During my 30-plus years in Supply Chain Management I have participated in many projects as a practitioner, consultant or educator to improve demand forecasting. I have also participated in many projects to improve inventory management. My experience is that most businesses have not done enough to link these two areas from a people-process-technology perspective. This article highlights some lessons I have learned and provides some suggestions to improve the link between these important processes.

New Products & Inventory Control

We all know the story regarding new products. Sales and Marketing are conditioned to over-forecast these in most cases. In their view it is much better to create excess inventory than to risk a loss of revenue. Of course, in most units Sales & Marketing are not held responsible for inventory levels or dysfunctional inventories. Supply Chain is accountable for inventory performance, but this responsibility does not usually address new product introductions in a timely manner. Often excess and aged inventories result from lower than expected demands for new products. Several years ago, a business unit with poor inventory performance got a new leader. When discussing this with the Supply Chain leader, he was told that new product and trial inventory was over $500,000.  He directed the Supply Chain manager to add this inventory performance to the monthly report reviewed in the S&OP meeting. Table 1 depicts an example of the report, along with comments.

• There were no sales for these 10 items in the month.
• Inventory increased on two items which were produced to the original plan although no sales have occurred the past three months.
• The current month-end value of this inventory ($552,000) represents approximately 85% of total new product-trial inventory.

Based on this poor performance, the business implemented a process whereby the sales forecast was used to establish an inventory plan. The actual sales and inventory were compared to plan and a meeting was held every two weeks between the product development, marketing, sales and Supply Chain functions. The result was improved demand-supply balancing in both quantity and timing. Chart 1 explains further sales, production and inventory, and Chart 2, planned and actual inventory.

Chart 1 | New Product Sales & Inventory Plan

Chart 2 | Tracking New Product Sales and Inventory to Plan

Demand versus Stocking Strategy

The textbooks tell us that make-to-stock strategy should be limited to higher volume products that are easy to forecast. This ensures an acceptable inventory investment and that slow-moving and obsolete inventory can be controlled. One mechanism to evaluate the stocking strategy is ABC-XYZ volume variance analysis. Variance is based on the Coefficient of Variation (CV) which is defined as the standard deviation in period sales divided by the average period sales. Most practitioners use a CV threshold of >1.0 to segment those products which will be difficult to forecast. If the product also has low sales volume (C item based on volume), the correct stocking policy is make-to-order (see Table 2).

Table 2 | Sample ABC-XYZ Analysis with CZ Item

Notice Article 551 in Table 2 has both high volume and high variance in demand. Collaboration with the customer resulted in a stocking policy to ensure product availability at the point of order. Here the customer provided an order schedule. In this case Article 552 was being forecasted using a 3-month moving average. The result was being out of stock in some months and having excess inventory in others. Chart 3 depicts the actual demand for this article.

Chart 3 | Actual Sales for Article 552 (CZ Article)

As indicated by the quantitative analysis, this article should not be made-to-stock based on a forecast. Some firms use re-order point planning based on average demand for articles with erratic sales patterns. As such, it would not yield acceptable inventory and service.

After collaboration between Supply Chain, Sales and Marketing, it was decided to place the article on make-to-order status. In addition to the erratic demand pattern this article requires a unique raw material in production and the risk of producing this article to stock is high.

Best practice is to perform the volume-variance analysis periodically. The frequency (monthly, quarterly, twice per year) depends on how dynamic demand is within the business. The Demand Planner should perform the data analysis and the Supply Chain leader should facilitate a review with Sales & Marketing in which decisions must be made. There is a strong link between forecastability and inventory control.

Forecast Error & Safety Stock Inventory

Another key link in planning is the use of the demand variance or forecast error to plan safety stock levels. The use of subjective safety stocks by ordering early is common in industry. This judgment model for determining safety stock quantity leads to high inventory. Below is an example of using forecast error to set safety stock levels.

Chart 4 | Use of Statistical Safety Stock Based on Forecast Error

As shown in Chart 4, the resulting statistical safety stock performs well based on historical sales. Statistical safety stocks assume the sales data is normally distributed (bell curve). In this example, the average sales are 498 units and the standard deviation of sales is 57. This yields a Coefficient of Variance of 0.12 (57/498). As mentioned before, CoV’s of less than 1.0 indicate that variation approximates normal distribution and use of statistics based on normal distribution is a valid approach. Next we will look at an example of erratic demand versus safety stock level.

