Demand Forecasting
Constrained vs Unconstrained Demand and S&OP
Through the S&OP process, the organization sets a projected business level that balances expected sales and production capabilities with financial and inventory implications. The constrained demand plan reflects a demand plan aligned with the supply plan.
Do we need both?
Many companies find it useful to distinguish and track the gap between unconstrained and constrained demand plans. An increasing gap may indicate lost opportunity to realize sales that exceed current capacity. Companies should scrutinize unconstrained demand signals to verify demand is real versus “pie-in-the-sky”. Long term capital improvements aimed at increasing capacity need to be aligned with realistic projections of future demand.
Finally, the constrained demand plan feeds a consensus plan to which the organization agrees to execute. Our Sales and Operations VPs need to stop fighting and starting aligning. S&OP facilitates this necessary collaboration.
Reduce Surprises. Reduce Inventory. Improve Operational Efficiency. Increase Sales.
Sphere: Related ContentSales and Operations Planning, Collaborative Demand Planning Depends on Bottom-up, Top-down and Statistical Forecasting
An effective S&OP program depends on solid, accurate demand forecasts. Best practice companies do three things well: statistical, top-down and bottom-up forecasting. Many companies are doing one or two of these, but few are doing all three well. Of course, some companies do none. Let’s just say these companies have a huge upside improvement potential.
A statistically generated forecast should use a “best fit” approach to select the mathematical algorithm that minimizes error (such as mean absolute percentage error (MAPE)). The statistical engine should select the best algorithm for each time-phased data series or set of regression data. The resulting forecast should serve as a starting point for bottom-up and top-down forecasts.
Bottom-up forecasts are accumulated from many contributors. A distributed sales force may have hundreds or thousands of contributors. Each contributor has a specific area of expertise such as a specific customer, product or geographic area. The contributor enters her forecasts for her specific area of responsibility. Forecasts from all contributors are summed to capture an overall bottom-up forecast.
Conversely, a top-down approach applies a more centralized view. A small number of forecasters will look at various inputs and generate forecasts. Influencing factors may include market data, economic indicators, and general product and customer trends. Here, too, the statistically generated forecast is a good number from which to start.
The beauty of top-down and bottom-up forecasts is their ability to look at the world from differing vantage points. The folks in the “ivory tower” know important information, but they don’t know everything. The folks in the field have keen insights into their unique areas, but they only see their small piece. The challenge is to capture the small pieces without tainting the field forecaster’s view. In other words, don’t tell the field forecasters the top-down targets. When field forecasters are told what their forecasts are expected to be, they tend to send back values right in line with the top-down values. Such tainted bottom-up forecasts miss the point of gathering field intelligence.
An effective marriage will capture top-down and bottom-up forecasts separately. A management by exception S&OP tool will make comparisons quickly to enable users to analyze critical differences and refine the ultimate consensus driven forecast.
Sphere: Related ContentManaging Future Demand in a Rapidly Changing Environment
Early in 2007, during the high tech industry downturn a major supplier of networking and bandwidth management solutions for telecom service providers, launched a global forecasting initiative to more accurately predict future demand for its equipment. The goal was to better align the operations plan with a more accurate picture of customer demand to improve service levels and reduce potential inventory write-offs.
Historically, company planners had cobbled together forecast data from multiple systems — a problem compounded by mergers and acquisitions— using unwieldy spreadsheets, manual processes spanning multiple departments, and only a minimal amount of analysis. The resulting forecasts were often inaccurate. In the post-boom economy, flexible and accurate planning would not only be critical to stabilizing current operations, but would play a center-stage role in strategic decision-making across the entire organization.
However, solving this problem was no easy task. Like many technology companies, the company begin outsourcing in late 2003. With this business model, forecasting and planning product sales became an even greater challenge– 11 major product lines, 50 product families and more than 10,000 SKUs to forecast for hundreds of customers across the globe. In addition, their products were highly configurable and customized, ever-changing with constant updates. And, many of these configurations had a very short lifecycle—additional creating forecasting complexity.
