Session 2: Forecasting and the S

1
Session 2 Forecasting and the SOP

• Demand Forecasting and
• Planning in Crisis
• 30-31 July, Shanghai
• Joseph Ogrodowczyk, Ph.D.

2
Forecasting and the SOP

• Session agenda
• The SOP process What is it and how does it
  relate to forecasting?
• Ingredients to a successful forecasting process
  in the SOP
• A diagnostic model for potential issues in the
  SOP process

3
Forecasting and the SOP

• The SOP Process
• What is it?
• The Sales and Operations Plan (SOP) is a
  business process implemented by a company to
  match anticipated demand with anticipated supply
• A means for all departments involved in the
  planning and execution process to discuss,
  debate, and agree to a common set of goals and
  objectives
• A series of periodic meetings with
  cross-functional teams set with an objective of
  creating synchronized demand and supply plans
• When implemented correctly, the SOP process can
  give the company a holistic view of demand,
  capacity, product volume and mix, and financial
  goals

4
Forecasting and the SOP

• The SOP process
• Steps to the process
• Data gathering
• Deciding what historical data to use, how to
  incorporate new demand/products, understanding
  the impact of promotional activities, choosing
  the appropriate external factors
• Demand management
• Using statistical models, inventory, backlog, and
  actual demand to produce a realistic
  approximation for unconstrained demand
• Supply planning
• Using resource requirements and capacity
  constraints to determine the feasibility of
  maximizing the profit associated with the
  estimated unconstrained demand

5
Forecasting and the SOP

• The SOP process
• Steps to the process
• Pre-meeting
• Meeting for discussion of demand and supply plans
  for the purpose of finalizing a consensus
  production plan with associated recommendations
  for the executive meeting
• Executive meeting
• Final approval from executive committee with a
  discussion of alternative scenarios

6
Operations Plan Unconstrained baseline
forecasts Initial demand plans
Supply Chain Rough-cut supply plans Capacity
planning reports
Finance Financial plan
Marketing and Sales Sales forecasts
SOP Process
Supply side adjustment elements Purchasing Invento
ry Transportation Warehouse
Demand side adjustment elements Product
marketing Consumer marketing Pricing
Outputs Constrained demand forecast Adjusted
supply plan Adjusted financial plan Adjusted
demand plan
7
Forecasting and the SOP

• SOP and knowledge creation
• Knowledge creation transformation of
  information from customer, exchange partners, and
  competitors into actionable knowledge (Mello
  and Esper 2007, 23)
• During the SOP, information is collected,
  distributed, and analyzed among all forecasting
  and planning groups within a company
• Each group brings potentially unique information
  to the process
• Knowledge creation is accomplished by sharing
  this information to develop business strategies,
  new products, and desirable services

8
Forecasting and the SOP

• SOP and knowledge creation
• Three levels of learning
• Individual
• Group
• Organizational
• Four attributes of learning
• Intuition Recognizing patterns
• Interpretation Refinement of ideas to make them
  understandable
• Integration Transforming information into
  action
• Changes in consumer tastes are collected by
  Sales, and a group consensus is achieved on
  actions to address those changes
• Institutionalization Establishment of routine
  actions to allow new information to be embedded
  within the organization

9
Forecasting and the SOP

• SOP and knowledge creation
• Learning within the SOP cycle
• The purpose of the SOP process is to match
  potential demand with known supply constraints
• By focusing on the four attributes of learning,
  an organization can elevate the SOP from a
  coordinating business process to a knowledge
  creating process
• Incorporating learning into the SOP
• Intuiting Recognizing patterns
• First stage in SOP is gathering data
• Individuals can begin to recognize patterns to
  external data
• Interpreting Refining ideas
• Second stage in SOP is the demand management
• Individuals and the groups bring ideas into a
  forum for discussion and interpretation of useful
  data

10
Forecasting and the SOP

• SOP and knowledge creation
• Incorporating learning into the SOP
• Integration Transforming information into
  action
• Third step in the SOP is supply planning
• Knowledge integration can be utilized during
  supply planning when forecasts are translated
  into operational plans
• Can result in changes to marketing plans and
  other operational activities
• Institutionalizing Establishing new business
  processes to incorporate updated information
• Final steps in SOP are the pre- and executive
  meetings
• Formal methods for sharing information and ideas
  can be created to support the meetings

11
Forecasting and the SOP

• SOP and knowledge creation
• Incorporating learning into the SOP
• Key to knowledge learning is to incorporate the
  stages of learning into the SOP process
• Training of employees to identify trends and
  listen to external data sources (customers)
• Encourage employees to share insights
• Ensure that all ideas are given full
  consideration in the SOP process
• Publicly recognize employees for ideas that
  resulted in measurable process improvement