Erratic Demand & Safety Stock Inventory

For some businesses, many items have demand patterns that are difficult, if not impossible, to forecast. Chart 5 gives such an example.

Chart 5 | Erratic Demand & Safety Stock

The CoV test indicates bell curve statistical techniques are not valid in this case.  CoV is greater than 1.0. If statistical safety stock is used, both over-stocks and stock-outs will occur. In that case, the best solution is to place it on a make-to-order policy. However, if the customer insists on the supplier keeping some stock, the best solution would be to maintain a minimum safety stock of 1,500 units. This covers demand for ten of the twelve months. For the two months when demand far exceeds average, the options are advance warning from the customer, expediting by the supplier or longer delivery lead time.

A key point is that the actual demand pattern can help in developing a stocking policy. So often I have been told by planners they just use re-order point based on average demand for those items with erratic sales. Of course, re-order point was created to handle items with stable demand and random variation and does not work well for patterns like this one.

The use of forecast error or demand variance in safety stock calculations often gets a bad reputation because the tool is applied to items with erratic, non-normal demand patterns. Use of the CoV data and inspection of the demand pattern can help to ensure statistics is used but not abused.

Using Exception Reports to Link Demand Planning & Inventory

A good practice is to link forecast performance to inventory and service. The “Top Ten” report below is reviewed in the S&OP Meeting each month.

The red numbers represent how much inventory was planned due to over-forecasting these products. The inventory totals over $1.8M for this month. The other items were under-forecasted resulting in schedule changes or stock-outs. In this case, the stock-outs did result in customer backorders. This business offers dozens of finished goods line items and exception reports are used to prioritize improvement efforts.

Summary

The Supply Chain function is usually accountable for inventory management. They should ensure this includes new product inventory management and work with Marketing & Sales to get inventory plans in place. One aspect of product portfolio management is the evaluation of demand volume and variance. Supply Chain should ensure this analysis is performed periodically and that Marketing and Sales participate in review of the data. Decisions regarding whether to stock the product and how to ensure availability if stocked need to be a team effort.

For items with reasonably normal demand patterns, Supply Chain should link safety stock quantities to demand variance or forecast error. Excess and slow-moving inventories should be monitored routinely; this can help to identify when stocking policies and safety stocks need a review. If items with erratic demand patterns must be made-to-stock, Supply Chain must work with Marketing and Sales to decide what stocking policy is required. It is best not to provide an invalid statistical forecast but rather identify items which require decisions based on informed judgment. The use of exception reports such as “top ten” forecast errors, or “worst ten” over stocks each month is a better practice. Also, the use of the ABC principle to ensure resources are focused on those items that significantly impact the bottom line is very important. The “C” items provide more challenges for both demand planning and inventory control but usually represent a small percentage of revenue.

In closing, Supply Chain must take the lead to integrate new product planning and product portfolio review in the S&OP process. Seldom are marketing and sales held accountable for the inventory and cost issues for mistakes in these processes. Demand planning and Supply Chain are accountable for linking actual demand patterns to safety stock decisions. They must also routinely perform inventory analyses (e.g., slow moving, excess, obsolete) to identify priorities and the need for change. Supply Chain serves as the link between Marketing, Sales, Finance and Operations to better balance service-cost-inventory.

This article originally appeared in the Spring 2020 issue of the Journal of Business Forecasting. Click here to become an IBF member and get the journal delivered to your door quarterly, as well discounted access to IBF training events and conferences, members only workshops and tutorials, access to the entire IBF knowledge library, and more.

A key element in sustaining a competitive advantage in today’s global business environment is an effective Sales & Operations Planning (S&OP) process. Supply-chain focused companies use S&OP to develop a business-wide game plan to improve its overall business performance. It is designed to enable value-based management and ensure optimal overall business results.

What is S&OP?