Further, the company had independent planning processes through various departments: Sales created revenue forecasts; finance created revenue targets; and operations did product forecasts–all different processes usually with different measurements that did not tie together. They were manual processes with no timelines, all managed through a combination of SAP r/3 and Excel spreadsheets. It was difficult to maintain any consistency and data integrity. With minimal feedback between the groups, there always were differences in the numbers.
The Global Demand and Order Management team had to manage day-to-day consensus planning for hundreds of products, while supporting senior management efforts to reorient the company’s entire business strategy.
- What would the demand ramp look like in each region and segment?
- What impact would new market entries have on product mix and profitability?
- What effect would canceling or delaying a new product have on revenue streams and customer satisfaction?
Company executives needed answers. In essence, they needed a way to seamlessly integrate and executive on their demand forecasts, enabling every group from marketing and sales to operations and the CFO’s office to drive their actions based on a common understanding of the demand.
The company quickly identified requirements for a completely new business system, one that pushes the proverbial envelope of traditional forecasting and planning system, by including:
- Effective process and change management to support flexible, strategic planning and drive shorter cycle times
- Support for complex product lines, including variable product mixes, hierarchies and life cycles
- Support for diverse business processes to accommodate new product development and acquisition, multiple currencies, and unique rules for material, revenue and sales forecasts
- Cross-functional visibility and participation across sales, marketing, finance and operations, with the ability to offset gaming, normalize disparate reports and support international users
The company evaluation team reviewed their current ERP capabilities as well as supply chain management (SCM) solutions. They found that current resources could not effectively support planning of highly configured products and were biased toward production forecasting, when they needed flexible cross-functional forecasting and planning.
Moreover, the company needed a solution that addressed consensus planning for complex manufacturing that would support both operational efficiency and plan performance management. So after evaluating the demand planning modules by SAP and SCM vendors, the company chose Steelwedge Software (www.steelwedge.com).
Steelwedge offered the company a unique approach which leverages the Steelwedge Sales and Operations Planning (S&OP) platform, a combination of best practices gained in over a decade of forecasting and planning research and implementation with dozens of complex manufacturers, plus a next generation technology engineered by enterprise software and business planning veterans.
The company’s Global Demand and Order Management organization first created a standard forecasting and planning process with fixed time schedules and managed all the activities to keep all groups on schedule. There was a dramatic increase in collaboration between the sales, finance and operations departments on information and key assumptions.
Then, the departments began to engage each other in a more systematic fashion. As a result, the need for intensive reconciliation went away and allowed them to move to a monthly process. Every month after the forecast is done—first the sales input is made, then the revenue targets are set, and then the product forecast is done— the teams get together to review any discrepancies and ensure that the departmental plans all in sync and they are all on the same page. Hence, the solution has also allowed them to manage forecast by exception as opposed to each line item.
Today using Steelwedge Software, the company creates a consensus forecast that incorporates direct feeds from the corporate sales opportunity pipeline system and balances the bias of operational systems with quantitative and qualitative input from cross-functional teams. The new process has cut forecast cycle times and allowed staff to focus more time on analysis and planning. The Steelwedge implementation, including integration with the company’s CRM system used for sales pipeline management and with multiple SAP r/3 systems, took less than 16 weeks.
Steelwedge now serves as the central link between company’ CRM and SAP ERP systems. The company has also extended the Steelwedge solution through a web services interface to the company portal—giving users and executives access to current and historical pipeline numbers and forecasting analysis.
With Steelwedge, the company gained greater visibility and predictability in their business and a less costly, more effective way of planning. Not only do operations run more efficiently, during the first phase of the project, the company achieved some significant strategic business results.
- Provide strategic insights that guided critical financial, product management and marketing decisions
- Smoothly managed the integration of major acquisitions including AFC and Vinci Systems driving new revenues and sustaining North American optical market leadership
- Accelerated development of international versions of product lines, leading to significant new accounts
The company’s ‘ initial investment in Steelwedge paid for itself in less than one year. Today, the company reports millions of dollars in annual cost savings in inventory and logistics. In addition to being the critical bridge across organizations and functions, the company expects that its current S&OP automation project with Steelwedge, will save them nearly a million dollars annually, provide an IRR of over 62%, and pay for itself in two years. In addition to improvements in supply chain management metrics arising from the project, the company expects to further facilitate strategic planning, improve Wall Street guidance, and free up key personnel to focus on value-add activities.
