collaborative planning and forecasting
Sales 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.
Improving 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.
Do Asian Manufacturers Need S&OP More than Ever?
The level of interest in Steelwedge S&OP from large Asian manufacturers has recently increased dramatic. Frequently, they are asking the question “Do I really need a collaborative Sales and Operations process? The answer to this question is a definitive Yes!
We have most typically observed that the more sophisticated Asian manufacturers leverage staffs of PhD graduates to manuallly anualize transactional history (from ERP and APS systems) and use statistical methods to make estimates of the future. While this highly rigorous approroach worked extremely well for them in the past when growth was relatively stable and predictable, depending on a rear view mirror to drive has proven to be a disaster in today’s volatile times.
While Asian manufacturers often find collaboration more challenging than their US counterparts, given language, cultural, and logistical challenges, in today’s world, there is no choice. Getting direct and immediate feedback from customers and from a company’s own salesforce are imperatives. Eliminating information latency, capturing qualitative feedback, and keeping a direct pulse on markets are the keys to surviving the recession. Establishing a fact-based, highly collaborative Executive S&OP is a crucial starting point in this long journey.
Best Practice: Attribute Based Planning in Sales and Operations Planning (S&OP)
Attributes are often needed to plan the supply and demand of products that are built-to-order or required to meet complicated engineering specifications. What is new, is the way that Steelwedge seamless enables companies with complex configured products to manage their Sales and Operations Planning process using this approach.
Examples of the types of companies that benefit from this approach include those that manufacture products such as servers (disk drives, processor type, etc), network switches (type, size, capacity, memory), and electrical components (different voltages, capacities and fittings).
Engineered products drive higher margins and premium prices because they meet the actual requirements of customers and halt the profit-eroding impact of products which are commodities. Steelwedge customers use attributes not only for Demand and Supply Planning but also for S&OP thereby enabling companies to better track and plan their high margin products.
For S&OP, attribute-based planning is used to translate market demand into demand for a specific group of products that an organization sells. At the order level, attribute planning determines which products are used to satisfy demand.
Furthermore, Steelwedge customers use attributes to describe the engineering specifications, code-date of manufacture, lot id, and color to support specific customer needs. Environmental concerns, safety concerns, and quality concerns also drive customers to prefer specific suppliers for a product. Attribute-based planning has enabled some Steelwedge customers to drive higher prices and better manage their inventories.
Sales and Operations Planning (S&OP) in a world of Cloud Computing
Last year, 100% of Steelwedge Sales and Operations Planning (S&OP) solutions were delivered on a “SaaS” (Software-as-a-Service or OnDemand) basis – in other words, they were delivered “in the cloud.” Our partners and prospects frequently ask us why? The simple response is that it is what our customers asked. However, the broader question is why is this happening? The strategic answer is that the nature of computing is going through a sea change and that change is being accelerated by the current economic crisis.
But first, what is cloud computing? It is a world where applications and data are hosted in a “cloud” consisting of thousands of computers are linked together and a ccessible via the Internet. With cloud computing, all activities are performed via th internet rather than being based on your desktop or inside a corporate network.
How does cloud computing change the way people work? For one, people are no longer tied to their office or to a single computer. Work can be taken anywhere and team members can easily collaborate on plans and forecasts.
Why? Cloud computing offers a revenue and service model that enables companies to survive today’s challenging times – on one hand the huge upfront capital costs associated with the kind of traditional enterprise computing solutions offered by SAP and Oracle are eliminated. On the other, the need for costly, large dedicated IT organizationns with specialized knowledged are also eliminated.
Further, cloud solutions lend themselves to easy collaboration with partners and customers outside of corporate firewalls and ensure that software upgrades and updates are seamlessly applied with minimal disruption. In short, cloud computing offers customers a compelling, accessible, flexible, pay-as-you-go, and extremely cost-effective solution for automating cumbersome, manual excel-based integrated business planning and sales and operations planning processes.
SaaS is Surging in the Downturn, says IDC
Market researcher IDC has published an upward revision to its market size projections for SaaS in 2009. At a time when most industries and economies around the world are slashing their growth forecasts into single digits or even negative territory, IDC now expects SaaS growth to surge by more than 40 percent in the current year. That’s a significant move up from its previous forecast of 36% growth, published back in July when most economists were still trying to deny the onset of recession.
SaaS’s counter-cyclical boom is entirely due to the enhanced attractions of the model when times are bad, says IDC:
“… the harsh economic climate will actually accelerate the growth prospects for the software as a service (SaaS) model as vendors position offerings as right-sized, zero-CAPEX alternatives to on-premise applications. Buyers will opt for easy-to-use subscription services which meter current use, not future capacity, and vendors and partners will look for new products and recurring revenue streams.”
Don’t you just love that definition of SaaS? “Right-sized, zero-CAPEX alternatives to on-premise.” The report’s author, director of on-demand and SaaS research Robert Mahowald, adds an interesting observation that bears out the uprating:
“… several key vendors finished the year very strong, reporting stable financials and inroads into new customer-sets.”
From my own conversations with privately held SaaS players, I can certainly confirm that business seems to be expanding with continued momentum. Yesterday I was on a call with Phil Fernandez, CEO of marketing automation vendor Marketo, when I heard a bell ring and some cheering in the background. “We ring that bell whenever someone closes a deal in the sales team,” he explained. “Someone’s had a good start to their day,” I commented, noting it was 10am in his timezone. “That’s the third time so far this morning,” he replied. Marketo, which launched its offering just ten months ago, has already signed up its first hundred customers, at subscription levels that start from $1,500 per company per month.
Yesterday, collaboration vendor Central Desktop reported that in 2008 it had seen a 150% increase in user count and revenue over 2007, bringing its user base to the quarter-million mark. Growth continued througout Q4 and the company signed ten new customers in December alone, including urban planning consulting firm IBI Group and on-demand ERP vendor Workday. In a counterpoint to this week’s bleak employment news, Central Desktop says it tripled its workforce last year.
Chris Cabrera, CEO of sales performance management vendor Xactly, which last week acquired its largest rival, blogged about the IDC finding yesterday and picked up on Mahowald’s contention that many of these SaaS purchases are seen as “tactical fixes which allow for relatively easy expansion during hard times.” Cabrera counters:
“I will be surprised, very surprised, if an appreciable number of SaaS customers dump their on-demand applications in favor of on-premise solutions when the economy eventually rights itself. The excellent renewal rates enjoyed by SaaS leaders show that, once bitten by the SaaS bug, there’s little impetus to go back to on-premise solutions.”
I side with that analysis, and it’s interesting that a mainstream market researcher like IDC, even when it can’t deny the success that SaaS is experiencing, still feels it has to qualify it as some kind of blip in the normal scheme of things. I think Cabrera is spot on when he concludes that IDC’s findings show that the tipping-point from conventional software to SaaS “is now a lot closer than anticipated. And once tipped, no matter what brought you to that point, it will be counter-intuitive to go back.”
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