish a budget. This is a sure sign that the forecast timing is optimistic and may not even occur at all.

In my experience, most non-buying prospects are not entirely forthcoming about their budget.

Authority – Many sales people call into C-level managers these days because of escalated company decision making policy. C-level managers have decision making capability over business direction and company budget. However, it is unlikely that C-level managers have time to answer every phone call, email, and postcard received. It’s more likely that they initiate action based on significant business issues presented to them internally. Therefore, most of the marketing directed at them is just noise. The same scenario could be happening with any person responsible for purchasing in an organization.

Most purchasing decisions require authority. If the purchaser does not have the authority to make the final decision, then the sales person’s risk of not completing the transaction is very high. The sales person’s conundrum is that decision makers often delegate investigative responsibility to their staff. The delegation probably goes something like this - “You’re the expert, find me a solution to…, but do not involve me until you have established a shorter list of suppliers to select from.” This action can create inherent risk for both sides engaged in the transaction. The risk can become particularly significant when large purchases are at stake.

The Authority questions used to qualify a sales person’s forecast, identify whether the decision maker is aware of the pending interaction, or better yet, involved in the purchasing process. They reveal whether the sales person has established enough contact to close the sale. The following question might be asked by the demand manager during communication with the sales person;

“You’re the expert, find me a solution to..., but don’t involve me until you have established a shorter list of suppliers to select from.”

Again, if the sales person is speaking to people too low in the decision tree, they may not be able to get the answers they need to these questions. The sales person may be talking to people unable to make final decisions needed to move things forward. This is another sure sign that the sale will either take longer than expected, or again, not even occur at all.

Need – There is nothing more compelling in a sales cycle than establishing what the needs are of the customer. I suspect most people get hundreds of marketing calls per year, but very few people are likely compelled to shop this way. Clearly, a guy with a chainsaw immediately showing up to sell you on tree removal, 10 minutes after it falls on your house is more than a little sketchy, but my point is this; if the customer has a requirement that facilitates a business transaction, it should be evident. Prospects typically will not spend money without a compelling need and the sales person should have uncovered it. Prospects that vaguely answer the ‘Need’ question are usually in the early stages of a buying process. Alternatively, they could be just educating themselves and not ready to buy.

The goal in the ‘Need’ query is to help the prospect frame their requirements. This involves hard work, product knowledge and the discipline to execute without making assumptions. Discovering a customer’s need is not always exciting but it can be rewarding when properly executed. As an example; I recognize that buyers often balance how I’m able to handle their issues against price. If I’m accountable, deal with issues quickly, save time, and can mitigate most of the buyer’s risk, then I expect they buyer will realize a significant benefit in our interaction during discovery. When the buyer realizes the value, the probability of us doing business together will be more likely. Inquiries to make regarding the sales person’s forecast might be:

• What are the compelling business reasons behind this prospect’s purchase order?
• Is the buyer already working with another vendor?
• How will buying the product from us resolve the customer’s need?
• What does the customer like, or dislike about our products?

Timing – Timing can be examined from many different angles, but the obvious one concerns the buyer’s purchasing timeline. While it is risky for a sales person to push a buyer, they obviously cannot let the sale linger forever. For this reason, it is important to set milestones and goal posts in a sales cycle. Attaching a time expectation to the purchasing steps, will help the buyer manage the purchasing process better. In addition, a clear timeline clarifies to the sales person how far in the future they can expect an order. A sales person can also use timing to gauge the potential in the business interaction by monitoring how well the prospect adheres to the schedule of events. Things like internal planning, budget approval, product sampling, demonstrations, contract review, Executive bridging discussions, price negotiation, expectation alignment, legal adjustments, and other essential steps can highlight the purchase timing and clarify the buyer’s intention. Questions to ask when further qualifying the timing of the forecast might be:

While it is risky for a sales person to push a buyer, they obviously cannot let the sale linger forever.