And with the assistance of business intelligence provided by Steelwedge Software, the company has revamped its business strategy, targeting high-yield markets, internationalizing key product lines and closing major acquisitions. The result: significant quarter-to-quarter revenue gains and strategic new accounts. As the industry digs out from the crash, the company looks forward with confidence. With strategic forecasting now a top priority, and Steelwedge driving consensus planning, the company is set to control its own destiny.
The company’s’ Global Demand and Order Management organization has developed a highly effective cross-functional forecasting and demand planning process, setting the stage for the company’s to move toward a comprehensive Sales and Operations Planning (S&OP) process incorporating extensive supply, demand, and financial feedback from sales, marketing, finance, and operations. The goal of the global S&OP project is to improve executive visibility and drive efficiencies across the organization. In addition to selecting Steelwedge Software to support post-merger planning, the company has also chosen Steelwedge to support their its global S&OP process roll-out.
Forecasting and planning “guru” Dr. J. Tom Mentzer said “Now that the company has adopted best-in-class forecasting and demand management practices, increased its global footprint, and made several major acquisitions, it is natural for company to leverage the industry’s leading business planning software solution, to enable a best-in-class global S&OP process.”
Sphere: Related ContentImproving Business Performance with Sales and Operations Planning (S&OP)
Effective Sales and Operations Planning (S&OP) measurably improves margins. However, historically, S&OP relied on backward-facing shipment data, subjective opinion, and incomplete operational data. It was overly complex, costly, time-consuming, unreliable and inaccurate.
Now, technology-enabled S&OP processes drive a practical S&OP process, systematically integrating people, processes and data, and restoring confidence in the forecasting and planning processes. Effective technology-enabled S&OP guides participants through a workflow-driven, collaborative process, resulting in a highly accurate aligned forecast and plan that all functions and trading partners can trust. With solutions such as Steelwedge Compass Express S&OP planners can quickly adapt resources to changing conditions, significantly increase margins and dramatically improve revenue predictability. The key is the adoption of a flexible, easy to use, collaborative, and comprehensive solution.
Improve Revenue Visibility
Two-thirds of Fortune 500 companies have no formal way of aligning supply and demand based on corporate-wide inputs. Unscientific approaches result in poor focus of organizational resources like capacity, manufacturing, staffing, sales efforts, finance and budgets. The overall Sales & Operations Planning (S&OP) process suffers in turn. Creating true revenue visibility not only requires strong analytic support, but also the automation of systematic and automated processes for soliciting feedback and creating agreement among multiple parties
Create a Profitable S&OP Plan
Steelwedge empowers executives to evaluate alternate pricing scenarios, product mixes, and configurations. Once the optimum margin forecast scenario has been identified, promotions, product packaging and configuration, and customer targeting decisions can be even further tuned to drive the most profitable demand plan possible. Through participative processes, sales, operations, marketing, and finance are able to work in unison toward a common goal of selling and delivering the most profitable mix of products. The result is enhanced corporate earnings and more efficient operations.
Increase Corporate Accountability
Most planners point solutions don’t allow you to identify, track and archive multiple plans of record, individual adjustments, detailed accountability statistics, and process measurements. For example, the sales staff is inevitably overshooting and undershooting their numbers. However, they typically do it consistently. What’s needed is a system for tracking those consistent fluctuations and archiving the information for analysis.
Support Emerging Manufacturing Initiatives
Steelwedge is the first S&OP solution that addresses vital emerging manufacturing initiatives, revenue visibility issues, and corporate accountability challenges faced by today’s corporations.
Outsourcing Managing outside suppliers or contractors requires a high degree of collaboration and communication, as well as negotiation skill when dealing with competitive bids for limited manufacturing capacity. Accurately understanding inventory liabilities, managing demand and coordinating forecasts is essential for effective outsourcing.
