Whether you’re stocking your shelves or updating your business plan, understanding what lies ahead is an important part of running a healthy manufacturing business. Forecasting key business factors, such as sales demand, receivables, payables and working capital, can help manufacturers reduce excess inventory and other overhead, offer competitive prices, and keep their companies on solid financial footing.
While no forecast is guaranteed, using the right method goes a long way toward getting meaningful results. To help you determine the right forecasting methods for your business, ask yourself these five questions.
1. How far into the future do you plan to forecast? Forecasting is generally more accurate in the short term — the longer the time period, the more likely it is that customer demand or market trends will change. While quantitative methods, which rely on historical data, are typically the most accurate forecasting methods, they don’t work well for long-term predictions. If you’re planning to forecast over several years, try qualitative forecasting methods, which rely on expert opinions instead of company-specific data.
2. How steady is your demand? Weather, sales promotions and other factors can cause manufacturers’ sales to fluctuate. For example, if you make box fans, chances are good your sales dip in the winter. If demand for your products varies, consider forecasting with a quantitative method, such as time-series decomposition, which examines historical data and allows you to adjust for market trends, seasonal trends and business cycles. You also may want to adopt forecasting software, which allows you to plug other variables into the equation, such as individual customers’ short-term buying plans.
3. How much data do you have? Quantitative forecasting techniques require varying amounts of historical information. For instance, you’ll need about three years of data to use exponential smoothing, a simple yet fairly accurate method that compares historical averages with current demand. If you want to forecast for something you don’t have data for, such as a new product, you’ll either need to use qualitative forecasting or base your forecast on historical data for a similar product in your arsenal.
4. How do you fill your orders? If you manufacture your products to stock instead of producing them as customers order them, forecasting is particularly critical for establishing accurate inventory levels and improving cash flow. For peak accuracy, take the average of multiple forecasting methods. To optimize inventory levels, consider forecasting demand by individual products as well as at the local warehouse level, which will help you ensure speedy delivery.
5. How many types of products do you sell? If you’re forecasting demand for a wide variety of products, consider a relatively simple technique, such as exponential smoothing. If you offer only one or two key products, it’s probably worth your time and effort to perform a more complex, time-consuming forecast for each one, such as a statistical regression.
Plan to succeed
You may not have a crystal ball, but using the right forecasting techniques will help you gaze into your company’s future with much more accuracy. Your financial advisor can help you establish the forecasting practices that make sense for your business.