Forecasting 2.0: How to make forecasting a strategic imperative
Prasad Saraph, business partner at Bayer HealthCare, explains why forecasting must reflect an organization’s collective intelligence
Though the worst of the financial crisis may have passed, pharma companies still face high capital costs across the industry, which has intensified the need to trim the fat from working capital.
Forecasting is a key lever to manage this challenge. Forecasting can illuminate where inventories can be reduced and how to free up idle capital locked internally.
It can also clarify how to use this capital judiciously—at the right place at the right time in the right amount.
Moreover, as companies seek to negotiate the volatility of emerging markets, the uncertainties of healthcare reforms, and the changing demands of customers, forecasting should come to the fore as a way to optimize the changing pharma landscape.
“Forecasting the existing portfolio as well as future revenue streams is critical for our industry in the 21st century,” Prasad Saraph, business partner at Bayer HealthCare, told the audience at eyeforpharma’s Pharma Forecasting Excellence Europe conference earlier this year.
“The companies [that] are good at these things will emerge as leaders over the next five to 10 years. The others will struggle.”
Addressing forecasting flaws
To claim this competitive edge, companies need to evolve their forecasting practices.
Responsibility for forecasting today often is divided among various departments—financial, logistical, sales, marketing, a long list.
The result is that forecasts sit in various silos.
“People don’t like to correlate the different types of forecasts together,” Saraph said. “They like to keep them separate.”
This can lead to a lack of integration and gaps in knowledge from one department to the next; contradictory objectives often ensue.
A second problem that can plague forecasting is lack of senior level buy-in.
Oftentimes, Saraph said, “forecasting is treated as a necessary evil rather than as a strategic toolset.”
Even if senior managers convey support to forecasters, they often turn around and push revenue numbers that are contrary to the forecast.
“There’s a huge gap between intent and message,” Saraph said.
When the financial crisis hit, Bayer asked Saraph to overhaul the company’s approach to forecasting.
Two years later, with a new model in place, the company has achieved its targets in terms of inventory reductions and forecasting accuracy improvements.
The forecasting model that Bayer envisioned and executed is built around the idea that forecasting is a strategic imperative.
Forecasting can no longer be passed off on various departments without alignment.
Rather, the new goal is consensus forecasts that represent the collective intelligence of the organization.
In specific countries, finance and logistics managers work in tandem with marketers to provide numbers and share information.
“It is important to have consensus owned by all of the organization in a country for all brands, and that drives one number forward,” said Saraph.
Regarding financial and logistical forecasts, the numbers don’t have to be the same, but organizations need to be aware of the differences, not ignorant to them.
Second, Bayer made forecast quality performance globally relevant.
Third, Bayer ensured that head forecasters are given adequate organizational power and training so that they can challenge other parties and get a consensus on the right number.
The company also prioritized using forecasting tools for straightforward forecasting functions so that human resources could concentrate on non-standard business forecasting.
“We all have these nice forecasting tools,” Saraph said. “Rely on these systems to do most of your normal business and focus your resources on the difficult tasks.”
Finally, Bayer has encouraged active involvement of key customers in the forecasting process and in demand shaping.
Demand shaping does not entail manipulating the demand, Saraph said, rather “educating key customers, wholesalers, and distributors about how to sense demand in markets and then accordingly how to respond.”
A new kind of forecaster
With this new approach to forecasting comes the need for a new type of forecaster.
“It’s the difference between a calculator and an iPad,” Saraph said. “It’s a significantly different role.”
Forecasters have traditionally been veterans of logistics or controlling with little specific training for the forecasting function.
The new forecaster needs to be a business manager with exposure to different facets of running the business, like marketing, sales, strategic planning, supply chain, manufacturing, and regulatory.
“We do expect the person to know what happens in these different and disparate functions,” Saraph said.
“Only then can you be a good forecaster and challenge these opinions from different functions.”
Forecasters don’t need to be whiz kids when it comes to IT, but they do need to be trained in the fundamentals of forecasting—what errors and time spans to use, what trends to rely on, where to find outliers, what ranges to set, etc.
Furthermore, they need to have experience managing peers and interacting with senior-level leaders outside of their direct reporting lines. This enables them to challenge weak forecasting views, to steer managers toward proper numbers, and to keep the department focused on solutions rather than distractions.
“All of us deal with noise in the planning world,” said Saraph.
“This noise comes day in and day out. There is a stock out, the plane landed late, a customer has held up the shipment, and so on.”
Most of this noise is due to short-term, operational hurdles that don’t signify larger problems.
“We should be able to phase them out and only focus on issues that are sustainable and have potential to create long-term problems,” Saraph said.
Finally, forecasters in the 2.0 era must be able to present forecasting updates and conclusions to senior management succinctly and in a manner that elucidates where support is needed and where opportunities lie.
“The last thing that any senior manger wants to see is a detailed Excel chart with SKU numbers and the data for the last 12 months and the next 12 months,” said Saraph. “It’s very easy to get lost in the details.”
Instead, forecasters should highlight those issues where specific decisions must be made.
If an organization is projecting product launch volume and the forecasting and marketing teams have come up with significantly different numbers, you need senior management to make a specific decision about that discrepancy.
“We should be able to present a succinct summary to this person and to highlight those issues where the decision is needed.” (For more on presenting a forecast, see When forecasters take the floor: 6 tips on presenting a forecast.)
That’s the ultimate goal of forecasting in the changed pharma landscape, said Saraph—to highlight critical issues and facilitate specific decisions that strengthen a company. (For more from Prasad Saraph, see Forecasting Europe: The key to competitiveness.)
For an overview of eyeforpharma’s forecasting coverage, see ‘Highlights from eyeforpharma’s Forecasting coverage’.
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