How often does a salesperson tell you that a customer wants you to stock a certain product? They probably will dictate the number of pieces of the item that should be kept in inventory. You buy the product, place it on the shelf, and forget about it. Twelve months later you discover most, if not all, of the quantity of that product under a pile of dust in your warehouse and wonder if it will ever be sold.
It is common for salespeople or customers to overestimate their predictions of future usage. Some of the reasons:
- If they ask you to stock 100 pieces of a product, they are more confident that you will have the 10 pieces they will actually need.
- If they grossly overestimate what they will buy, they don’t have to put much effort into their forecast
- People tend to spend money when it is not their own. If they ask you to stock a product, they are spending your money. They don’t spend their money, until they actually buy product.
How do you to encourage salespeople and customers to give you a better forecast?
- Insist that salespeople or customers who request that new items be stocked, give you forecasts, by month, of the quantity of the product that will be purchased during the first six months after the product is received.
- Have the customer provide you with a purchase order, or other form of written commitment that they will buy a certain quantity of the product. Explain that as a service, you will monitor their purchases of this “customer specific” inventory.
- At the end of each of the first six months compare the quantity actually purchased by the customer to their forecast. If the purchased quantity is less than 75% of the forecast, report the results back to both the salesperson and the customer and ask why they are not buying what they committed to purchase. Should future forecasts be revised to reflect their actual consumption? We have found that the process of monitoring the accuracy of customer forecasts encourages them to put more thought and effort into their predictions. No one likes to have to explain why they gave you inaccurate predictions. If you don’t report back the results, they may feel that you really don’t pay attention to their forecasts and that they disappear into a “black hole”, never to be considered again.
- Let’s do one more thing to encourage customers to give you a better forecast. Offer them a better price if they provide you with accurate forecasts of what they will buy. For example, they get a discount if they buy a quantity that is within 25% of their estimate. After all, you can stock less and still meet their needs if you have a good idea of what they will buy. Remember that collecting and evaluating information is usually less expensive than buying additional stock!
Next month, we will continue our discussion of additional interventions to encourage salespeople to produce better forecasts.