How Would You Respond if Forecasts Were Unreliable?

Numerous examples exist of management processes built on flawed assumptions. These often lead to misallocation of resources and wasted effort. In pursuit of elusive goals, management can inadvertently tie the organization in knots.

The biggest fallacy along these lines is the notion that management can predict the future through their sales forecasts and strategic plans. And holding onto that fallacy leads to so much unneeded pain and suffering–all of which could be avoided if the organization adopted a more agile approach to how it looks at the future.

Rethinking the Sales Forecast

Anyone in a sales and marketing role understands the effort that goes into trying to predict future sales for the organization accurately. The catch is that these forecasts are rarely accurate. Sure, your sales can be somewhat predictable in some businesses, like government contracting or where you have renewable revenue streams.

The idea behind building an annual sales forecast in a business such as manufacturing is that we want to paint a picture of the future and then act against those plans to make them a reality.

But, in most businesses, these sales forecasts are much less predictable than you might hope.

And when these forecasts are wrong, which they almost always are, big problems result, because now you’ve made decisions and taken actions in an inefficient or even destructive way.

For example, I have worked with a manufacturing company struggling to get the needed parts because of long supplier lead times. That meant it couldn’t get its products to its customers. On the basis of its forecast, the company focused on building up an inventory of finished goods–we’re talking about $20 million-plus worth of products–to be able to ship products to its customers when they needed them.

The problem was its forecast was wrong. It was always wrong. The customers didn’t want or need the products it now had in its warehouses. Worse, it was usually wrong on the highest margin and most profitable products. That’s a tough mistake to rebound from.

Incremental Strategy

Another place predicting the future (badly) shows up all the time is in strategic planning. But, unlike sales forecasts, which might try to predict the future a few months to maybe a year out, strategic plans might extend two, three, or even five years into the future.

Companies then revisit their plans once, maybe twice a year. But the market moves much faster than this. It isn’t long before you recognize that the goals you should be chasing have shifted while you continue to try to execute an outdated plan.

When you finally recognize that these forecasts will be wrong, what have you done to your organization? When it comes time to review how the organization performed against the plan by the end of the year, it again results in massive wastes of time and resources.

The good news is that there’s a better way to think about the future. Start by assuming that your forecast will always be wrong. Rather than making static plans, you must design your organization around agile forecasts that enable the organization to adapt and change rapidly.

Building an Agile Organization

This is where we can take a lesson from Agile software development. The goal of building software this way is to constantly shift and adjust on the basis of what you’re learning. Unlike more traditional forms of building software, Agile developers embrace the idea of “failing fast,” meaning that if something isn’t working, stop doing that thing as soon as you can. Their goal is to use a process that fixes and updates things in real time instead of waiting until the end of the year to see if it worked.

If you again start with the assumption that your forecasts are wrong, then embracing an Agile approach to sales forecasts and strategic planning gives you far more flexibility to adjust to market conditions and what your customers are asking you for than trying to execute an outdated plan.

In our manufacturing company example, it could abandon its outdated strategy in favor of one where the organization is built to deliver more just-in-time responses to its customers rather than stocking up too much on the wrong product mix.

Your goal should be to build processes with short cycle times that allow you to build products and services in days instead of months. In other words, if you assume you can’t predict the future, you must build different organizational capabilities that allow you to act agilely.