Postponement Planning In order to understand how many configured products will be sold and to “manage the mix,” manufacturing companies need to dynamically manage product attach rates and connect sales pipeline data to customer buying patterns that are based on historical estimates and analysis of item/component demand.
Lean Manufacturing There is a misconception that with just-in-time (JIT) inventory there is no inventory and hence no need for a forecast. In actuality, accurate forecasts are more important than ever. Suppliers need to know what orders to expect, and specialized components often have long lead times and are not always in inventory. Moreover, regardless of short-term operational requirements, product management, marketing and finance need to plan and invest based on a common set of future assumptions.
Mix Management In today’s volative environment, companies are struggling to understand and deliver the right mix of products, components, and packages. Retailer’s are increasingly bundling products to reduce costs and increase margins while technology players are becoming highly focused on delivering the exact mix of components required by their clients. In this envrionment, the need for an S&OP process that manages product mix and assortment is crucial.
Sphere: Related ContentDoes Toyota Need to Forecast? When Lean Manufacturing Doesn’t Work
The relationship between sales forecasting, demand planning, and lean principles has been analyzed, evaluated, and debated for decades. However, in light of recent market volatility, this debate is final reaching resolution – executives overseeing even the most lean, JIT-focused supply chains, need to planning.
Chris Chiappinelli, a blogger associated with the Managing Automation Blog offers the following :
“Just in Time, in its purest form, is a thing of beauty. Read Toyota’s description of it on their website — it sounds like poetry in motion. But the marketplace doesn’t care for poetry. We don’t want to place our order and watch the gears — perfectly meshed though they may be — smoothly churn out our product. We want our hamburgers pre-cooked and waiting for us under a heat lamp. In that world, Just-in-Time has no place. It’s a museum piece, a relic of a more patient era. In this world of pre-heated hamburgers and mass customization, Toyota and its counterparts are forced to produce not to actual demand, but to expected demand. And that, my friends, not only belies JIT; it creates a huge amount of risk.”
“A New York Times article illustrates just how far from its roots Toyota strayed:Previously, plants operated under the sales force’s direction of “you make them, we will sell them,” said Real C. Tanguay, president of Toyota Motor Manufacturing Canada. Now the philosophy is, “if we can sell them, then you will make them,” he said.” “Oh, how the mighty have fallen. Who would have predicted that a Toyota executive would ever sum up the company’s philosophy as, “You make them, we will sell them”?”
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Steelwedge enables customers to better understand and anticipate demand through forecasting, collaborative engagement of field sales, and analysis of changes in sales pipeline opportunities. In today’s world, these are vital processes.
Sphere: Related ContentOnDemand Sales and Operations Planning in 30 Days for SAP Customers
Steelwedge today announced a new release called “Compass Express S&OP” which offers a highly scalable “out-of-the-box” S&OP solution that can be implemented in less than thirty days. The solution leverages Steelwedge’s award-winning Sales Planning and Performance Management Platform (SPPM) and advanced partnership with SAP. The solution also draws on leading-edge technological developments to usher in a level of ease-of-implementation and ease-of-use never before available.Steelwedge Compass Express S&OP delivers the full range of functionality available in SPPM in a packaged, best practice-based format that expedites implementation, integration and training. Standard functionality includes Executive S&OP, collaborative demand planning, revenue planning, and performance management. The next release of Compass Express will also include direct integration with SAP BusinessObjects Xcelsius and SAP BusinessObjects Explorer for enhanced data analysis, reporting and business intelligence capabilities. Steelwedge Compass Express S&OP also includes standard integration with Salesforce.com (SFDC).
Steelwedge Compass Express was developed in response to growing demand from manufacturing companies in North America, Europe and Asia for an easy, highly cost-effective packaged OnDemand S&OP solution with standard integration into SAP, very low upfront costs, low total-cost-of-ownership (TCO) and a subscription pricing model. “Steelwedge Compass S&OP represents a major milestone for the software industry. Compass Express offers a packaged, OnDemand S&OP solution with standard integration points that enables manufacturing companies to increase planning visibility and improve profitability,” said Glen Margolis, CEO.
Steelwedge Compass Express Release is scheduled for general availability in Q2 of 2009.
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