Can you name the Seven Deadly Sins?
Give yourself a pat on the back if you can remember at least a few of them. They are: lust, pride, greed, gluttony, envy, anger, and sloth.
The Seven Deadly Sins are reputed to earn you not just a slap on the wrist, but an eternal punishment.
Now, can you name the Seven Deadly Sins of Sales Forecasting? You're probably thinking, "I didn't know there was such a thing."
Fair enough. After all, I did coin the concept myself.
But that doesn't mean it's not real. After decades of firsthand experience, I've discovered that some mistakes can really drag down a sales forecasting process for good.
Over my next few blog posts, I'll look at these deadly sins one by one. Today, let's focus on a mistake that's especially harmful because of how innocent it looks at first glance.
The Perils of Basing Your Forecasts on Shipment Data
Suppose you're building your statistical forecast for next quarter. On what will you base this forecast? All systems use sales history data, but the key is which sales history data?
Far too many organizations don't put enough thought into this. They'll extract whatever sales history data is in their ERP system and go with it. And that's where they run into trouble.
Many ERP systems post shipment history as sales history. In other words, they paint a picture of demand based on when you shipped goods, not based on when those goods were ordered.
An example: your customer places an order for 1,000 widgets to be delivered July 15. You're currently out of stock. You let your customer know you're backordered and won't be able to fill the order until September 3.
Your ERP system records the sale as September demand, along with the sales of several other customers who ordered your widgets in July and received them around Labor Day. Next year when you go to generate a forecast, you see a spike in September demand. So you plan to order more supplies in August.
See the problem? When a flurry of July orders roll in, you'll be forced to tell customers—again—that they can expect their goods to ship in September. You've perpetuated your stock shortage.
That's why using shipment history is the First Deadly Sin of sales forecasting.
A Best Practice for Sales Forecasting
To avoid the First Deadly Sin of sales forecasting, use true customer demand history—not shipment history—to generate your sales forecasts.
What I've described is just one of the Deadly Sins of sales forecasting. To learn about the other six, download our free white paper, "7 Deadly Sins of Sales Forecasting."