We are teaching that « forecasts are always wrong »… and this is true! But, some people take the opportunity of this truth to assert that forecasting demand is useless.
For some time, I also hear or read more and more frequently that forecasting is useless because we are now living in a VUCA world (VUCA stands for Volatility, Uncertainty, Complexity, and Ambiguity).
This kind of reasoning is wrong because it misses a key aspect of the forecasting process.
Looking at the sailing boat on the left picture, conditions look cool. Calm seas, sunny and just right windy weather. Weather looks quite predictable in the hours ahead. There is no major issue, just a calm and nice cruise. Thus, each mate can relax and enjoy the sun. Now, if we look at the picture on the right, things look totally differently. It’s also a sailing boat, but this one is a racing yacht. No doubt that this crew is willing to win. Conditions look not so nice. Seas are rough, wind gusts can hit the sheets at any time and waves are also unpredictable. Local conditions are unpredictable in the very-short range and make maneuvers critical and difficult. In such conditions, the crew must be totally focused and, above all, fully synchronized: the slightest mistake during a maneuver could capsize the boat.
Overcoming unpredictable conditions is easier when the crew and the boat are well trained and prepared, and, moreover, when the crew is acting synchronously. Winning a race is at first a question of planning! The crew doesn’t know which conditions it will be facing during a particular stage of the race. But they are trained to act in every condition and, when the time comes, each mate knows what s/he should do in coordination with her/his team mates. Paradoxically, in the case of the boat on the left picture, where conditions are more predictable, the need for coordination is lower, and planning is easier: if weather forecasts are bad, the (wise) decision which is generally taken is not to leave the wharf!
One primary goal of forecasting is obviously to elaborate probabilities about future demand. But it is also the weakest point of forecasting because « forecasts are always wrong! » Also, demand forecasting feeds the planning process (S&OP and MPS levels of the planning system) which consists in taking decisions about demand and supply, and in allocating resources for reaching performance objectives. Planning firstly necessitates to define hypothesis regarding demand to develop plans for having all stakeholders acting consistently and synchronously. Without a formal expression of these hypothesis (a formal and unique set of forecasts), each manager who have to anticipate decisions – for example a purchasing manager negotiating with a supplier, or a production manager setting out a recruitment plan – will consider her/his own hypothesis, and there is little chance that they are consistent. The result could be having hired operators who cannot work due to lack of raw material, or to create useless inventories of raw material that cannot be processed due to lack of operators.
Thus, we need forecasts for planning, more specifically for synchronizing decisions. And, obviously, the closest to reality they are, the better it is.
However, we have to consider the value of striving to reduce forecast errors. In the case of regatta, we do not strive to forecast the strength of gusts or the height of waves with the better accuracy. Rather, we prepare the crew and the boat to overcome likely values with a reasonable margin of error. But the greatest effort is for preparing consistently the boat and the crew (For example, not overloading the boat with sheets that will likely not be used), and, above all, training and practicing for rapid, fluid and synchronized maneuvers.
In the same way, in the VUCA world, striving to reduce forecast errors could be a wasteful effort. Rather, our efforts should be directed towards creating the agility which allows to survive in the VUCA world. But agility isn’t a feature that comes spontaneously when people become aware of its necessity! Creating an agile enterprise firstly requires creating teams embracing a broad range of skills, with multi-cultural open-minded people. In an agile enterprise, processes are agile. Agile processes are lean in that their lead time have been reduced by eliminating wastes. Moreover, managers and teams have got the skills for reconfiguring processes quickly for adapting to changing conditions. Such features cannot arise overnight. It necessitates clear vision of leaders, anticipation, appropriate resources… and time. And when time is required for doing something, planning is necessary. And planning necessitates shared hypothesis about what will happen. In other words, it necessitates forecasting!