The Impact of Forecasting Improvement on Return on Shareholder Value
John T. Mentzer; Journal of Business Forecasting

Improving Salesforce Forecasting
Mark A. Moon and John T. Mentzer; Journal of Business Forecasting

Benchmarking Sales Forecasting Management
John T. Mentzer, Carol C. Bienstock, and Kenneth B. Kahn; Business Horizons

Using S&OP to Reduce Complexity and Create Value
July 29, 2005, 1pm Eastern, 10am Pacific
Principal Speaker -
Seema Phull, Director, Process and Technology, Enterasys Networks


Sales and Forecasting Management Forum Executive Roundtable,
September 7-9, 2005

By Anil Gupta, The Applications Marketing Group

In almost every organization, the Finance team is responsible for creating and managing two plans – the detailed annual budget and a financial plan with a pro-forma income statement used for internal planning and external communication purposes. These plans are typically created iteratively between Finance, other department heads and the President/CEO of the company. They are also commonly developed in spreadsheets and take weeks of effort. Over the course of the year, as the revenue picture for the year becomes clear and budgets get tweaked, Finance manually tries to keep budgets and the financial plan in sync.

In manufacturing organizations, there is a third plan that requires the involvement of the Finance department – the operations plan. This plan is typically updated more frequently than the budget and financial plan, and details the product mix, or what will be built based on the demand plan from Sales and Marketing. If the demand plan/forecast has a high degree of accuracy and the operations plan maps well to the demand plan, then the operations plan should provide an organization a clear view into the likely revenue and margin scenario. In most organizations, the three plans are managed as separate entities. As a result the operations plan, the financial plan and budget fall out of sync with each other as the year progresses.

The Operations Planning Challenge

The reason for this is that Finance department does not have the right tools to take the proposed operations plan, calculate expected revenue and margins based on the plan and use that information to create a pro-forma P&L. A pro-forma statement would immediately tell the team if the proposed operations plan can meet/beat revenue and margin targets and give them the comfort they need to approve the plan. Without the right tools, Finance has to go through a tedious, manual process to identify potential shortfalls in revenue and margin from the proposed operations plan.

A Two-Step Approach

This issue could be addressed in a two-step process –

• Step 1: Deploy a mechanism that allows a company to automatically calculate revenue and margins from a demand/operations plan. As a result, when the demand and operations plan scenarios are created (with various product mix/volume/delivery date options); the Finance organization has instant visibility into revenues and margins from each of the scenarios. Hence tradeoffs between revenue/margin and order fill rate can be reviewed, while committing to an operations plan. The management team exits the process with full visibility into its actions and impact on margins & customer satisfaction.

• Step 2: Ensure that the operations plan, financial plan and budgets are deployed on a common collaborative and event-driven platform. This ensures that as soon as a change is made to one of the plans (budget, financial plan or operations plan) that put the three plans out of sync, the changes required to the other plans are flagged automatically to the stakeholders. As a result, the plans are always in sync. In addition, the collaborative environment ensures that the assumptions used in developing the plans are consistent.

The Enterprise Planning Solution: Steelwedge Software

Customers typically start by deploying the demand planning capability within Steelwedge. This includes implementing the statistical forecasting capabilities which uses demand history and adaptive analytics to create a baseline demand forecast. Most customers also implement additional modules that use inputs such as sales pipeline and new product introduction plans to improve the quality of the forecast.

Sales pipeline, a good indicator of short-term demand, usually exists in aggregate customer and revenue terms and needs to be translated into demand units to make it useful for planning.
In addition, it also contains natural biases of each individual sales rep, resulting in a lack of consistency across the pipeline. Customers can deploy Steelwedge Sales Opportunity Planning, which uses heuristics & intelligent filtering capabilities to convert sales pipeline into information used to improve demand forecast.

Similarly, assimilating new product introduction into demand forecast requires support of diffusion based lifecycle curves, which individually and systematically represent assumptions regarding product release dates, order projections, promotions, pricing, and other company-defined variables. Customers can deploy Steelwedge Product Lifecycle Planning, which uses such capabilities to convert new product plans into information that can be used to improve demand forecast.

Once a demand plan is created, it becomes critical to balance supply availability with the consensus demand forecast to prioritize demand orders and appropriately set customer expectations. Customers use Steelwedge S&OP to guide internal and inter-company collaboration to balance committed supply with consensus demand forecasts and create a feasible and profitable operations plan. Its unique capability in enabling team members to create multiple operational scenarios and compare them in real-time based on supply constraints, delivery performance and revenue/margin impact allows team members to collaboratively create the right operations plan. Steelwedge Revenue & Margin Planning module plays a key role in this process by enabling Finance executives to have automatic visibility into revenue and margin from an operations plan at various levels of detail and evaluate the impact of a change to Average Selling Price (ASP) or product mix on revenue and margins.

If the budgets, financial plan and operations plan are all created using Steelwedge, any changes to one of the plans (that makes the other plans fall out of sync) are immediately highlighted – so all plans can stay in sync. It also enables users to create quick analytics on planned (from Steelwedge financial plan) vs. projected (from Steelwedge operations plan) vs. actual (from ERP) performance.

Traditional planning systems have been designed to address the needs and the constraints of the operations organization. Steelwedge provides a planning system that enables Operations, Finance, Sales and Marketing to collaborate in creating a plan that is feasible and profitable. In addition, by providing a cross-enterprise planning solution, with an ability to deploy the solution one department at a time, it provides a framework for enterprise-wide performance management.

Anil Gupta is a principal at The Applications Marketing Group. He has specific expertise in ERP, supply chain and analytics applications. He is also a research advisor to Ventana Research, an industry analyst firm, in IT performance management. Anil has been a VP of Strategy and/or Marketing of enterprise software companies such as Baan, Niku, Evolve and Oracle.