How to Avoid Circular Reasoning in Demand Planning and Forecasting

Demand Forecasting

62% of executives rely on their “gut feeling” to make decisions.

The other 38% rely on strict planning methods to help their company achieve its goals.

Where does your company stand? Where do you stand?

There is no evidence to truly say whether one idea is more effective than the other. One is based on facts, and one is based on intuition. In the business world, we always hear that going with the analytics is going to bring about the best results.

Today we are going to talk about demand planning and forecasting and why there is a debate on whether or not this is an effective plan for businesses.

The strategic role demand planning and forecasting play in any organization is often viewed as essential and the best way to look for accuracy and validity. Although this may be the case, it is also looked to as a concern due to the common conception of circular reasoning.

Never heard of this idea? Let’s dive into what demand planning and forecasting are and then discuss the circular reasoning debate!

What is the Demand Planning and Forecasting Method?

Demand planning and forecasting is a supply chain management process that strategizes the stock levels of each product.

Looking at the current demand for a product can tell a company that they need to be increasing their stock, or decreasing their stock due to the current need for the product. There are many factors that determine the demand for the product:

  • Weather
  • Time of Day
  • Geographical Location
  • Need for it Daily
  • Cost of the Service

These are just a few of the factors that are taken into account when looking at this method of planning.

Forecasting is the actual motion of estimated the number you will order. Once you have determined the demand, you will estimate the amount of stock you want to order and have on hand.

Here are a few other questions to consider when deciding on how much stock to forecast:

  • What are the products involved?
  • Where are they currently?
  • What is the current pattern of their demand?

The more information you know before you start the execution, the better your outcome will be.

Circular Reasoning is a Common Problem

Scott Fenwick, director of product management at Manhatten Associates, shared that a good forecast is based on demand, not sales. Meaning that forecasting should look first at the demand for the product, and next at the previous sales for it.

He goes on to say, “stock to true demand (or as close to it as we can get) so the retailer doesn’t miss out on those opportunities lost when the inventory isn’t maintained perfectly”.

But if you are forecasting based on the demand, you are essentially saying that the sales should be at a certain height due to the demand for the product. If you do not have the right amount of inventory and didn’t predict the demand, then you lose sales.

This is why circular reasoning is a common problem with the demand planning and forecasting method. The demand is found, a forecast is made, sales happen, and then the accuracy is looked back at the original demand made.

This is a common problem many companies have when implementing this demand planning and forecasting method.

How to Avoid Circular Reasoning

One of the best ways to avoid the effect of circular reasoning is to remember the basics of demand planning and forecasting. Too often we focus so much on the logistics of the process that we forget to look at what the process is meant to do.

Here are 7 ways that demand planning and forecasting are meant to be used, and how to avoid circular reasoning:

1. Improve Product Forecast Accuracy

How do you accurately forecast for the future of the company? Do you make predictions based on your “gut feeling” like many executives claim to? Or do you research the success of your product in the industry?

Demand planning and forecasting are meant to improve your forecasting accuracy by giving you multiple opportunities to research and report. Looking at the demand of the product is the beginning of the process.

Even if inventory accuracy is not crucial to your company, the planning process can provide insights to help you meet and achieve your goals.

2. Better Supply Chain Scheduling

Avoiding circular reasoning is best done by increasing supply chain scheduling efforts with accurate forecasting. Predicting potential monthly sales allows you to better adjust your employee’s schedules to increase productivity and decrease downtime.

Consumers expect their deliveries within a few days of ordering. That is just the nature of the business. It is crucial that your company understand the importance of forecasting so that they can have the right number of employees staffed.

3. Budgeting Prep

Mastering cash flow is essential for great demand planning and forecasting. Many online services provide you with tools such as to help manage workflows.

Finding the right rhythm for your budget is essential to set a path for the growth of your business.

4. Plan Around Reality

Do not ignore the reality that is your industry. There are times when the product is selling great, and times when it can be tough to stay afloat.

Making rash supply decisions around your long-term goals is not going to reap the benefits that you hope for. Plan around the actual reality.

Circular reasoning can come into play when not taking into consideration the demand for your product. If you order according to a forecast that was not based on the demand, you are going to keep circling around the idea that you need to order less product each month in order to increase the accuracy of your forecast, which is not true.

The sooner you plan for the reality of your business, the better.

5. Ongoing Communication Across Departments

How strong is your connection to the marketing and sales departments? What about the finance and the customer support departments?

Forecasting errors can be made solely by not communicating with the other departments across the company.

Too many companies think that the supply managers know everything about the state of the business when in reality the other departments can give great insights as to what they are seeing.

For example, the customer support team may be receiving a lot of calls about the shampoo bottles they received not being what they thought.

If you, as the supply manager, order 10,000 more because your stock was running low without talking with the customer support team, you will be missing out on this additional information sharing that the shampoo bottles need to be relabeled before we order and ship.

6. Take the Forecasting Software as “Probabilities”

Forecasting software can be a useful tool when analyzing data for potential product shipments. The software can show what has been successful in the past, but do not take the information as fact alone.

There are many departments within your company that also see sales, and their efforts can affect the successfulness of a product during a promotion period.

For example, if there was one month where all of the clearance was put at an additional 50% off, your company may have sold many more bracelets than usual. That does not mean that you should order may more bracelets the next month. Be sure to take the information from your forecasting software as “probabilities” and not “100% accurate data.”

7. Hold Accountability

Accountability for the successes and the mistakes is crucial when trying to master a new process. Holding accountability for those events can be the difference between solving forecasting problems today and two years from now. In the supply chain, confirming that integrations are included in forecasting can be the difference between five errors and 0 errors.

Circular Reasoning in Demand Planning and Forecasting

There can be a lot of circular reasoning in the demand planning and forecasting process. There is a lot of circular reasoning that can be done in many supply chain processes, but that does not mean it should be avoided at all costs.

Remember, sticking to the basics of why demand planning and forecasting is effective can help you to keep your thoughts and ideas centered on the goal of bringing success to the

Interested in hearing more about the various platforms that could increase supply chain success? Learn more about how we can help!

Reader Interactions

Put your accounting on autopilot

Schedule a free consultation today.

Scalefactor dashboard desktop graphic