Tag Archives: Sales Forecasting

Seven Steps to Improved Sales and Operations Planning (S&OP)

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Sales and Operations Planning (S&OP) is a function that corporate executives often fail to recognize as a key contributor to success.   From a revenue perspective, an accurate S&OP plan allows for high levels of customer service.  When demand is predicted accurately, it can be shaped and met in a timely and efficient manner.  Of course, accurate forecasts help organizations avoid stock outs and lost sales.  The impact of an inaccurate S&OP plan on profit margins is also profound.  Raw materials and components are more cost-effectively acquired on the basis of advance planning instead of last minute, rush orders.

The impact of excellence in S&OP is profound.  In a number of cases, clients working in tandem with the Steelwedge team to develop, improve or automate their S&OP processes have seen increases in product margins of upwards of five percent and reductions in inventory levels of over fifteen percent.   In spite of such tangible benefits, many companies fail to prioritize this critical executive process.  Although no management function can be reduced to seven items or even seventeen items, there are certain basic S&OP improvement lessons learned that can be generalized across clients and industries.

Each of these steps is summarized below:

Step Symptoms Actions Results
#1: Understand the purpose of S&OP Blurring of the distinction between plans and forecasts Establish a structured S&OP process that incorporates discrete demand and supply planning steps The entire company agrees with the priority and goals for S&OP 

 
#2: Forecast Sales, Plan Supply Shipment history as the primary basis for forecast Create a standard process forecasting and then constraining demand. Adopt scenario planning approach. Improved working capital utilization and customer service levels.  Achieve demand-driven supply planning.
#3: Collaborate Duplication of forecasting effort, mistrust of “official forecast” Integrate financial planning, regional sales feedback and operations into decision process All relevant information is incorporated into the S&OP plan.  S&OP plan results are trusted by the entire organization.
#4: Eliminate silos of planning Each function has its own forecast. Each forecast involves a different unit of measure, time period, or level of aggregation Build a single, demand-supply planning infrastructure, conduct training and brainstorming sessions across functions More accurate forecasts, constrained demand optimizes production capacity, reduces inventory levels and matches demand achieving improved customer satisfaction
#5: Adopt an S&OP automation solution Tools are only used for statistical analysis, Spreadsheets are pervasive Integrate quantitative & qualitative methods, automate workflow Reduce latency in the planning cycle, more quickly react to unexpected events, develop what-if scenarios, engage executive in real—time decision making
#6: Prioritize S&OP No accountability for S&OP plan 

No cross-functional S&OP program

 Company understands implication of poor S&OP process.   S&OP process accountability created.  Top management supports process. Team collectively focused on improving S&OP metrics, substantial financial benefits to company
#7: Measure Performance Plan accuracy not measured, plan success measured at wrong level or period, no S&OP key metrics dashboard. Multi-dimensional metrics created and incorporated into planning process.  Accuracy is measured wherever and whenever appropriate. Adoption of S&OP process is improved through accountability.  Sources of error can be isolated and resolved.  Improvement in confidence in plan.

 

Each of these seven steps offers substantial opportunities for improvement.  In coming weeks we will discuss these steps in greater detail.  What barriers does your company face to adopting these steps?

 

My name is Khan and my Blackberry is made in India

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Photo: Comparison of the ship sailed by Christopher Columbus with the giant ships sailed by Zheng  He in 1405 (source:Wkikipedia)

 

The world of global sourcing, manufacturing and distribution is rapidly turning upside down.  Just a short time ago many pundits relegated India as a place filled with IT genius and broken infrastructure totally inhospitable to manufacturing.  After all, China was the place for manufacturing.  However, with each passing day history is moving in full circle.

It was very precisely 606 years ago that Zheng He, representing the Ming Dynasty, made his first trading voyage from China to India. He visited Calcutta, Cuchin, Sri Lanka and other well know places during his journey, traveling in a fleet of ships in 1405 that dwarfed in both size and number the ships that Christopher Columbus later sailed in 1492.  With these enormous ships Zheng He established a brisk trade between India and China in a twenty-five year period.  At the time it was the world’s largest sea trade.

European ships would not surpass these enormous Chinese vessels in size, sophistication or capacity for another 400 years.   Zheng He also managed to clear the seas extending all the way to the Horn of Africa and Somalia of pirates that had long plagued traders.

Today, analysts predict that the volume of trade in manufactured goods between China and India will surpass that of any other global trade route by the year 2020.  And just a few months ago China surpassed every other country in the world other than the United States in terms of economic output.  Anyone intrigued by the world of maritime shipping is aware that the biggest “post-panamax” ships were recently built by Chinese shipyards and are now operated by Chinese shipping concerns.  Those in involved in global IT have no doubt about the growth trajectory in India

So what does this mean to planners?  Volcanoes, earthquakes, terrorism, tsunamis, inflationary energy prices and the like will continue to have a huge, unpredictable impact on global supply chains.  However, we also need to plan for the impact of rapidly accelerating changes in global patterns in consumer demand, sourcing, and transportation.

Just as harnessing technologies such as the Chinese compass and the Indian crucible steel production process were keys to business success in the 15th century, it is becoming increasingly clear that in the 21st century the capability to rapidly assimilate, interpret and leverage information is now a business imperative.  Understanding new scenarios, analyzing trade-offs, and integrating sales and operations plans (S&OP) have never been more important.

 

Join me for a Twitter chat tomorrow!

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I’ll be participating in my first Twitter chat tomorrow – I hope you’ll join me! The topic is The Continuing Emergence of Sales and Operations Planning. We’ll be live on Tuesday April 26 at 1pm Pacific time / 4pm Eastern time.

