5 steps to setting forecasting performance objectives (Part 1)

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It is after Labor Day in the US, meaning we must no longer wear white shoes, skirts, jackets, or trousers. But even if you are now going sans-culotte, it is time to begin thinking about organizational performance objectives for 2015.

Setting forecasting performance objectives is one way for management to shine...or to demonstrate an abysmal lack of understanding of the forecasting problem. Inappropriate performance objectives can provide undue rewards (if they are too easy to achieve), or can serve to demoralize employees and encourage them to cheat (when they are too difficult or impossible). For example:

Suppose you have the peculiar job of forecasting Heads or Tails in the daily toss of a fair coin. While you sometimes get on a hot streak and forecast correctly for a few days in a row, you also hit cold streaks, where you are wrong on several consecutive days. But overall, over the course of a long career, you forecast correctly just about 50% of the time.

If your manager had been satisfied with 40% forecast accuracy, then you would have enjoyed many years of excellent bonuses for doing nothing. Because of the nature of the process -- the tossing of a fair coin -- it took no skill to achieve 50% accuracy. (By one definition, if doing something requires "skill" then you can purposely do poorly at it. Since you could not purposely call the tossing of a fair coin only 40% of the time, performance is not due to skill but to luck. See Michael J. Mauboussin's The Success Equation for more thorough discussion of skill vs. luck.)

If you get a new manager who sets your goal at 60% accuracy, then you either need to find a new job or figure out how to cheat. Because again, by the nature of the process of tossing a fair coin, your long term forecasting performance can be nothing other than 50%. Achieving 60% accuracy is impossible.

So just how do you set appropriate objectives for forecasting? We'll learn the five steps in Part 2.

Reminder: Foresight Practitioner Conference (Oct. 8-9, Columbus, OH)

This year's topic is "From S&OP to Demand-Supply Integration: Collaboration Across the Supply Chain" and features an agenda of experienced practitioners and noted authors. The conference provides a unique vendor-free experience, so you don't have to worry about me (or similar hucksters) being there harassing you from an exhibitor booth.

Register between September 2-9 with code 2014Foresight and receive a $200 discount.

The Foresight and Ohio State University hosts provide an exceptional 1.5 day professional-development opportunity.

See the program and speakers at http://forecasters.org/foresight/sop-2014-conference/.

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About Author

Mike Gilliland

Product Marketing Manager

Michael Gilliland is author of The Business Forecasting Deal (the book), and editor of Business Forecasting: Practical Problems and Solutions. He is a longtime business forecasting practitioner, and currently Product Marketing Manager for SAS Forecasting software. Mike serves on the Board of Directors for the International Institute of Forecasters, and received the 2017 Lifetime Achievement in Business Forecast award from the Institute of Business Forecasting. He initiated The Business Forecasting Deal (the blog) to help expose the seamy underbelly of forecasting practice, and to provide practical solutions to its most vexing problems.

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