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There's an analogy here
with what happened recently at The Home Depot. Bob Nardelli was deposed
as CEO after four or five years of relentlessly pursuing bottom line
profitability. To do so, he reduced staff in the stores, replaced full
time
sales people with lower cost - and less knowledgeable - part-timers,
and made other moves that degraded the shopping
experience.
He turned what used to be a good place to shop into one that wasn't good at all. Many Home Depot
customers, yours truly included, started going to Lowe's - which is a good place to shop. Nardelli got his profits but, in
doing so, he broke the very processes that made the company successful. My bet is that Home Depot's profitability will start to lag, because
the broken processes will take time and money to repair. And in the meantime, Lowe's gets better and better.
So does this have anything to do with forecast accuracy? Yes it does - a lot. Companies that
focus on forecast accuracy make the same mistake Nardelli did: they focus on the result and not the processes required to achieve the
result.
Okay, so what should they focus on? Answer: forecast error. Now if this sounds like word games
- semantics - I assure it's not, for two reasons.
The first is that
focusing on error moves us one step away from the result - accuracy -
and one step closer to process. Once we start to talk about forecast
error, we can start to think in terms of all those good tools we
learned about
in our Six Sigma or TQM training:
- measures of variability
- upper and lower control limits
- the Five Why's (asking "why" five times to help get to root cause)
and others. We can start
to apply these tools to improve our forecasting processes. Because, you
see,
forecasting is a process: it has inputs, a conversion step, and
outputs. For more on this, click here for a
look at
how we treat this
issue in our
book, Sales Forecasting: A New
Approach.
The second and
equally important, reason not to focus on forecast accuracy: it's
a turn-off
for the people in Sales and Marketing. It pushes them "away from the
forecasting table" and hence positive participation in the process. And
that's not good, because Sales and Marketing folks are the most
important ones in the company when it comes to forecasting. As Bob
Stahl says,
"Focusing on accuracy is attacking; focusing on process is endearing."
Technically, error and accuracy are the same thing, but emotionally they
are very different.
Next month we'll look at this important issue further, and talk about different types of forecast
error. Stay tuned.
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