Session 2: Forecasting and the S&OP Demand Forecasting and Planning in Crisis 30-31 July, Shanghai Joseph Ogrodowczyk, Ph.D

Session 2: Forecasting and the S&OP

Demand Forecasting and

Planning in Crisis

30-31 July, Shanghai

Joseph Ogrodowczyk, Ph.D.

Session 2 Joseph Ogrodowczyk, Ph.D.

Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 2

Forecasting and the S&OP

Session agenda The S&OP process: What is it and how does it relate to

forecasting? Ingredients to a successful forecasting process in the

S&OP A diagnostic model for potential issues in the S&OP

process



Forecasting and the S&OP The S&OP Process

What is it? The Sales and Operations Plan (S&OP) is a business process

implemented by a company to match anticipated demand with anticipated supply

A means for all departments involved in the planning and execution process to discuss, debate, and agree to a common set of goals and objectives

A series of periodic meetings with cross-functional teams set with an objective of creating synchronized demand and supply plans

When implemented correctly, the S&OP process can give the company a holistic view of demand, capacity, product volume and mix, and financial goals



Forecasting and the S&OP The S&OP process

Steps to the process Data gathering

Deciding what historical data to use, how to incorporate new demand/products, understanding the impact of promotional activities, choosing the appropriate external factors

Demand management Using statistical models, inventory, backlog, and actual demand to

produce a realistic approximation for unconstrained demand Supply planning

Using resource requirements and capacity constraints to determine the feasibility of maximizing the profit associated with the estimated unconstrained demand




The S&OP process Steps to the process

Pre-meeting Meeting for discussion of demand and supply plans for the

purpose of finalizing a consensus production plan with associated recommendations for the executive meeting

Executive meeting Final approval from executive committee with a discussion of

alternative scenarios



Supply ChainRough-cut supply plans

Capacity planning reports

Operations PlanUnconstrained baseline forecasts

Initial demand plans

FinanceFinancial plan

Marketing and SalesSales forecasts

S&OP Process

Supply side adjustment elementsPurchasingInventory

TransportationWarehouse

Demand side adjustment elementsProduct marketing

Consumer marketingPricing

OutputsConstrained demand forecast

Adjusted supply planAdjusted financial planAdjusted demand plan



Forecasting and the S&OP S&OP and knowledge creation

Knowledge creation: “transformation of information from customer, exchange partners, and competitors into actionable knowledge” (Mello and Esper 2007, 23)

During the S&OP, information is collected, distributed, and analyzed among all forecasting and planning groups within a company Each group brings potentially unique information to the

process Knowledge creation is accomplished by sharing this

information to develop business strategies, new products, and desirable services




Three levels of learning Individual Group Organizational

Four attributes of learning Intuition: Recognizing patterns Interpretation: Refinement of ideas to make them understandable Integration: Transforming information into action

Changes in consumer tastes are collected by Sales, and a group consensus is achieved on actions to address those changes

Institutionalization: Establishment of routine actions to allow new information to be embedded within the organization




Learning within the S&OP cycle The purpose of the S&OP process is to match potential demand with

known supply constraints By focusing on the four attributes of learning, an organization can

elevate the S&OP from a coordinating business process to a knowledge creating process

Incorporating learning into the S&OP Intuiting: Recognizing patterns

First stage in S&OP is gathering data Individuals can begin to recognize patterns to external data

Interpreting: Refining ideas Second stage in S&OP is the demand management Individuals and the groups bring ideas into a forum for discussion

and interpretation of useful data




Incorporating learning into the S&OP Integration: Transforming information into action

Third step in the S&OP is supply planning Knowledge integration can be utilized during supply planning

when forecasts are translated into operational plans Can result in changes to marketing plans and other operational

activities Institutionalizing: Establishing new business processes to

incorporate updated information Final steps in S&OP are the pre- and executive meetings Formal methods for sharing information and ideas can be created

to support the meetings




Incorporating learning into the S&OP Key to knowledge learning is to incorporate the stages of

learning into the S&OP process Training of employees to identify trends and listen to external data

sources (customers) Encourage employees to share insights Ensure that all ideas are given full consideration in the S&OP

process Publicly recognize employees for ideas that resulted in

measurable process improvement




S&OP process Recommended factors for successful S&OP

Regularly scheduled meetings with supporting agendas All pre-meeting work completed All work is NOT “event driven”

