Are you making the most of your Forecasting Data?
Distribution agreements usually contain a forecasting clause. Most commonly this requires the distributor to provide the supplier with a monthly rolling 12 month forecast of which the upcoming quarter is treated as a firm order
This allows production to plan ahead and ensures that the distributor gets the quantities that it needs. Sometimes there are added niceties such as the producer only being obliged to supply quantities in excess of the forecast if they are within say 10% of an overall production quota or maybe a maximum monthly allowance but generally the clauses follow this pattern and are designed primarily for the benefit of the manufacturing department.
The forecasts however can also be valuable to the sales and finance departments. Looking at the forecasts especially where they bear the “teeth” of a deemed order for the most recent period can provide an early warning of whether a distributor is likely to meet agreed sales targets. By comparing the actual sales with the forecasts you can also get an idea of the distributor’s stock management while variations over time in the forecasts compared with the final orders gives you an idea of the reliability of their forecasting and so more generally how that business is being run. An early warning that sales targets may not be met provides an opportunity for the supplier to step in and explore with the distributor if there are any problems and what might be done to address them while there is still time to perhaps turn things around.
With smaller distributors it can be tempting to leave out the forecasting clause on the basis that you will always be able to supply what they need but if you see the forecasts in a broader context as a management tool then their value even in these instances becomes clear and of course having accurate data coming in makes it easier for you to develop your own forecasts.