Tom’s Note:

I had a chat with Mike Reilly, president of EWC Controls, and we talked about what he does regarding forecasting. I wanted one manufacturer and one wholesaler (see the interview with Jeff Corken) to give me a “from the ground view” of how they forecast. I suspect most of us do it somewhat similarly, but it’s helpful to confirm that what you’re doing is sensible or considering an adaptation from your current approach to something new.

Tom Perić: Mike, three quick questions. Do you forecast, is that the word you use, and when do you start the process?

Mike Reilly: We use the word forecast, and yes, we do forecast and we continuously forecast.

Tom Perić: Really?

Mike Reilly: We do. We used to start looking at it on a yearly basis and we found out that six to eight months into it, you’re kind of revising it and you’re going back, and what you originally thought [would occur] wasn’t actually what was going to happen.

Tom Perić: What is different now?

Mike Reilly: We still do the yearly forecast for the big picture, but we go at it on a monthly basis. We take our annual forecast that we’re predicting and then we go over it every month throughout the year.

Tom Perić: OK.

Mike Reilly: What we’re looking for is to make sure that we are following the same trend lines that we’ve always followed.

Tom Perić: What is the tradition?

Mike Reilly: A lot of our forecasting is based off of historical data, and that’s what we’re using to ensure that we’re following the traditional trend lines that our company and our zoning industry have followed over the last several years.

Tom Perić: All right. You and I are talking on Oct. 22. When do you have the first formal meeting for 2016, or have you had it already?

Mike Reilly: We have not had 2016 [forecasting meeting] yet. We normally try and do it the week before Thanksgiving.

Tom Perić: It’s planned? 

Mike Reilly: Everybody knows that’s our time to do a yearly forecast. ... It’s not just yearly. We always plug in a three-year plan also.

Tom Perić: Really?

Mike Reilly: Yes. What I do and how I gather some information leading up to that is that I’ll survey all of my reps, my factory guys that are out there, and ask, “Hey guys, what are you hearing regionally? What’s going on?” They’ll give me some input. “It sounds good.” My guy in Texas  may say, “Austin’s going to continue to go strong. Everyone’s talking about a good economy. Nothing in the foreseeable future that’s going to change that.” My guy in Florida may say, “Hey, you know what? We may see a little bit of a lull. Housing may start to slow down a little bit.” I try and get some regional data out there so that we can put out a larger trend line together and see what we may be predicting three years out.

There are a few reasons we’re doing that, mostly based on employees and staffing, what do we need to think about going forward ? Also, what about the physical space that we’re in right now? The size of our building, the size of our machinery, the capacity of our machinery. What do we need to keep an eye on two, three years out? Do we need more? Do we need less? Are we good where we are? That applies to the employees the same way. What we’re gauging then is do we have  enough manpower currently with us to meet a perceived increase, or do we actually have to think about decreasing the employees if there was a significant downturn looming?  We don’t like to think like that, but we have to be realistic and be ready to react accordingly.

Tom Perić: What do you actually forecast for? Are you forecasting, in your case, the amount of production that you’re going to have to meet anticipated needs, I guess?

Mike Reilly: What we’re doing is we’re forecasting for inventory control, inventory planning.

Tom Perić: OK.

Mike Reilly: That’s one way we’re looking at it, for materials. We’re also looking at it and forecasting for cash flow needs. If we see spikes coming up or if we see a trend line where a spike’s going to be, we know that that’s going to impact cash flow.

Tom Perić: To prepare?

Mike Reilly: We need to know that and we want to know it beforehand so that we can make some adjustments if need be.

Tom Perić: You mentioned talking to your reps and I guess the factory floor, but the core team, who’s the core? I presume it’s the management team, but who is it actually. ... Is it just you? Who’s involved in that process?

Mike Reilly: There’s actually six of us that are considered our core team. Myself. We have a plant manager who runs the plant and runs the production.  We have an engineering manager.  We have a procurement manager, a quality control manager and our chief financial officer.

Tom Perić: A real team?

Mike Reilly: Yes. The six of us sit down and we go through the data, like I said, on a monthly basis.  The yearly meeting, the one we’ll predict for a year and three years out, could take up to two or three hours  just to kind of hash it all out and get all of our thoughts and ideas on the table. Our monthly meetings are usually 20 minutes to 30 minutes just to make sure we’re on the trend line that we all predicted and to see what if any changes need to be made.

Tom Perić: So your initial annual meeting for the forecast is two or three hours, maybe a little more, and then within 30 minutes each month to gauge where you are, correct?

