Walgreen's Billing Error

Walgreen’s Billion Dollar Forecasting Error Forecasting is a preparation tool that helps a company figure out what might happen in the future; and to do so, the company will primarily rely on data from both the past and present to figure out possible trends. Forecasts can be made in short term, medium term or long term. When it comes to forecasting it is important for a company to look at all possible factors including fluctuation of prices and the market, possible declines in the economy, technological errors and so much more. In 2014 the well known pharmaceutical company Walgreens prepared to forecast the companies earning up to the year 2016. However, somewhere during their process an error occurred resulting in the company suffering from a billion dollar cut. “[A company must] evaluate data before plotting the projected numbers on [a] graph. [A company must] eliminate as much irrelevant data as possible and use only the most solid credible data: Don't try to craft a sophisticated model full of
comprehensive data if the information is based purely on guesswork” (Cosper). When Walgreens was forecasting they went two years into the future which could be seen as a long term forecast. However, they should have looked into a shorter term forecast where errors could be caught sooner before any sort of publications or announcements were made. The error mentioned was the company suffering from a billion dollar cut in forecasts. “Walgreen’s CFO estimated $8.5 billion in pharmacy unit earnings for the year ending 2016 at the board meeting in April this year… However, the estimate was lowered by $1.1 billion last month as the company had not factored in an increase in the price of some generic drugs that it sells as part of its annual contracts under Medicare” (Trefis Team). The result of this caused their CFO Wade Miquelon to step down from his position. Walgreens is a large middleman for providing proscription drugs under Medicare. When the company originally made its forecasting plan they did not plan for some of the prices to rise as well as several other factors. “Walgreen directors have told investors they were stunned by the change in the pharmacy forecast, which was for earnings before interest and taxes” (Siconolfi). Investors said, that Walgreen directors announced that forecasts given to directors in April were "inadequate" and that the company's finance and pharmacy units were not "talking to each other" (Siconolfi). Due to a lack of communication, forecasting errors were made which most likely could have been avoided. “The key to best-practice forecasting is transparency.
Decision makers need the right amount of business detail (not a big dump of numeracy) to noodle out the FP&A team’s “what if” scenarios and figure out the best tactical path to revenue growth and profit protection” (Driscoll). A simply way the company could have caught their error would be if they occasionally reviewed and attuned their forecasts to make sure that business costs and opportunities to keep everything on track. In general “Pharmacy chains make long-term contracts with health insurers and others, including firms that operate Medicare Part D drug plans, agreeing to sell a range of drugs for set prices” (Siconolfi). This is what caused the mistaken forecast. Walgreens most likely had some sort of deal created with Medicare to keep prices relatively level. However if communication was scarce, Walgreens could have missed a message saying prices were going to skyrocket past their forecasted
prices. In conclusion, forecasting errors can have a devastating effect on a company causing its leaders to step down, money to be lost, and even its reputation to be diminished. Whatever happened to Walgreens behind the scene to cause such an error has not made much of an appearance to the public, but the audience fallowing the story can likely assume a lack of communication and lack of understanding the forecast is what most likely made such a large error occur. In future situations, Walgreens has a lot of information to look at and correct their errors for better forecasts and a larger profit to be made.