I’m going to be the guest for #SCMchat, hosted by Jeff Ashcroft  aka @SupplyChainNtwk. Here’s what Jeff has to say about it:

#SCMchat allows us to get to know SCM greats better & also get together to discuss cool SupplyChain and Logistics topics.

To chat, simply use the hashtag #SCMchat to be included in #SCMchat transcript. If you aren’t on Twitter, you can follow along using your browser to just listen! http://bit.ly/fJqqdf

Participants will have a chance to ask questions. The challenge will be keeping answers to 140 characters!

 

Earthquakes, Oil Spikes, Peak Oil & Actuarial Analysis: Is it time to think about S&OP from a different perspective?

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Do companies need to substantiate and quantify critical risk scenarios as part of their planning process?

Financial analysts evaluate return and earnings potential on a risk-adjusted basis. In other words, analysts incorporate an understanding of the volatility associated with returns when evaluating the underlying value of a business.

Today the only certainty is uncertainty.  How can one plan in a world seemingly dominated by unanticipated terrorist events, political upheaval in and around oil producing nations, natural disasters striking presumably well prepared, developed economies wreaking global havoc, and energy production disasters of all sorts?

What does this mean for planners? Validated and informed risk management and risk-based decision making is more important than ever.  Quantitative support and innovative solutions can help measure and estimate impacts; facilitate key business, financial and operational scenario management, and reduce the uncertainty attached to strategic growth, budgeting, change, and macroeconomic volatility.  In this environment sales and operations planning must truly be transformed into some sort of risk-adjusted integrated business planning scenarios (IBP).

What Will You Say When Shareholders Ask: “What Happened?”

Accurate quantification and assessment of risk is paramount to an organization’s success.  Executives need to ensure that their organizations are undertaking an efficient and effective process of quantifying risk.

Are key decisions made in the context of risk-adjusted scenarios?  Should we be doing some sort of actuarial analysis?

Is there an understanding of the full range of financial outcomes associated with a particular S&OP scenario?

Can we able to back up our scenarios with substantiated, sound, risk analysis?

Do we know how much risk and/or volatility can be sustained?

Does our organization have the right tools to navigate inevitable “Black Swan” events that will disrupt the best laid S&OP scenarios?

Are we confident that we have posted liabilities to match the risks our organization faces?

Who’s looking out for you?   In the coming months, we will explore this further.

Is the “Arnold Palmer of S&OP” on Your Sales Team?

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golfAre you struggling with motivating your sales people to invest the effort required to create accurate forecasts?  We reached into our archives to unearth a creative way that you can put the competitive sales spirit to work for the benefit of your S&OP process — and have fun along the way too.  Devised by Dr. Kenneth Kahn, professor of marketing and director of the da Vinci Center for Innovation at Virginia Commonwealth University, Forecasting Golf brings the fun of golf into the forecasting process, motivating team members to elevate their “game”.

The game’s goal is for an individual player to score the lowest forecast error for the year. A year-long round consists of 12 monthly “holes” that are scored during each forecasting cycle. Attractive prizes are awarded at the end of the game to those who have achieved the lowest scores (i.e., the most accurate forecasts) to reward participation and focus attention on the importance of minimizing forecast error.

Dr. Kahn stresses the benefits of translating statistical language into more understandable form. For instance, a forecast error of 15% does not readily convey if this error acceptable or not. However, when the same forecast is referred to as “par,” then everyone in the company including other department and management levels can readily interpret that error as being acceptable.

Monthly groupings of sales people into scrambles can further enhance the game by offering someone not doing very well year-to-date the chance to still win, and thus, stimulate players to continue their participation in the monthly forecasting effort.

Rules of the Game

True to the game of golf, Dr. Kahn uses the terms eagle, birdie, par and bogey to describe the possible scores for each hole or forecast period.  The terms describe a forecast’s proximity to actual sales where eagle is extremely close, if not perfect, birdie is very close, par is within an acceptable region of error and bogey is beyond an acceptable region of error.

The baseline forecasts provided by the forecaster serve as par and are typically based on a weighted mean absolute percent error (MAPE). The baseline is distributed to the sales force for adjustment wherein each sales person can accept the statistical forecast or make an adjustment up or down. A player could hold par simply by agreeing to the baseline. The benefit of this is 1) it forces a player to think twice about making adjustments, and 2) it builds credibility for the planner as he/she becomes the focal point of the forecasting process. Ultimately, a sales person should only adjust the baseline forecast if they can improve the number rather than out of a desire to create excess inventory or sandbag for the sake of quota.

The following is the scoring methodology. You can change the particulars to suit your company’s goals.

  • Eagle = a score of one. Defined as a weighted MAPE of less than 2.5% and less than the given baseline forecast.
  • Birdie = a score of two. Defined as a weighted MAPE of more than 2.5% but less than the given baseline forecast.
  • Birdie = a score of three. This is defined as within 5% of the given baseline forecast’s weighted MAPE.
  • Bogey = a score of four. This is defined as greater than 5% of the given baseline forecast’s weighted MAPE and less than 10% of the given baseline forecast’s weighted MAPE.
  • Double Bogey = a score of five.  This is defined as greater than 10% of the given baseline forecast’s weighted MAPE and less than 20% of the given baseline forecast’s weighted MAPE.
  • Triple Bogey = a score of five.  This is defined as greater than 20% of the given baseline forecast’s weighted MAPE.

Yearly awards can be given to the lowest overall score as well as second place, third place and honorable mentions. Forecasting Golf can also include “closest-to-the-pin” during the year (i.e., the person who had the lowest weighted MAPE for a month over the course of the year.)

Extra game components you may want to create could include scorecards and an overall game board. After the first year, handicaps could be considered to even the playing field for those having to forecast products that are highly volatile (e.g., a handicap could be easily calculated by using the standard deviation of actual sales.)

Read the original Journal of Business Forecasting article here.