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 less than the actual, you make an error of under-forecasting. Please plug in your numbers below to calculate the 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 percent of sales will be lost as a result of under-forecasting? Let's say you will lose 10% of the under-forecasted sales, then plug in 10.
- 4. Plug in your mark up. If your cost is 60% and profit margin is 40%, then your mark up is 40%. In that case, plug in 40.
- 5. List the percentage of your sales that has a companion product. There are certain products that go together. If you are short in supply of one, you won't be able to sell the other product (companion product) that goes with it.
- 6. Under-forecasting will increase production cost. Plug in here by what percentage it will increase your production cost.
- 7. List here your shipment cost as a % of sales.
- 8. Under-forecasting increases the shipment cost, because products in short supply may have to be shipped in small quantity, and expedited. List here by what percentage the shipment cost will increase.