Answers to Your Demand Planning and Forecasting Questions

A forecast that matters is the one that gives an error, which is tolerable. How much error can be tolerated depends on the company’s ability to adjust to the error and the cost of error. If the lead time is too long, the company cannot adjust quickly to the error, particularly, in the case of under-forecasting. How much the error will cost also matters. The best thing, therefore, is to generate ex post forecasts for a number of periods to determine how much error can be expected. Try to find ways to improve it further if necessary. If not, it has to be compensated with additional inventory, or customer service has to be compromised.