Weather Forecasting vs. Demand Forecasting: A Case of Different Expectations

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Meteorologists predict what the weather will be like, whether it be tomorrow or the next few hours. 

Demand forecasters predict what customers will buy and how much, whether it be next week, next month or next year. 

When a weather forecast is wrong, we don’t hold the meteorologist accountable.  We may grumble about the inconvenience caused, but we won’t condemn him or her. 

When a demand forecast is wrong, some executives hold the forecaster accountable.  Some condemn him or her. 

We recognise meteorology as a science.  It uses data like barometric pressure, temperature, and wind speed.  A weather forecast is based on hard data and usually isn’t too far off from what really occurs.  We can excuse the meteorologist if it rains at 7:00am instead of at the predicted hour of 6:00am. 

We don’t recognise demand forecasting as a science.  We see it as a management art mixed with some mathematics using historical data.  If the forecast is off by as much as a margin of 10%, we see it as flawed.  We believe the forecaster could do better even if there is a lack of hard data. 

Weather forecasts for the next 24 hours are more likely to be accurate than predicted conditions in a week from now.    

A demand forecast of how much of an item will be sold tomorrow is no more accurate than for a prediction of how much will be sold on Wednesday next week.  The margin of error of how much customers buy tomorrow versus forecast usually is similar, if not more, than the margin of error next week. 

We pay greater attention to the forecast of a typhoon’s path in the next hour than the forecast for the next day.   We care more what’s the weather going to be like this morning than what will be happening later tomorrow.    

We pay more attention to a demand forecast at the beginning of the month than one towards the end of the month.  We care more for what we think we will sell next month than what we will sell this month, especially if this month is almost over.  We clearly can see what we will be selling this month as it nears its end so we’d find an updated forecast for the current month as not really useful. 

We accept the outcome of the weather, never mind if the forecast was right or not.  We can’t control the weather after all and meteorology looks complicated as it is.

We see demand forecasting more as speculation and something we can influence.  If demand forecasts turn out close to the outcomes we want, we celebrate and praise the forecaster.  If things turn out not what we want, we find faults in the system and in the performance of the forecaster.

Meteorologists push to improve the science of their forecasting by investing in technologies and state-of-the-art equipment such as satellites and sensors. 

Enterprise executives push demand forecasters to be better in their predictions with hardly any investment in science or technology.  The most enterprises will do to improve forecasting is to expand market research and customer surveys. 

We adapt our behaviours and plans to the weather forecast.  We prepare our raincoats and umbrellas if the forecast is rain or we wear lighter clothing if the meteorologist says it’s going to be hot.

We insist demand forecasters revise their numbers and marketers influence customer preferences if we don’t like the sales predictions.  Executives believe the adage, “we don’t predict the future, we make it,” applies to demand forecasting. 

Forecasting is an activity that should as much as possible be based on science and hard data.  But it can never be fully accurate either for weather or for market demand. 

Yet, we treat each differently. 

We see meteorology as a science and though we may be frustrated by its sometimes inaccurate moments, we adapt to what the meteorologists forecast, even if the forecast is for the next 60 minutes than for the next day. 

We see demand forecasting as an approach to be performed with high accuracy and its predictions and outcomes consistent with enterprise goals, especially those pertaining to revenue.  We expect the organisation to change market behaviour and not the other way around.

Forecasting the weather is a science.  Forecasting demand is performance.  We accept and adapt to what the weather forecast is.  We insist that the demand forecast should always be correct and in step with our objectives. 

Forecasting is about predicting what the future will bring.  It can never be 100% right.  Yet, we expect differently depending on what we forecast.  This is because there are things we think we can influence and things we know we can’t. 

We can’t change what the weather will be like tomorrow but we can change what customers will prefer. 

The trouble is we sometimes bark at the wrong tree.  We try to influence the forecaster when we should be trying to influence the market. 

About Overtimers Anonymous

The Four (4) Priorities of Business

San Miguel Corporation (SMC) is the largest business enterprise in the Philippines and is among the top 2,000 global firms listed by Forbes magazine.  SMC’s gross revenue was PhP 384 billion ($USD 7.6 billion approximately) in 2018 earned from its diversified portfolio that includes food & beverage products, real estate properties, and infrastructure & energy investments.

Steering the SMC behemoth is the corporation’s president and chief executive officer, Mr. Ramon Ang, who has been actively overseeing not only the growth of the corporation but also its investments in infrastructure and contributions to rural communities.  Mr. Ang has received accolades for the continuing profitability of SMC but he stands out for his pursuit of high-capital projects such as construction of a new international airport and the building of an elevated expressway passing over the heart of Manila. 

Mr. Ang apparently recognises the challenging responsibilities of running the largest enterprise in the country.  He demonstrates that profit cannot be the sole priority. He recognises the value of SMC’s standing in society while at the same time makes sure the corporation maintains its competitive edge over rivals and continues to grow in the industries it does business in. 

Every business enterprise has four (4) priorities.  These are:

  1. accumulate wealth;
  2. attain & sustain competitive advantage;
  3. establish esteem;
  4. grow in influence.

