Sunday, August 31, 2014
Are Forecasting Models taking into account variability in Consumer Demand?
Attributed to global competition, demand is no longer certain in any business. Over the years forecasting has gained tremendous role in supply chain management. Managers are increasingly looking at forecasting models to reduce costs. Despite advancements in the field of technology, machine learning and predictive modelling most of the organizations do a relative poor job in incorporating uncertainty in their production and sales forecasting process. Abercrombie and Fitch was a victim of this error. Like several others, the analysts failed to incorporate uncertainty in demand while forecasting their sales model.
Over the past four quarters, sales have declined by an average of 9% every year. The decline in sales is responsible for the decrease in the company’s stock price too. In the second quarter the stock’s declined by 6%, worse than what the analysts were fearing. The analyst’s prediction were off by 0.6% and the same store sales declined by 10%.
Abercrombie and Fitch once the most famous brand among teenagers is now struggling to stay in the market. Teens who once sought out for brand names and logos are now moving towards their more individualized styles. This is one of the major changes and has undermined Abercrombie’s pricing power and hurt its sales. Could this be avoided had Abercrombie and Fitch taken into account the change in consumer demand will forecasting their sales? Abercrombie is having a hard time keeping up with their competitors such as H & M, Forvever21 and Aeropostale etc. who are selling similar items at lower prices. A dress on average costs 58$ at Abercrombie and Fitch whereas a similar dress sells at 15$ at H & M. Abercrombie is trying to speed up its supply chains to keep up with the latest trends. Due to increased proliferation of smartphones and tablets, the ease of shopping on the internet has increased and consumers are visiting store less frequently. This is a concern for major retailers including the already struggling Abercrombie. This is impacting sales at Abercrombie, which earns close to 80% of its revenues from store sales.
A precise and efficiently laid out growth demand forecasting system is the key to keeping one’s business afloat in times of massive fluctuations in market demand for products. The ability to identify market trends that may lead to changes in future demand is a fantastic asset to help businesses avoid any wasteful sales commitments. Keeping a close eye on the trends and hiring experts who can accurately forecast demand is the key to long term success.
This raises a question, are companies relying too heavily on forecasting techniques and failing to incorporate changing consumer demands in the forecasting model?