Let’s Talk About Forecasting
For the past three years at Qdigitizing.com week three has been the slowest week for order volume for the entire year. We have to see how the rest of the year plays out but week three 2012 is already slower than weeks one and two. And if the trend continues next week will be busier than last. Based on this information it is also safe for me to make an educated guess that next year week three will also be slow. Will it be the slowest week of the year? Maybe, Maybe not; but I am confident it will be slow. Planning for that and why it is important from a production standpoint is a matter of forecasting which is what this blog is about.
The most important thing to understand about forecasting is that any single event does not begin or end a trend. Even a major catastrophe will only be the epicenter of an event, not the totality of the event. You can look to any event, for example: the fiscal crisis of September, 2008 in USA. While it might seem like the financial world collapsed in a matter of a week in reality it had been building for a very long time and a catalyst tipped the scales. There is always a buildup to any event. For that reason it is important to pay attention to long term empirical data and make your plans and decisions based on that analysis. Avoid making snap decisions in reaction to peaks or valleys in your key metrics. You are in it for the long haul. Not everyone crashed in September, 2008 and even in the excruciatingly tough economy that has followed many businesses have managed to thrive.
For instance, it would be unwise for me to make long term staffing decisions based on last week’s order volume. A careful review of more comprehensive records indicates order volume will remain slow for a few more weeks and start to ramp up as we enter spring. For this reason now might be a good time to offer vacation time to key team members or take advantage of a less hectic pace to provide additional trainning for staff.
Accurate forecasting is like having a crystal ball to peer in to the future. I can tell you with reasonable confidence what the busiest period of the year will be at Qdigitizing. You should be able to do the same for your business and it should not be a guess. You should be able to back your intuition with facts. The most important reason is the ability to plan for having the right amount of staff available to handle the business volume at any given time.
Order Volume (velocity) forecasting is far more difficult for a new business than an established business because you have no history on which to base your numbers. To that end all you can do is “capacity plan” to your staff and equipment level and do all you can to maximize your marketing efforts allowing you to fill those machines. For example, if you own one 6 head embroidery machine and your staff consists of you and two employees you need to figure out how many embroidered units you can (realistically) get out the door in a week and plan accordingly. If you aren’t filling the machines step up your marketing. Do not reduce your marketing efforts to save money. That is cutting off your nose to spite your face.
For established business (3 years or more of accurate records to order volume) it is relatively easy to forecasts for a coming year assuming you set realistic sales growth goals. Let’s say for the past three years your shop has embroidered the following number of units during week three of your fiscal year:
2009 = 1,100 units
2010 = 1,210 units
2011 = 1,331 units
A close examination will show you this is 10% year over year growth. Unless there is an outside factor telling you something different it is safe to assume in 2012 your week three unit count will be in the range of 1,464 units. A simple spread sheet can extend this formula for an entire year (or longer) and will lend more credibility to the numbers. This example is meant only as a very specific (and simple) snapshot for one period of time.
However, what you do with the information forecasting provides you is an entirely different conversation. In our simple example the year over year growth might not be critically important (from a production standpoint) but the long term growth between 2008 and 2012 is. If you have not planned accordingly you will not be able to handle a 40% increase in order volume. In this example if you changed nothing in your operation from 2008 to 2012 I can assure you your shop will not be running efficiently.
Business owners or managers who do not understand forecasting are slaves to intuition. Some might argue forecasting is nothing more than “fancy” intuition. I understand why someone might make that argument. I would counter with the simple fact that all companies generating significant revenue forecast their sales so they can effectively plan for sustained growth. That is the reason for forecasting.
While this is a simplified and brief exposure to forecasting it is my hope it will whet your appetite to look more closely at forecasting models for your business. As a consultant I have been in hundreds of embroidery shops over the years and I am always astonished when a production manager cannot show me their order velocity for any given period of time. If you have employees labor is your single most important controllable expense. As a manager the most powerful tool at your fingertips is vigilant forecasting based on accurate, historical data combined with a careful review of the current business climate and your organizations marketing efforts.
Next month I will outline how you can best determine your embroidery shops (or screen printing) production capacity based on your equipment Utilization. Utilization combined with forecasting will allow you to accurately plan the most efficient use of your staff and potentially save you organization thousands of dollars over the course of a year.
This topic is of special interest to me. If anyone would like to have a more in-depth discussion please do not hesitate to contact me of list by dropping me a message at steve.freeman@qdigitizing.com
I look forward to hearing from all of you soon…thanks for participating.
Steve Freeman
Qdigitizing.com