The Harm of "Chasing Right" with Your Forecast
This is the time of year for alternative planning scenarios...stop spending months creating and refining just one forecast. Manufacturers who do not yet have a rolling forecast, including scenarios, risk underperforming competitors who are more prepared.
For many manufacturers, this is planning and budgeting season. Commercial and finance teams are busy preparing forecasts for next year and the following 3+ years.
What I’ve noticed over the years is that manufacturers spend extensive resources and time to formulate only a single forecast for the next 3-5 years. I call this trap, “chasing right.” This is common for manufacturers who haven’t moved on to a systematic rolling forecast.
The process of building the five-year plan is a big part of the problem. When it takes three months to build this critical outlook, simple math dictates that you can only perform this once, or maybe twice, per year. The method is usually an Excel consolidation exercise across many commercial teams and operational units. This forecast process rarely accommodates alternative scenarios to model affect on the business. Adding another scenario or two cripples this method of forecasting by adding even more time before completion of a forecast.
Manufacturers with a rolling forecast system don't fall victim to “chasing right.” For them, the forecast is live, with rolling commercial and market updates assimilated throughout the year. This means a ready business plan is available all of the time. Instead of consuming months formulating a forecast, manufacturers with rolling forecasts enjoy being wrong many times with scenarios for strategic benefit. It is easy to formulate alternative scenarios for market volume, currency shifts, contracted pricing, input material fluctuation, for modeling impact to the enterprise plan. They use these functional scenarios to prepare contingency action plans for their operations and capital prioritization.
Many manufacturers are already preparing for potential downturns in the cyclical industries they serve as we extend deeper into this economic cycle. Decisions might include what capacity to take off-line first, how to best consolidate operations and where to apply capital for optimal return under more difficult market conditions. Manufacturers who do not yet have a rolling forecast process risk underperforming competitors who are better able to model downside risk and ready contingency action plans.
--John Brennan, EVP & Chief Strategy Officer, Saphran, Inc.