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24 FEDA News & Views A few years ago, I was advising a major company in restructuring its supply chain and customer relations. I visited one of the company's most important suppliers. This supplier was very well run, with a well-regarded sales and operations planning process. In the course of our frank and confi dential discussion, a senior VP of the supplier leaned over and said to me, "We always forecast their forecasts." The supplier executive was referring to the diffi culty of forecasting sales. In fact, my client was quite well run, and had state-of-the-art forecasting and replenishment systems. Nevertheless, the forecasts were often inaccurate and the supplier simply formed its own judg- ment about the customer's upcoming purchases. Why is forecasting so diffi cult in so many companies? I thought about this question as I prepared for an inter- view with a writer penning an article on forecasting branch sales and expenses. Traditional Approaches The traditional approach to forecast- ing is to analyze historical trends, and project them into the future, often by product or product line. Of course, this assumes that the future is like the past. It also implicitly assumes that the compa- ny does not have the ability to dramati- cally change sales. In a rapidly changing world, this approach leaves much to be desired. A second approach is to correlate sales with a broad economic or industry indicator, such as an industry purchasing or inventory index. The diffi culty here is that even if you understand the correla- tion and relevant time lags, you still have to forecast the indicator. Here's a third traditional approach. In many companies, the sales forecast is a compilation of each sales rep's indi- vidual forecasts. How does a sales rep forecast sales? For a start, each rep has a sales quota for the upcoming year, and it's always larger than the previ- ous year's—even in a declining economy. Think about this: Have you ever seen a sales rep forecast sales below his or her quota? Where They Fall Short The underlying problem with the fi rst two traditional forecasting approaches is that they are too aggregated and pas- sive to be consistently accurate. In fact, a company's overall sales is a blend of a set of identifi able revenue streams—diffi cult to forecast in aggregate but individually much more amenable to accurate pre- diction. Importantly, you need a different predictive technique for each major rev- enue stream. These can be summed into a very precise forecast. The problem with the third approach, of course, is that not all sales reps meet their quota—often leading management to develop a "secret forecast" using the fi rst two approaches. This is a real prob- lem in a declining economy. A Precise Approach The starting point for precision fore- casting is to disaggregate a company's revenues into a set of major revenue streams, each of which has similar char- acteristics. Here's an old Byrnes family recipe. Divide your company's accounts into core and non-core categories. Core accounts are major accounts where you have a strong relationship and ongoing sales, where you are a dominant suppli- er. Non-core accounts are lower-volume accounts that either purchase steadily or occasionally. Core products are products that have high aggregate sales volumes, while non-core products are slower movers. You can dis- play this cat- egorization in a simple 2 x 2 matrix, like the one here. Core Products in Core Accounts This is a critical part of your business. It represents your most important, high- volume products and your most impor- tant customers. Note that there will be a relatively small number of products and customers in this category. Here, there are two key elements to a good fore- cast. First, it is critical to have ongoing intensive discussions and collaboration with these customers, especially with the customer's sales and marketing team so that you develop a deep understand- ing of the factors that are driving their sales and purchases of your products. Often, you will have as much knowledge as the customer has, and surprisingly Have you ever had an experience at a meeting that you will never for- get? Here's one of mine. Shifting the Focus Want to Penetrate More Accounts and Increase Sales Performance? Try Precision Forecasting, says Byrnes By Jonathan Byrnes, Author of Islands of Profi t in a Sea of Red Ink