6 Seasonal Index Mistakes You Don’t Want to Make
We all know snow shovels aren’t going to sell in the summer, and beach towels will flop in December. Most of us can identify general seasonality and spot a wrong seasonal index by applying simple common sense. But do you frontload your key seasons or reduce orders because your Replenishment System doesn’t quite get the job done? You might be encountering common seasonality issues that cause retailers big headaches. The irony of seasonal index errors is that they are one of the few things where an Excel file can solve the problem; yes, shocking, we all thought Excel was a reporting tool.
The critical point is that a seasonal index is just a multiplier to run against the base forecast. Some software solutions will lose you with a discussion using words like multiplicative and additive. While the debate has merit, these terms only describe seasonality math, not how it needs to be applied in replenishment or even what numbers are required for the seasonal index math. A seasonal index is multiplicative, and a market force is an additive against the base forecast, but I have gotten ahead of myself.
Promotions and clearance:
Lost Sales:
The demand forecast does not include lost sales in the calculation. This omission lowers the seasonal index or moves the sales to different weeks.
Moving holidays:
Your Seasonal Indexes rely on sales occurring in the same week every year. When Easter shifts several weeks from year to year, the index becomes averaged over several years or tries to match last year. Either way, you end up with products coming in too early or too late.
Changing weather patterns:
Snow shovels and ice melt only sell when it starts to snow. If your system relies on last year’s sales, you may miss the early snowstorm or load up for snow that never comes.
Forecast smoothing:
Demand forecasting systems try to smooth forecasts into pretty seasonal curves. Smoothing takes some of the in-season sales and redistributes them to out-of-season weeks. This fact becomes especially troublesome for micro-season items that sell yearly for only a few weeks. You end up with too much on hand out of season and need more on hand during the selling season.
Seasonal indexes applied too broadly:
The same seasonal index is used for multiple locations and products. Unfortunately, this leaves Florida and Wisconsin stores with snow shovels simultaneously.
Snow Shovels in Florida is a Bad Idea:
Fixing even one of these issues could increase your GMROI, lower your average inventory, and make your customers happier. Unfortunately, many demand forecasting systems make correcting these issues difficult. At Data Profits, we can help you fix your seasonal indexes without all the headaches. Our iKIS system has a user-friendly interface, easy-to-read graphs, and customizable forecast alerts for easier demand forecasting. If you are ready to “Tighten the Links in Your Chain™”, contact us today!
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Stuart graduated from Auburn University, with bachelor of science in business administration.
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