Cross-functional managerial support Team members have authority for decision making Avoid “silo” forecasting

Unbiased baseline forecast Supply chain can provide a statistical forecast for guidance Acceptance of statistical methods may require change in

management methodology




S&OP process Recommended factors for successful S&OP

Metrics for tracking progress Ensure that the S&OP process is achieving the objectives

Supporting technology Used to collect and manage the input forecasts and the output

consensus Software will support a business process addressing “back-

forecasting” (determining revenue/financial goals and calculating the corresponding quantities)

External inputs VMI, POS, Collaborative Planning Forecasting and

Replenishment (CPFR)




Demand management How does S&OP relate to forecasting?

The common goal is a single number forecast that all departments will use in their processes Sales and marketing will use to focus on sales channels Operations will plan production Finance will set revenue and profit goals

Demand management: Business processes designed to produce an unconstrained, information-based, consensus forecast from historical demand and assumptions about future market conditions




Demand management Steps to effective demand management

1. Forecast review, production, and aggregation Reviewing previous forecasts for patterns of large errors Produce forecasts and incorporate lessons from previous error

patterns Calculate the total forecasts as well as the individual member

forecasts Aggregation with respect to time, product, and customer

dimensions Collecting the forecasts by volume and by mix





2. Addition or updating new product forecasts Input from key players – product developers, marketing

promotions May be a “range” forecast with lower and upper bounds Possibility of losing demand for older products Additional resources to support company goals





3. Application of external factors Macroeconomic conditions, economic crises, etc. Sales promotions Anticipated price changes Changes in quantity or quality of customers Inventory levels or POS data Customer or supplier forecasts





4. Financial conversion and reconciliation Convert unit forecast into dollar forecasts

Sales uses average selling price Production and inventory use standard cost Gross profit calculations use average margins

Compare financial forecast to business forecast and clearly document the differences

Compare the mix forecast (lower level forecast for planning purposes) to the volume forecast (higher level forecast for strategic purposes)

5. Submission to supply planning




Demand management Recommendations for success

Upper-level management support Accountability to forecasters Consensus on unit of forecast Translation key for forecast interpretation Combine statistical forecasts with expert knowledge

(marketing, sales) Measurement of forecast accuracy




Forecasting as a diagnostic model Failure to produce satisfactory forecasts can be a signal

that the S&OP process needs improvement Results of poor forecasting indicate a breakdown in the

S&OP process Consistent inaccuracy Inability to respond or slow response to changes in

product/customer mix Ineffective use of measurement tools Omitted forecasts




Forecasting as a diagnostic model Is it better to have a questionable forecast or no forecast? Forecasting audits provide insights into barriers to forecast

process improvement These barriers can indicate where the S&OP process can

improve Managerial intervention may be necessary if the

forecasting process requires major changes



Forecasting and the S&OP Forecasting as a diagnostic model

Common problems and potential issues Absence of vital information (pricing, new customer forecasts)

can be a sign of miscommunication Inability to obtain information may indicate a need for new

systems to collect and distribute relevant information Low accuracy or little improvement in accuracy can indicate

lack of accountability or lack of education among forecasters Lack of functional forms for models may indicate a lack of

understanding of the data, or larger issues revolving around the business forecasting process




References Jain, Chaman L. and Jack Malehorn. 2005. Practical Guide

to Business Forecasting (2nd Ed.). Flushing, New York: Graceway Publishing Inc.

Mello, John and Terry Esper. 2007. S&OP, Forecasting, and the Knowledge-Creating company. Foresight. Summer: 23-27.

Moon, Mark. 2006. Breaking Down Barriers to Forecast Process Improvement. Foresight. June: 26-30.

Documents

Session 2: Forecasting and the S&OP Demand Forecasting and Planning in Crisis 30-31 July, Shanghai Joseph Ogrodowczyk, Ph.D