Execution – While the previous four points are useful in helping to remove ambiguity from the sales person’s forecast, it should not be overlooked that closing new business is often a team sport. It is not an option to turn away new business, therefore, forecasting it should be taken seriously by the demand manager. Any sales person would prefer to under promise and over deliver. At this point, qualification of the forecast should involve at least a cursory review of the company’s ability to execute on the new order. There is nothing more embarrassing and frustrating to a sales person than making a commitment to a customer and then finding out that it cannot be delivered as promised. Furthermore, there is nothing more frustrating to a planner than unexpectedly having to jump through hoops in order to keep the unrealistic promises made by a sales person.

Determining the ability to execute on the forecast requires a review of available inventory, the current rate of demand, resupply lead time, manufacturing capacity, and what is already outstanding in purchasing or plant schedules. Other customer’s priorities may have to be shifted when the sales person’s forecast is late. If the order incurs expedited delivery cost, or production needs to stop and retool to get the order out on time, margin is eroded. Depending on the competitive pressure to quote aggressively, reporting a late forecast puts unnecessary pressure on profits and hinders a company’s ability to operate efficiently.

It should be duly noted by sales people that supply planning is not an easy task, and the implications of reporting a forecast to supply chain late may be detrimental to their relationship with the customer. In the best interest of the business, it is vitally important that forecast expectations be openly communicated between the sales person and the forecast manager. The following questions should be addressed following questions should be addressed with planning.

• Will there be enough inventory to fill the customer’s order without shorting others?
• How long will it take to get more product if there is not enough to fill all the orders?
• What will be the impact on operations to fill the order on time if supply is short?
• Is there any risk that the order might not get filled on time?

Requirements – This should be self-explanatory - what does the customer want? How a customer thinks and feels about a company and their products is a key aspect of trade. A sales person’s interaction with a customer will shape the perception of value. Dealing with the sales person’s company will further develop the client’s perception too. Therefore, it is everyone’s task to meet the needs of the customer more precisely than the competitors, without exceeding the limitation of an acceptable margin of course.

Although it may be assumed that customers usually think carefully about the business purchases they make, it would be impossible for them to know all of their choices without speaking to a salesperson first. Wherever there are options involved in a purchase, the “art of possible” also needs to be thoroughly explored with the customer. A customer’s complete understanding of what options are available may change the forecasted requirement. Before making commitments with a customer, establishing requirements with the internal supply planning team, ensures that the right products will be available when the customer orders. Questions to explore regarding requirements might be:

• What has the customer asked for and why?
• What is the best configuration of options and price to meet the customer requirement?
• Is there anything else the customer might be interested in that wasn’t discussed?

Contributions from sales and marketing are essential to improving forecast accuracy. Companies that produce the most accurate forecast, manage variability by discussing upside potential and downside risk not represented in their statistical analysis.

Wherever there are options involved in a purchase, the “art of possible” also needs to be thoroughly explored with the customer.

Measurement – Although, measurement is not part of the BANTER acronym, it is an important element to the topic and should not be overlooked. The famous statistician George Box is quoted as saying “All models are wrong; some are useful.” In demand forecasting, accuracy is a relative term without the accompaniment of a measurement. All too many organizations I’ve helped were initially confident their forecast was near perfect, yet rarely were they able to produce the statistical evidence to back up that claim. The two most important indicators in measuring forecast accuracy are how inaccurate the forecast is and which direction it needs to go to improve. Forecast performance can be validated by comparing the expired forecast to actual sales. Measuring the forecast will help build organizational confidence in the numbers and inherently help improve the quality.

Obtaining an excellent reliable forecast requires a good set of tools and a deep understanding of the marketplace demand. Awareness of the customer’s business needs requires open communication about demand creation activity. The ability to detect bias in both the quantitative and qualitative inputs is essential to gaining improvements in forecast accuracy.

Once an accurate representation of future demand is available, an organization will be more capable of determining a supply strategy. They will be better equipped at optimizing inventory and creating the right mix of products to elevate customer order fill rates. Finally, a high quality forecast will help a company improve awareness of customer behavior and market trends, allow them to operate more efficiently, drive profitable business growth, and increase their strategic performance.

Published by Slimstock, market leader in forecasting, demand planning, and inventory optimization
Since 1993, Slimstock has been synonymous with better demand forecasting, effective inventory optimization, clearer inventory analysis and continuous improvement of inventory reliability. Our customer base consists of over 650 companies worldwide, across a diverse range of industries, covering large, medium and small enterprises.