The Forecasting category examines your ability to forecast demand, build adequate inventories to satisfy demand, and yet not accumulate excessive inventory. Each product contributes towards Forecasting points.

For a product to earn points, it cannot be out of stock on December 31, and it cannot have more than 120 days of inventory in the warehouse. For example, suppose a product sold 365 thousand units this year. It would earn its points if it had at least 1 unit in the warehouse on December 31st and did not have more than 120 thousand units.

To take the pressure off of new products, a product must start the year with a plant and begin making sales on January 1. Products that are in R&D at the beginning of the year are ignored.

Further, if a product's plant is running at maximum utilization (a complete second shift), stock outs are ignored because you could not make any more inventory in that year. Of course, the team should address the problem, but situations arise where a company faces an unexpected industry-wide capacity shortage. For example, a competitor exits a segment, or downsizes a plant. If the company recognized the problem in their forecast, they would run their plant at 200% utilization this year and add sufficient capacity to meet a forecast for next year. In short, you do not want to stock out, and you do not want to carry too much inventory. Recall the discussion from the Working Capital category. You can think of inventory as crystallized Cash. If you sell the Inventory, it is converted back to Cash. If demand is below expectations, Cash is converted to Inventory. Since you cannot predict what competitors will do, you cannot predict demand perfectly. Therefore, your Cash plus Inventory is a hedge against two risks — the risk of stocking out, and the risk of building too much inventory. Stock outs are expensive. Carrying excess inventory is expensive. Consider the following situation. You want to forecast sales for Able. As it turns out, demand is 1200. Case 1 underestimates by 200 thousand. Case 2 has only 1 unit left over. Case 3 has 120 days of inventory left over. In all cases unit cost are the same, and the contribution margin is $10.06 per unit.