Bias can cause discrepancies in your demand forecasting, which can have several negative side effects on your business. You want your demand forecasting to be as accurate as possible; this will help your company better plan for periods of different demand levels. This accurate demand planning can help your company save money, as well as gain customer satisfaction. It is clear that bias can be a potentially dangerous thing to a company, but what exactly is it?
What is Bias?
To put it quite simply, forecast bias is what it is called when there are consistent differences between the actual sales that your company experiences, and the forecast that was made for sales. For example, if your company expected a sale amount of $2.3 million, but only made $1.8 million in sales, there was an over-forecast of half a million dollars. If this situation begins repeating itself, there is a bias occurring.
Why Is It Important?
As we mentioned, bias occurs when a company continuously over-or under-forecasts its sales predictions. If a company consistently over-forecasts, the company will not be making as much money as it expected to make. If this goes on long enough, the company may be forced to lay off employees and eventually even go bankrupt! Poor forecasting can be detrimental to the well-being of a company if it is not corrected.
Tips to Improve Forecasting
There are a few things that can be done to help a company improve its forecasting results. Each of these methods can be used individually to help find the bias (or the particular thing that could be causing the over-or under-forecasting), or you can use more than one method.
- Invest in a monitoring tool- This technology can be used to try to detect patterns between your company’s forecasts and the final conclusion. The object is to try and find consistencies between the two to more easily pinpoint a potential bias.
- Measure FVA- And do it regularly! FVA is the Forecast Value add, which is a process that is used to extensively monitor your forecasting process. Each individual step of the forecasting process will be evaluated; those that do not add value to the forecast are discarded.
- Make adjustments- Forecasts are not set in stone once they have been made; it is perfectly acceptable to make changes throughout the entire process. If one of the departments involved in the process notices something needs to be changed, let them change it!
- Run a forecastability analysis- This analysis will help tell you if you are using the best technology and the best forecasting method that is right for your company and for your process. This analysis will also help you discover upcoming trends in the market that may be helpful with future forecasting.
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