Sales & Operations Planning (S&OP) is the process by which we bring together all the plans for the business (Customers, Sales, Marketing, Development, Manufacturing, Sourcing, and Financial) into one integrated set of tactical plans. S&OP gives management the ability to direct its business to achieve a sustainable competitive advantage. The overall objective of S&OP is to arrive at a business “Game Plan” to help manage and allocate critical resources to meet the needs of the customer at the lowest cost. S&OP is a five-step process as illustrated in Figure 1.

Figure 1: The S&OP Process

S&OP is a process that coordinates different areas of the business to meet customer demand with the appropriate level of supply.

Implementation of S&OP should be undertaken in phases. Most businesses start with a pilot program in one business unit in one country, for example. S&OP has been around for over 20 years now, and many firms have implemented it at the country or region level. However, in today’s globalized economy, firms must evolve to using S&OP at the global level.

The Global S&OP Process

 Globalization has occurred at such a rapid pace that many firms today find themselves thinking “globally” but acting “locally.” It is only natural that priority has been given to establishing a presence in new and emerging markets. However, it is time for firms to begin the journey to global planning and execution in supply chain.

The first step in implementing Global S&OP is to understand the configuration of the firm’s demand and supply planning, and execution processes. For example, do plants only serve their region and if so, is this the best approach? What region-specific product requirements exist? For example, do different packaging and labeling have to be used in each region? Global S&OP is applicable regardless of existing constraints within regions. However, it must be customized based on that situation. Obviously, one goal is to eliminate self-imposed constraints that make global planning more difficult.

This article will present details for two scenarios. In the first, most products can be produced at all plants globally. Products are assigned to plants based on profitability. In the second, most products are sold and produced at a regional level. Both scenarios can benefit from Global S&OP.

S&OP Scenario 1: Most Products Can Be Produced At All Plants Globally

 Let us assume a global business has five producing plants located on four different continents. All five plants can individually produce approximately 80% of the total products offered. The other 20% of the products must be produced at a particular plant. This constraint is programmed into the toolset used to optimize the production schedules. The S&OP process for this scenario is outlined in Figure 2 (see below).

In this environment, regional demand is consolidated to arrive at a figure for global demand. Then, demand is allocated to the producing plants based on projected gross margins. The overall objective of the Global S&OP process is to maximize operating results within the service level and inventory constraints. Highlights of the process include the following:

• Demand planning is performed on a regional basis as regional marketing and sales are closest to their market and are held accountable for meeting the sales plan.
• The regional demand plans are consolidated into a global demand plan, which is compared against the global business plan. Global marketing can and does make adjustments to the overall demand plan.
• The Global Master Production Scheduler develops the supply plan and assigns products and volumes to individual plants using the optimizer tool. The results are shared with the regions.
• A Global S&OP meeting is conducted to review and discuss the supply plan. Open issues or individual regional concerns are addressed in this meeting.
• The Regional Master Production Schedulers develop more detailed plans for plants in their region. They are constrained by decisions made in the Executive S&OP meeting.
• The Region conducts an S&OP meeting to finalize and communicate the plan.

The size of the business, the complexity of the network, replenishment lead times, etc., are used to determine whether the Global S&OP plan should be revised quarterly or monthly. Exceptions that arise during execution of the plan are resolved through the coordination of the Global Master Production Scheduler. Pre-established policies and procedures are used to control changes during the plan period and ensure focus is on total economics. The Global Master Production Scheduler routinely monitors performance to plan.

S&OP is a multi-step, collaborative process, with inputs from various stakeholders to develop an operational plan.

In this scenario, key inputs in development of the plan include:

• Total Delivered Cost (Source-to-Customer)
• Current Prices
• Inventory Constraints
• Production Capacities

Emphasis in measuring performance must be total profitability and the plan must result in higher utilization of assets and lower costs.

S&OP Scenario 2: Most Products Are Sold And Produced At A Regional Level

In the second scenario, the business offers many products in small quantities across a dispersed market. Some product-to-machine links must be maintained to ensure satisfied customers, and lead times do not allow for global sourcing. In this case, the Global Business Plan is allocated and maintained at a regional level.