12
Forecasting and the SOP

• SOP process
• Recommended factors for successful SOP
• Regularly scheduled meetings with supporting
  agendas
• All pre-meeting work completed
• All work is NOT event driven
• Cross-functional managerial support
• Team members have authority for decision making
• Avoid silo forecasting
• Unbiased baseline forecast
• Supply chain can provide a statistical forecast
  for guidance
• Acceptance of statistical methods may require
  change in management methodology

13
Forecasting and the SOP

• SOP process
• Recommended factors for successful SOP
• Metrics for tracking progress
• Ensure that the SOP process is achieving the
  objectives
• Supporting technology
• Used to collect and manage the input forecasts
  and the output consensus
• Software will support a business process
  addressing back-forecasting (determining
  revenue/financial goals and calculating the
  corresponding quantities)
• External inputs
• VMI, POS, Collaborative Planning Forecasting and
  Replenishment (CPFR)

14
Forecasting and the SOP

• Demand management
• How does SOP relate to forecasting?
• The common goal is a single number forecast that
  all departments will use in their processes
• Sales and marketing will use to focus on sales
  channels
• Operations will plan production
• Finance will set revenue and profit goals
• Demand management Business processes designed to
  produce an unconstrained, information-based,
  consensus forecast from historical demand and
  assumptions about future market conditions

15
Forecasting and the SOP

• Demand management
• Steps to effective demand management
• Forecast review, production, and aggregation
• Reviewing previous forecasts for patterns of
  large errors
• Produce forecasts and incorporate lessons from
  previous error patterns
• Calculate the total forecasts as well as the
  individual member forecasts
• Aggregation with respect to time, product, and
  customer dimensions
• Collecting the forecasts by volume and by mix

16
Forecasting and the SOP

• Demand management
• Steps to effective demand management
• Addition or updating new product forecasts
• Input from key players product developers,
  marketing promotions
• May be a range forecast with lower and upper
  bounds
• Possibility of losing demand for older products
• Additional resources to support company goals

17
Forecasting and the SOP

• Demand management
• Steps to effective demand management
• Application of external factors
• Macroeconomic conditions, economic crises, etc.
• Sales promotions
• Anticipated price changes
• Changes in quantity or quality of customers
• Inventory levels or POS data
• Customer or supplier forecasts

18
Forecasting and the SOP

• Demand management
• Steps to effective demand management
• Financial conversion and reconciliation
• Convert unit forecast into dollar forecasts
• Sales uses average selling price
• Production and inventory use standard cost
• Gross profit calculations use average margins
• Compare financial forecast to business forecast
  and clearly document the differences
• Compare the mix forecast (lower level forecast
  for planning purposes) to the volume forecast
  (higher level forecast for strategic purposes)
• Submission to supply planning

19
Forecasting and the SOP

• Demand management
• Recommendations for success
• Upper-level management support
• Accountability to forecasters
• Consensus on unit of forecast
• Translation key for forecast interpretation
• Combine statistical forecasts with expert
  knowledge (marketing, sales)
• Measurement of forecast accuracy

20
Forecasting and the SOP

• Forecasting as a diagnostic model
• Failure to produce satisfactory forecasts can be
  a signal that the SOP process needs improvement
• Results of poor forecasting indicate a breakdown
  in the SOP process
• Consistent inaccuracy
• Inability to respond or slow response to changes
  in product/customer mix
• Ineffective use of measurement tools
• Omitted forecasts

21
Forecasting and the SOP

• Forecasting as a diagnostic model
• Is it better to have a questionable forecast or
  no forecast?
• Forecasting audits provide insights into barriers
  to forecast process improvement
• These barriers can indicate where the SOP
  process can improve
• Managerial intervention may be necessary if the
  forecasting process requires major changes

22
Forecasting and the SOP

• Forecasting as a diagnostic model
• Common problems and potential issues
• Absence of vital information (pricing, new
  customer forecasts) can be a sign of
  miscommunication
• Inability to obtain information may indicate a
  need for new systems to collect and distribute
  relevant information
• Low accuracy or little improvement in accuracy
  can indicate lack of accountability or lack of
  education among forecasters
• Lack of functional forms for models may indicate
  a lack of understanding of the data, or larger
  issues revolving around the business forecasting
  process

23
Forecasting and the SOP

• References
• Jain, Chaman L. and Jack Malehorn. 2005.
  Practical Guide to Business Forecasting (2nd
  Ed.). Flushing, New York Graceway Publishing
  Inc.
• Mello, John and Terry Esper. 2007. SOP,
  Forecasting, and the Knowledge-Creating company.
  Foresight. Summer 23-27.
• Moon, Mark. 2006. Breaking Down Barriers to
  Forecast Process Improvement. Foresight. June
  26-30.