Business management must begin with accurate demand forecasting.
Without the use of mathematical methods of accurate and high-precision demand forecasting, it is impossible to provide high-quality solution of managerial tasks for the optimal increase in net profit, positive net cash flow and company value.
Reflections on the need for accurate and high-precision forecasting of demand (production consumption) of consumers for products.
In professional management, there are several axioms. The axiom, as we know, does not require proof, since its truth is obvious, which follows from the age-old experience.
The forecast of consumer demand for the company’s products is a quantitative indicator of consumer needs in the number of products. Does evidence prove the axiom that business management in a competitive market should begin with accurate forecasting of consumer demand for products? For people who are prone to pre-planning their actions and good governance, this is obvious. For people who are prone to perform actions first, and then evaluate their expediency, this is not so. The second group of business executives clearly exists. This, for example, is eloquently shown by a large number of unfinished buildings and facilities throughout the country, investments in the construction of which were made immediately before the onset of the global financial and economic crisis in 2008. The thesis that this is such a special strategy associated with the “freezing” of capital in reinforced concrete and brick, does not hold water and causes a smile.
It turns out that the axiom of the need for accurate forecasting of demand for products still requires proof. For the first group of managers, this evidence will confirm and strengthen their conviction of the need for accurate forecasting of demand and quality management based on knowledge of demand in the style of PDCA (Plan – Execute the plan – Measure deviations of results from goals – Improve activities by), and managers from the second Groups capable of reflecting on their own and others’ experiences may lead to the conclusion that accurate demand forecasting is necessary.
The management function “Demand Prediction (Production Consumption)” is a complex management function. Associated with it is a special course of study at the best business schools that graduate with MBA managers. Demand forecasting is the work with statistical data series on demand and mathematical models of its forecasting. For some managers, this is difficult because of their personal characteristics, which pushes them to replace the “Predict Demand” function with the “Sales Planning” function, which is based on the “I think so” intuitive-heuristic method. As a result, a sales plan for products is assigned based on the desire of managers to increase the amount of net profit, which is usually not enough, that consumers have little interest, as they are focused on meeting their needs in the amount of specific products. When implementing the strategy “There is nothing without sales,” managers forget that along with sales, not only revenues but also expenses grow, and often faster than revenues. So the company comes to the “learning rake”: the more we sell products, the less we earn net profit. Reflection (analysis, understanding) of unsuccessful experience brings insight that in a competitive situation it is necessary to manage not only the growth of income, the optimal reduction or restriction of expenses.
If you, dear reader, say that this is understandable, then how can you explain the management practice that exists in a large number of companies, although I would like to say “in a huge number of companies”, where managers simply do not know any methods of demand forecasting, except for intuitive heuristic types “no worse than in the past period”, “we must grow” or “need more and more” and do not know the significant technologies of optimal cost reduction, except for “I look at the amount of costs and think of what to refuse”.
You should pay attention to the fact that the requirement for sales of products is very often formulated based on the desire to increase the net profit of the enterprise, based on the assumption that the more sales, the greater the net profit. This assumption is generally incorrect, since net profit, being the difference between total income and total expenses of the activity period, also depends on the costs that are generated by an enterprise, as a rule, earlier than the incomes associated with them: first expenses, and then incomes . Therefore, the intuitive heuristic idea of “More Sales – More Net Profit” is more sensible to reformulate into the idea “More Sales: More Costs – There Can Be More Revenue if Lucky”. This means that an increase in sales of products only gives rise to the hope of an increase in net profit, which, as a rule, does not increase, if at the same time as an increase in sales there is no optimal reduction (restriction) of the expenses of the enterprise.