The primary purpose of the Global S&OP process is again to ensure maximum profitability within service and inventory constraints. However, the supply plan is maintained at the regional level and no Global Master Scheduler exists. The aggregate S&OP Plan is reviewed by the Global S&OP team, which consists of marketing, supply chain, and finance personnel from each region as well as the global leader and members of their staff. (See Figure 3)

In most organizations, regional teams develop forecasts and demand plans which are then reviewed by a centralized team.

In this scenario, the supply plan is not determined globally and allocated to the regions; rather, the supply plan is determined at the regional level and then aggregated for final review via the Global S&OP process. Balancing of service-cost-inventory occurs within the regional planning processes based on globally agreed-upon targets. In this approach, less emphasis is placed on cross-regional interaction and more on regional levels with the idea that the good regional performance will lead to good global performance.

Global S&OP Organization

To enable the global approach to planning, the organization must change, which requires vision and plan for change management. Responsibility for the process, the scorecard, and the technology become global. Regions participate in the selection of metrics, the design of the process, the development of the policies and procedures, etc. Also, both the demand planning and supply planning processes involve interaction between regional and global personnel. However, the ownership for the global processes is with the global personnel. The structure of the Global S&OP team is outlined in Figure 4.

Figure 4:  Global S&OP Team

Global S&OP structure.

With a global approach, the firm can expect the number of persons involved in the S&OP meeting to increase. More and more emphasis will be placed on resolving most of the issues and doing most of the planning before the meeting. Only those issues and imbalances that were not resolved in the pre-S&OP meeting processes will be placed on the global meeting agenda.

Global S&OP Policies & Procedures

Given the complexity and number of stakeholders in such a global process, the business must develop and use policies and procedures to ensure overall goals are the focus, and make every effort to avoid disruptions due to differences in opinions. For example, rules are needed to control tradeoffs between production plans at regions. Policies are required for handling unplanned demands or production disruptions. Figure 5 describes key planning rules/policies to be established for a successful Global S&OP process.

Figure 5:  Key Planning Rules/Policies for a Successful Global S&OP Process

Global S&OP policies are required for all regional teams to follow the same procedures and best practices.

The Global S&OP team must periodically review and revise rules/policies and procedures as required. The team must reach consensus on the policies and procedures as all key stakeholders must support the planning outcome.

Keys to Successful Global S&OP

The primary difference in performance management is that metrics need to focus on global performance as appropriate, and must be cross-functional in nature. Some typical metrics used in Global S&OP include:

• Total Operating Result, or Gross Margin vs. Plan
• Total System Inventory vs. Plan
• Actual vs. Planned Demand by Product Group
• Actual vs. Planned Production by Product Group
• Overall Forecast Accuracy

There are several challenges that are inherent when establishing a global planning process. These include:

• Timely and accurate communications across regions and functions. To make certain this happens, adopt easy-to-use tools that can be accessed globally. Develop a meeting schedule on a rolling 12-month basis to ensure participation. Use a planning calendar and measure adherence to agreed-upon dates.
• Align goals and objectives across regions and functions to ensure participants are not punished for shifting their focus on overall performance.
• Design and implement global IT support with the goal of minimizing overall cost while providing key participants the data views and data aggregations they need.
• Change management needs. This may require educating the Global S&OP participants in the process, and provide implementation and facilitation support for the first few months of the process.

At first, participants will not be focused on the global good. This takes time. The leadership will need to set the example. Clear roles and responsibilities must be developed, and documented procedures are needed to help remove emotion from the process. Performance against the business scorecard metrics will be the ultimate measure of success.

Benefits of Global S&OP

There are many benefits gained from implementing a Global S&OP process. Of course, with that, the firm improves overall financial performance. The typical benefits include:

• Shift in focus on value added from local or regional to global.
• Increased visibility across the entire supply chain enabling better business decisions and quicker reaction to issues.
• Improved communications and teamwork across regions and functions leading to more balanced tradeoffs in decisions resulting in improved bottom line.

The regions and countries of a global firm will not optimize plans from a global perspective in the absence of a global process. Instead, they will maximize benefits to their region or country without regard for the overall business results. Leveraging S&OP by shifting the focus to the global bottom line will yield significant financial, customer, and internal benefits.