Mike Reilly: Yep.

Tom Perić: Have you ever been wrong?

Mike Reilly: Always. When I first started here, going back 10, 12 years ago, we used to do just the one-year forecasting. Then we’d take a look at it the following year and say, “Wow, we were off there.”  That’s why we implemented going into a monthly forecasting meeting.  It’s kind of like a follow-up to make adjustments, to see any anomalies that pop up where we were wrong. Forecasting … I don’t think anybody can tell you that they’ve been 100 percent right every time,  when they’ve forecasted something. If they are, I’d like to meet that guy, because there’s a lot that he can teach me and teach all of us in the industry.

Tom Perić: I’m sure.

Mike Reilly: Forecasting … it’s kind of like a crystal ball.

Tom Perić: It sounds to me like it’s a fairly complicated process. Do you use special software? Do you use an Excel spreadsheet? Do you have someone come in who’s given you a program for the forecasting?

Mike Reilly: No, we do not have anyone come in. We do have a software program that we use. It’s pretty simple to use once you get used to it and you’ve got the numbers and the data you want to put into it. It will give you some very good information, good data, and it’s easy to work with. It’s easy to make adjustments on the fly. If you are wrong, [you can] go in and change it. It will calculate out ... again, this is more for cash flow for me personally. The way I look at it, if you’re wrong in your forecast and you’re forecasting for a 12-month period and you’re wrong in the first month or two, what’s that going to do six, eight, nine months out? It’s just going to be a rolling ball that’s going to compound your problem. It’s just going to be building up steam, and who knows how wrong you’re going to be? When we see that our trend or our data is incorrect, we can adjust it outwards and make tweaks to six, eight months out so that we can see what those minor changes [are].

Tom Perić: If you’re looking at different suppliers, even different wholesalers in this whole HVAC market, in the segment that you’re in, is there any particular element of information that you find is critical for you to make up more accurate forecasts?

Mike Reilly: Yes, absolutely. That’s why I check with our regional managers and our regional sales guys, because if there is, let’s say a large home builder who’s  done a large project this year, and EWC got that business,  ... We’ll know going into  next year, that project is done and over with, we’re not going to have those sales and we’ll have to adjust for that information.

Tom Perić: Good point.

Mike Reilly: If I don’t know that from a local standpoint of view, whether it’s from one of our wholesalers or our reps in that area, it would make our forecasting accuracy pretty unreliable.  If I’ve got that historical data but I don’t make the adjustment knowing, “Oh my god, that project is done, I’m not going to have those sales.” Then I’ve got to find another project or I’ve got to scale back. That local information coming from within our small little industry of zoning, if I don’t know that or don’t get that local feedback, then yeah, my data could be way off.

Tom Perić: OK.  Does HARDI play any role in helping you forecast?

Mike Reilly: We don’t use the HARDI modeling. We’ve been able to use other industry trends and data  over the years. I know HARDI’s been picking up with Alan Beaulieu, and he does a great job. I find his information very informative, but we’ve been using our existing software a lot longer, so we’ve kind of stuck with it. The information that they’re [HARDI] giving and providing is definitely helpful and worth taking a look at.

Tom Perić: What do you wish you had with regard to forecasting right now that you don’t have or don’t get?

Mike Reilly: The biggest thing, the biggest part of the crystal ball, so to speak, is really what are the economic indicators of where the economy is going. What is the consumer confidence level and how does that impact our industry?  What are the big guys talking about [regarding] the economy? That’s something that we’re always kind of searching for and seeing who’s got the best information. Alan [Beaulieu] is a great source for going two, three, five years out. At all of the annual meetings, he always puts up his chart as to where he’s going to see a dip in the economy or a spike in the economy. That type of data, if you can get that easier and more readily available, is probably the one thing that we’re always searching for. It’s not always as easy to get that information. That would be the one thing that I wish there was one button you could push and boom, here’s four or five guys, economists that are showing their prediction for three, four, five years out.

Tom Perić: To give readers a scale, how do you describe the size of your company?

Mike Reilly: Currently we have more than 60 employees.

Tom Perić: Thanks, Mike. I appreciate your time.

Mike Reilly: Hey, Tom, any time you’re in the area, always stop by or give me a call. I’ll certainly give you a tour.

Mike Reilly is the president of Englishtown, N.J.-based EWC Controls. Contact him at 732-446-3110, mreilly@ewccontrols.com or visit www.ewccontrols.com.