New Seasonal Index Lessons from History
Is Your Demand Forecasting Solution Actually Leading to Profits?
A seasonal index, or seasonal multiplier, is a figure that is used to adjust a demand forecast, either raising it or lowering it for a period of time. The result of the calculation (product base forecast x seasonal index) can be used to determine the inventory needed to support sales during that period of time. A holiday like Memorial Day, a season like spring, or an event like the Super Bowl is often better serviced by applying a seasonal index across the year.
The Problem with Seasonality
The problem with Seasonality is that it subject to change and therefore current fiscal year may not align with your seasonal index. Consider the Memorial Day holiday: this year (2016) it will be on May 30, last year (2015) it fell on May 25. In order for the inventory to be ordered correctly, the current year fiscal week seasonal index values must be adjusted.
Seasonal Index Peak Weeks May be Wrong in 2016
Seasonal indexes are often set up into 52 weekly buckets and utilize two or three years of history (the seasonal index formula is: (period sales / total year sales) * number of periods.) But a seasonal index used in 2016 for a holiday like Memorial Day based on a 2015 seasonal index would have the peak sales in a different fiscal week due to the differing dates of the Memorial Day holiday.
Seasonal Sales Can Create Inaccurate Demand Forecast
The demand forecast engine creates a demand forecast based on the data passed into the algorithms. As the Memorial Day holiday occurs at different times each year, the demand forecast will be affected; and if the wrong data is included in the sales history the demand forecast will be too low or too high depending on the timing of the holiday. Moreover when an incorrect base forecast is multiplied by a seasonal index the potential for errors can be significantly higher. The result? Lost sales, missed service goals, lower gross margin, and higher safety stock.
Seasonality Impacts Lead Time
Product lead time, for this discussion, is the time needed from when a purchase order is placed until the goods are available to pick, ship, or sell. Seasonality impacts lead time; and couple poor lead time management with inaccurate demand forecast and you may find that the Memorial Day picnic merchandise is expiring on the shelf before it is sold.
Don’t Fall Victim to History
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