Alan Milliken - BASF

This past week the mighty LA Lakers, were swept by the Dallas Mavericks in four games.  The Lakers had won two straight NBA titles and were favorites of many to three-peat.  Immediately after the 4th loss, which turned out to be one of the five worst losses of  series deciding games in the history of the NBA, rumors began to circulate about conflicts within the organization.

Several experts said that fans should expect to see many changes within the Lakers Organization coming soon that would affect members  from top to bottom.  They commented that LA had not reached a consensus in regards to what is the best strategy or the best way to approach the execution of that strategy. .  There appeared to be disconnects between upper management and the coach as well as between the coach and the players.

The LA Lakers example exemplifies the fact that   it might be easy to bring a group of professionals together and say they are a team but achieving teamwork that leads to overall organizational success is much more difficult.  This  also makes it clear that spending money and throwing resources at a process does not guarantee success.  Quite often in sports when the under-dog wins you hear folks say, they may  not have the best resources but they had the better team.

The same principles apply to businesses and the S&OP process.  A strong S&OP Team can be the difference between winning and losing.  Conflict among team members and lack of consensus on the game plan can lead to disaster. Failure to gain commitment from all key stake holders can derail the process.  LA’s bench (reserves) were totally outplayed by the Dallas reserves.  We must always remember that operational excellence is driven by People-Process-Technology but only one has the ability to think and act accordingly.

Strong teams must be able to anticipate change and respond to issues in real-time whether they work in business or in sports.  Dallas’s strategy was to post up outside 3-point shooters, move the ball inside and then pass outside to take the open 3-point shot and LA was slow to recognize and even slower to respond. . Likewise, S&OP cannot be effective unless team members can quickly change plans and execute  the new plan.  If your competitor has decided to take some 3-point shots you had better be able to quickly mount the proper defense.  Those who cannot do so will find themselves trying to explain their ineptness to their fans in sports or in the case of S&OP to the Board of Directors.

If you are wondering what happened to the Lakers or more importantly why  your S&OP Team is not winning, you should attend the Best-of-the-Best S&OP Conference in Chicago.

There you will learn:

• The latest technology trends with software providers on the leading edge.
• How successful firms leverage people-process-technology to improve performance?
• How to design planning processes and configure software to enable best practices?
• How to build teamwork and consensus that results in winning.

Attend the IBF’s Best-of-the-Best S&OP Conference in Chicago this June.

Alan L. Milliken,  Business Process Education Manager
BASF Corporation

Hear Alan Speak at:

Alan Milliken

Folks, we must constantly remind ourselves that “process” takes precedence over “technology” and technology should be designed to enable best practices. During the e-revolution many of the process best practices were first identified by those designing demand planning software. For example, the ability to identify exceptions to pre-defined rules in real-time and instantly issue alerts to planners. This best practice was in place before technology. However, technology is advancing and being embraced so rapidly that it often dominates our processes by default. That is, our people are not keeping pace with the knowledge, education, skills and abilities via objective training required to leverage the software. In many cases this has led to sub-optimal processes for planning and forecasting, where systems are wrongfully blamed for failure.

As the Business Process Education Manager at BASF I often ask my students which of the three components of operational excellence (People-Process-Technology) controls overall success? Unfortunately, some answer our ERP system. Many of us are asking; do we really run our ERP system or is it running us? The latest advancements in ERP software provide high power heuristics that can automatically calculate order quantities, safety stocks, maximum inventory levels, etc., based in part on demand forecasts. Priorities and trade-offs can be managed by the system. However, the objectives and associated rules are determined by people. Therefore, how effectively we deploy new processes and systems relates directly to the knowledge and skill of our people.

We must act now to avoid the “Terminator Syndrome” (Systems and machines taking over). Our people can make the difference in whether technology or process receives priority.  But, to do so they must be educated and trained in planning processes and then how the latest software enables planning. For example, if a Demand Planner does not understand how the software creates the forecast or the recommended safety stock related to forecast error, they cannot contribute to improving process performance.

We all agree that more emphasis is needed on what is best overall for the firm. For example, we want to leverage our S&OP processes to maximize the value added to the bottom-line. Software firms have responded by providing advanced tools that can simulate and optimize demand & supply plans across the business. However, we must ask if our employee skills are keeping pace, particularly in process best practices and quantitative methods such as time series forecasting, causal modeling, statistics, and more. Furthermore, internal collaboration and teamwork is now recognized as most important to business success since technology has enabled a much more integrated approach to planning. What is your firm doing to prepare employees to contribute in this new environment of the system and machine?