Accumulate Wealth

The aim of an enterprise is not only to make a profit but to reap cash from that profit and ensure that the amount it earns exceeds the minimum rates of return of investments.  Furthermore, the wealth that’s gained should translate into cumulatively higher net worth in the form of increased cash liquidity and added equity or stakeholders’ value as invested into the enterprise. 

The priority of the enterprise, to put it another way, is to make money and increase it. 

Attain and Sustain Competitive Advantage

A successful enterprise gains competitive advantage and maintains it.  An enterprise would wither if it cannot compete versus its counterparts in the marketplace. 

Michael Porter defines competitive advantage as one’s position and degree of advantage possessed by an organisation over its competition.[1]

According to Porter, an enterprise gains competitive advantage via either of the following strategies:

  • Cost Leadership
  • Differentiation
  • Focus

Enterprises that position their products or service as the lowest cost in the market are applying the Cost Leadership strategy. 

An enterprise adopts a strategy of Differentiation when it positions its products or services as superior in quality or utility versus others in the market.

Firms that target a certain group or niche of society are using a strategy of Focus.  When firms use a Focus strategy, they either offer products at the lowest cost for that particular group or niche or they advertise superiority but to a specific audience.  In other words, firms apply either the generic Cost Leadership strategy or a Differentiation strategy but for only a specific target market.

An enterprise can only adopt one strategy though large conglomerates may apply an exclusive strategy for each of its business divisions.

Porter’s Generic Competitive Strategies1

Esteem & Reputation

Enterprises have learned that public perception has bearing on how their products and services will perform in the marketplace. 

How a firm presents itself in public has become a management requisite.  When it comes to esteem and reputation, managers are bound to address the following:

  • Corporate Citizenship
  • Community Relations
  • Communications
  • Environmental Stewardship
  • Global Citizenship

Corporate Citizenship refers to a firm’s compliance to laws and regulations.  These include paying the right taxes, cooperating with regulators and government agencies, providing transparent information on finances and operations, and following the spirit and letter of the law in all manners of conduct. 

Community Relations is the enterprise’s outreach to its neighbours and to charitable institutions.  Enterprises receive and provide feedback from and to community leaders and with private associations especially those directly affected by the enterprise’s operations (e.g.  factories and distribution centres).  Enterprises also proactively donate time and resources for those less fortunate.  The purpose of all of these is to establish cordial and synergistic ties with communities the enterprises co-exist with. 

Communications take the form of public bulletins via media as in printed (newspapers), broadcast (television & radio), and social (internet networks). Communications may either be external or internal.  Either the audience is the outside world (the external) or for the benefit of employees and their families (the internal).  The purpose of communications would be to present an enterprise’s positive agenda whether it be clarifying a stand on controversial issues, or the quick dissemination of information on product issues (e.g. details on product recalls, clarifications versus rumours). 

Environmental Management has has to do with the enterprise’s initiatives in regard to environmental protection.  It is more than just compliance to existing laws.  Enterprises are expected to show effort in appeasing the ever growing movement to protect the planet Earth and its resources.  These include the participation in programs such as waste recycling, energy conservation, anti-pollution projects, and in public activities such as tree-planting, placing of artificial coral reefs, and hearings on environmental impact studies. 

Global Citizenship goes one step further especially for enterprises that are involved with suppliers and/or customers in different countries and territories.  Whether the involvement is foreign-based operations, partnerships or joint ventures, or sourcing of materials and labour, enterprises are expected to exercise compliance with domestic and international laws and treaties.  They are also expected to respect cultural and economic differences and proactively reach out to local communities they co-exist with.  It is complicated and comprehensive work but it helps the enterprise attain a reputation of admiration on a global level.       

Influence & Growth

Despite the pressures to deliver results in the short-term, enterprises have to plan for long-term sustainability and growth.  They also realize growth isn’t just about numbers in the balance sheet; it is about expanding their sphere of influence in the markets they compete in.

Enterprises need to have strong influence not only with their customers but also with their stakeholders, their suppliers, their employees, and with the communities they work with.  Having influence assures lasting stability and sustenance.  Successful enterprises therefore always plan for the long-term even as they may have to deal with the demands in the short-term.

Typical approaches for long-term influence and growth are business leadership, and vertical and horizontal integration.  Business leadership includes dominating markets with superior products and services. Vertical integration means gaining influence over suppliers on the upstream and customers or distribution channels on the downstream.  Horizontal integration means widening influence with firms with similar industries or expanding one’s business to new markets.  This often means mergers and acquisitions of other enterprises to gain greater market share and capital.

The four (4) priorities apply to all enterprises.  A start-up business may perhaps work more on wealth while a global manufacturing firm may busy itself boosting its reputation.  The level of importance an enterprise gives may not be evenly spread among the four (4) priorities.  Despite whatever emphasis given to each of its priorities, the enterprise should not lose focus altogether on all, lest it risks the potential downsides.      

The four (4) priorities and the level of focus an enterprise places on each sets the foundation for an overall direction that inspires the subsequent strategies in operations, organisation, marketing, and finance. 

About Overtimers Anonymous

[1] Michael E. Porter, Competitive Strategy,  (New York, N.Y. : The Free Press, 1980), p. 35