Where Should We Place the Forecasting Function?

No matter where you place the forecasting function, you will have a bias in forecasts unless you create an independent department. Production people tend to over-forecast because it gives them fewer headaches resulting from out of stocks. But if they are evaluated on the basis of inventory, they would prefer under-forecasts.

Salespeople have a tendency to under-forecast where sales quotas are tied to forecasts. Otherwise, they would prefer over-forecasts to make sure products are available when orders arrive. For marketing people, it all depends. If the advertising budget is tied to forecasts, they would prefer over-forecasts. Finance people, in general, are conservative, but their mind-set may change when they report to Wall Street.

Having an independent department is a solution but only large corporations can afford this option. So the question is not how to avoid the bias, but how to minimize it. A good consensus process with a good champion can help to reduce the bias. In that case it may not make that much difference where the forecasting function is placed.

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