A very interesting statistic – the Purchasing Managers Index (PMI) for August 2011 – caught my eye this morning. This metric tracks the financial activity of purchasing managers connected to their acquisition of goods and services. It is calculated on a monthly basis through a survey conducted by the Institute of Supply Management (ISM).

Surprisingly, the statistic concluded:

“Economic activity in the manufacturing sector expanded in August for the 25th consecutive month, and the overall economy grew for the 27th consecutive month,” say the nation’s supply executives in the latest Manufacturing ISM Report On Business^®.”

A visual representation of the metric is below. Please note that the way the metric is captured, any value above 50 percent is an improvement and a 100 percent value indicates that everyone in the survey indicates an improvement. The degree of change month-over-month is reflected in the actual value. For instance, 65 percent PMI for a month is a bigger change than 55 percent PMI.

Figure: PMI for 2010-2011

Source: Institute of Supply Management

So what does this mean for the supply chain executive who is looking at S&OP and IBP initiatives?

1. Need for Operational Efficiency: According to the ISM survey, the overall sentiment is one of concern and caution. In this sort of a situation, increasing operational efficiency and reducing waste in the end-to-end value chain is the best approach that companies can take. S&OP and Lean are two weapons that companies can adopt in this endeavor. In fact ,we see that these two initiatives dovetail into one another when the S&OP plan needs to be executed.

1. Multi-business S&OP: According to the ISM survey, respondents in general are reporting reduced domestic sales and increased international sales. This implies that large multi-national companies need to look carefully at balancing their supply towards demand and look at their S&OP process as more of a multi-enterprise/multi-business process rather than within their silos; for instance, being able to position supply in tax efficient countries and moving it closer to customer when the demand signal arrives (looking at building capacity in Eastern European countries, etc.). IBP processes should allow visibility not just at the divisional level but at the corporate level too .

1. Working Capital Management: According to the ISM survey, respondents are reporting that their inventories are in general higher than their customer’s inventories. This is of course a result of network wide inventory reduction efforts that have gone on for many years. What it has really resulted in is pushing out of inventory upstream into the supply chain where every node believes that they are at the receiving end with respect to holding inventory. Companies need to really look at inventory from a working capital standpoint and as part of the IBP process. The working capital is dependent on the customer sales, supplier purchases and inventory – the IBP process is the only process that provides visibility to all three. These three variables have to be looked at holistically and not in silos. So, implement IBP processes that  can model supply, demand, finance and inventory in a holistic fashion

Figure. ISM Inventory Index for Manufacturers and their Customers

What are your thoughts? Do you agree with the analysis? Also, more importantly, why are the unemployment numbers so high when manufacturing is apparently growing? I have thoughts on this but would love to get your feedback.

10.  Key Performance Medics:  Specially trained analysts who come to the rescue to turn around poor performance indicators

9.   Strategery:  a plan, approach, line of attack (very similar to strategy)

8.   Regression Forecasting:  Reverting to an earlier, more accurate forecast to give the impression of better forecasting

7.   Imperial Forecasting:  The ultimate Top Down forecast, dictated by the ruler of the kingdom

6.   Reactive demand shaping:  coming up with a marketing promotion during the month in which additional sales are needed rather than planning ahead as part of an overall strategy (or Strategery)

5.   Tough Luck Capacity Planning:  Similar to Rough Cut Capacity Planning; however, with Tough Luck, capacity is fixed so the supply plan drives the demand plan

4.   New Product Insanity:  The attempt to forecast new product launch dates

3.   Higher Keys:  Rooted in the data structure concept of hierarchies, this mutation is the idea that key groups are formed through aggregation

2.   Moving Adage Forecast:  A twist on moving average, continually changing forecast caused by management mood swings

And the number 1 term…

1.    Disaggravation:  The Steelwedge disaggregation functionality which enables users to enter forecasts at higher levels of aggregation, reducing the number entries and thus, reducing user aggravation.

