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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 3
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 4
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 5
Forecasting and the S&OP
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 6
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 7
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 8
Forecasting and the S&OP S&OP and knowledge creation
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 9
Forecasting and the S&OP S&OP and knowledge creation
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 10
Forecasting and the S&OP S&OP and knowledge creation
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 11
Forecasting and the S&OP S&OP and knowledge creation
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 12
Forecasting and the S&OP
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 13
Forecasting and the S&OP
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)
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 14
Forecasting and the S&OP
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 15
Forecasting and the S&OP
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 16
Forecasting and the S&OP
Demand management Steps to effective demand management
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 17
Forecasting and the S&OP
Demand management Steps to effective demand management
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 18
Forecasting and the S&OP
Demand management Steps to effective demand management
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 19
Forecasting and the S&OP
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 20
Forecasting and the S&OP
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 21
Forecasting and the S&OP
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 22
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
Session 2 Joseph Ogrodowczyk, Ph.D.
Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 23
Forecasting and the S&OP
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.