Very often questions arise how to convince upper management that the forecasting function is absolutely necessary. With IBF's Cost of Forecast Error Calculator you can see how much you will save for each percentage error reduced, this template will help you justify the support for the forecasting function to management. Although every benefit of reduction in forecast error cannot be quantified, many of them derived in the area of the supply chain can be measured. The savings alone from this area are big enough to gain support for this function.
Since error can result from under- and over-forecasting, the template has been divided into two: (1) Benefits of Reducing Error From Over-Forecasting and (2) Benefits of Reducing Error From Under-Forecasting. When your forecast is less than the actual, you make an error of under-forecasting. By the same token, if your forecast is greater than the actual, you make an error of over-forecasting. By reducing forecast error in each case, you will see improvements in your profits.
Plug-in your own numbers into the forecast calculator, and then see for yourself!
When your forecast is greater than the actual, you make an error of over-forecasting. Please plug your numbers below to calculate benefits. Description of each field is listed below as well.
- 1. Total sales of your company in millions of dollars. If sales are $1,000,000, enter 1. It could be sales of a company as a whole, sales of a certain category, or sales of a certain SKU.
- 2. For how much error reduction you want to compute saving. If you want to compute the savings resulting from 1% error reduction, plug in 1, if you want to Compute the savings from 2% error reduction, plug in 2, and so on.
- 3. What is your mark up? If it is 40%, it means 40% is profit, and 60% is cost.
- 4. List what percentage of sales will be sold at a discount because of over-forecasting.
- 5. List what % discount is given to dispose off excess inventory.
- 6. The merchandise may be shipped from one distribution center to another in an effort to dispose off excess inventory. What % of the over-forecasted will be transshipped.
- 7. Indicate here what would be the transshipment cost as a % of products to be transshipped.
- 8. Indicate here what % of over-forecasted products will become obsolete.
- 9. There may be a cost of disposing obsolete products. Plug in here % cost of disposing obsolete products.
- 10. There is a cost involved in holding excess inventory. Plug in here the interest rate to be charged to the assets of excess inventory.
- 11. There are also warehouse costs for holding excess inventory. Indicate here the warehouse cost as % of sales.