The Institute of Business Forecasting & Planning, IBF is the leader in providing S&OP, Demand Planning and Forecasting education & training. The breadth of the IBF program includes understanding these processes from a strategic, tactical and operational perspective. For example, their conference presentations include how firms are using demand planning to improve business performance as well as tutorials on how to better perform specific tasks. Participants learn both technical and personal competencies needed to succeed in today’s fast-paced, ever-changing environment. For the Demand Planner, the Certified Professional Forecaster (CPF) program provides the knowledge and skill needed to contribute to process design and system configuration.

— Want to discuss the latest technology trends with software providers on the leading edge?
— Want to hear how successful firms leverage people-process-technology to improve performance?
— Want to learn how to design planning processes and configure software to enable best practices?
— Want to prepare yourself to better contribute to your firm’s success?

Attend the IBF’s Best Practices Conference in Orlando, October 24-26, 2010

Alan L. Milliken, CFPIM, CSCP, CPF
Business Process Education Manager
BASF Corporation

About Alan Milliken:

Alan Milliken is Business Process Education Manager for BASF Corporation. He has extensive experience as a practitioner, consultant and educator in supply chain & operations management. Alan spent over 20 years at major manufacturing sites serving in production, logistics, process control, operator training, and scheduling. He has spent the past 15 years as a business process consultant and educator. Alan served as a subject matter expert on the teams that created the Certified Supply Chain Professional (CSCP) program for APICS and the Certified Professional Forecaster (CPF) for the Institute of Business Forecasting & Planning, IBF. He holds an engineering degree from Auburn University and an MBA in Management from Clemson University.

See ALAN MILLIKEN Speak in Orlando at IBF’s:

$795 USD for 3-Days including Advanced S&OP Forum!

]]> https://demand-planning.com/2010/07/28/the-terminator-is-stopping-our-demand-planning-forecasting-education-are-we-prepared/feed/ 3 https://demand-planning.com/2009/09/08/the-magic-of-better-demand-planning-in-orlando-and-i-am-not-talking-about-mickey-mouse-or-donald-duck/ https://demand-planning.com/2009/09/08/the-magic-of-better-demand-planning-in-orlando-and-i-am-not-talking-about-mickey-mouse-or-donald-duck/#respond Tue, 08 Sep 2009 18:56:31 +0000 https://demand-planning.com/?p=312

Alan Milliken

Many firms have no strategy for dealing with unforecastables and some even pretend that all items are statistically forecastable.  Statistical tests need to be used to identify those articles which cannot be forecasted with conventional techniques, such as intermittent demand and demand with high variances.

For example, low volume and erratic demand may indicate that an item should not be offered in the current product configuration or at a particular location.  A key question that must be answered in such cases is whether or not the product is profitable and to what extent? If the product is profitable, the corrective action may be to move the customer to a more popular package size or assign the customer to a different warehouse with more demand for the product.

So, I am not talking about Mickey Mouse and Donald Duck.  I am talking about the upcoming IBF conference in October where you can learn the “magic” of better demand planning.

You will have many opportunities to learn how to improve both the quantitative and qualitative aspects of the Demand Planning process.  I will be presenting on how the world’s leading chemical company, BASF, develops strategies to improve forecasting and better manage unforecastables.  This includes methodologies for aligning product offerings with forecasting strategies and determining when conventional statistical tools are the right answer.  Mine and other presentations will provide you with the knowledge and understanding to optimize the interaction of people-process-technology within the demand planning function.

If you are looking for a little “magic” to improve your demand planning & forecasting, join us in Orlando.  You will hear about the use of volume & variance analysis to develop demand planning strategies and much more.

Of course, your comments here would be greatly appreciated.  How do you handle unforecastables?  It would be great to hear from you.

Alan L. Milliken
BASF Corporation

See ALAN L. MILLIKEN Speak at The IBF’S:

$695 (USD) for 3 Full Days!

October 12-14, 2009
Orlando Florida USA