What’s your forecast accuracy telling you? Stop and ask a few questions

Here’s the Steelwedge Top Six:
1. Aggregation level: Are you measuring accuracy at a product SKU or family level? What about other hierarchy levels? Odds are your accuracy will appear to be better at an aggregated level such as family. This happens because variability of forecasts and actuals tend to cancel out one another as data is combined. The result is a smoothing of results and lowering of error calculations. Recommendation: Measure accuracy at the same level as the majority of forecasts are captured.
2. Error Calculation: In its most basic form, accuracy is a measure of the difference between a prediction and what actually happened. How far off were we? Error is equal to the difference between forecast and actual. Often, this is captured as a percentage value called percent error. Mean absolute percent error (MAPE) calculates the average of errors. Since we don’t want positives and negatives to cancel out each other, we use the absolute values of each error. There are other methods, but MAPE is fairly common. Weighted MAPE is a method used to give greater importance (weight) to items with greater activity. Amount of activity may be defined as the proportion a particular item is of the total. Recommendation: Keep it simple. Make sure people understand the measurement and how they can impact it.
3. Unit of Measure: “We forecast in both units and dollars. Which should we use for measuring accuracy?” Weighted accuracy measures, such as weighted MAPE, will give greater influence to items that constitute a greater portion of the sales volume. Higher dollar but low unit volume items will contribute much more to a measurement in dollars. Conversely, high unit volume, low dollar items will factor in more prominently using a unit based forecast. Which is preferable? It really depends on your business. Recommendation: Consider important business decisions made in the Executive S&OP meeting. Are they usually focused on $ or units?
4. Offset period: If we measure accuracy using the most recent forecast for a given period, it will likely be more accurate than a forecast made three months prior to a given period. That’s because we have better information as we get closer to the current period. But, how valuable is a forecast made in the very near term if the organization cannot act upon that forecast? It has virtually no value. The offset period defines the number of periods prior to an actual period for which a forecast will be measured against the given period’s actuals. For example, if our offset is 3 months, we can measure accuracy using actuals from August and the forecast for August that was captured in May. Recommendation: Set the offset period to most closely match the organization’s planning horizon.
5. Time buckets: Should we measure accuracy using weeks, months or quarters? Typically, you will want to measure accuracy in the same period buckets used to forecast. In some cases, where demand patterns follow a “hockey stick” high demand in the last month of a quarter, it may be more appropriate to use quarterly buckets. Recommendation: Measure accuracy using the same buckets you use to forecast unless there’s a compelling reason to move to a bigger bucket.
6. Which Forecast?: In a collaborative S&OP process, there may be several forecasts captured (Sales, Marketing, Demand Planning, Consensus, etc). Which should we use for accuracy measurement? If you’re only going to use one, then go with the forecast used by Operations to build or procure product. A typical example would be the Consensus Plan. Measuring accuracy against multiple forecasts will provide greater insights into potential areas for improvement. Recommendation: Measure accuracy using the forecast provided to Operations. Publish results throughout the organization. Also, measure accuracy across other forecasts to isolate areas for improvement.
Are there other aspects you’d add to this list? Please let us know.

Steelwedge Software Inc., the leading provider of software-as-a-service Sales and Operations Planning (S&OP) solutions, today announced that it was named one of the top 500  software companies.  This year’s inclusion in the Software 500 marks the third straight year Steelwedge Software, Inc. has been ranked.

“The 2009 Software 500 results show that revenue growth in the software and services industry was healthy, with total Software 500 revenue of $491.3 billion worldwide for 2008 representing 8.8 percent growth from the previous year,” said John P. Desmond, editor of Software Magazine and Softwaremag.com.

“The Software 500 helps CIOs, senior IT managers and IT staff research and create the short list of business partners,” Desmond says. “It is a quick reference of vendor viability. And the online version to be posted soon at www.Softwaremag.com is searchable by category, making it what we call the online catalog to enterprise software.”

“Our continued growth is further validation that our customers experience substantial business benefits from the Steelwedge S&OP solution,” said Glen Margolis, CEO and founder of Steelwedge Software, Inc. “We will continue to innovate and provide our customers with the Sales and Operations Planning (S&OP) solutions they need to increase their revenue and competitive advantage.”

The Software 500 is a revenue-based ranking of the world’s largest software and services suppliers targeting medium to large enterprises, their IT professionals, software developers and business managers involved in software and services purchasing.

The ranking is based on total worldwide software and services revenue.  This includes revenue from software licenses, maintenance and support, training and software-related services and consulting.  The financial information was gathered by a survey prepared by King Content Co. and posted at www.Softwaremag.com, as well as from public documents.

Pleasanton, CA – November 20, 2007 – Steelwedge Software , the innovator in OnDemand (SaaS) Collaborative Sales Forecasting and automated Sales and Operations Planning (S&OP), announced today that 2006 to 2007 sales grew by over 160%.

Representative customers launching Steelwedge Sales and Operations Planning (S&OP) applications include Juniper Networks, the leading provider of networking and security solutions; Honeywell, a diversified technology and manufacturing company; Nvidia, the worldwide leader in programmable graphics processor technologies; and Monster Cable, the world’s leading manufacturer of high performance audio cables. Examples of customers choosing the Steelwedge OnDemand Collaborative Sales Forecasting and Planning platform include Spansion, the world’s largest pure-play provider of Flash memory solutions and, EDS, a leading provider of information technology and business process outsourcing services.

New Partners include Salesforce.com AppExchange and Teradata. In September, Steelwedge announced the release of its OnDemand Sales and Operations Planning solution (S&OP) for salesforce.com’s AppExchange, extending CRM functionality to provide comprehensive sales forecasting and sales and operations planning (S&OP) solutions for manufacturers of complex products in the AppExchange high tech and manufacturing vertical. In October, Steelwedge entered into an agreement with Teradata, the data warehousing leader, to provide the S&OP component in Teradata’s SAP APO Accelerator enabling large enterprises to achieve real Demand Drive Supply Networks (DDSNs.)

“We are pleased that the world’s leading high technology manufacturing companies are selecting Steelwedge to drive their sales and operations planning and collaborative forecasting processes,” said Steelwedge CEO Glen Margolis, “Steelwedge’s unparalleled technology and S&OP expertise ensures that our customers quickly derive enormous value.”

ABOUT STEELWEDGE
Steelwedge Software. Inc. links Sales & Operations Planning (S&OP) processes to existing systems through familiar desktop applications including email and Excel. Steelwedge helps companies improve the effectiveness of their S&OP, Collaborative Planning, Sales Forecasting, sales planning, and Performance Management activities. Steelwedge customers include Harley-Davidson, Hewlett-Packard, Honeywell International, Emerson Electric, Juniper Networks, Monster Cable, Nvidia, Spansion, Tellabs, Enterasys Networks and Teledyne.
For more information, please visit www.steelwedge.com.

TAGS: sales forecasting, sales planning, S&OP