Lewis Carroll once wrote, “If you don’t know where you are going, any road will get you there.” Watts H. Humphrey, the American software engineer countered with “If you don’t know where you are, a map won’t help.” These two quotes remind us about the two essential ingredients of a healthy, continuously evolving process: direction and decisiveness. For a successful global S&OP process, direction and decisiveness are crucial. 

We had recently remodeled demand planning process at Hollister and our destination was simple. It was to achieve the following:

• Provide an interchange of thought between Sales, Marketing, Finance, and Operations
• Create meaningful reporting for demand planners and end users
• Focus on risk/opportunity for the company

Demand Planning and Global S&OP Process

Hollister Incorporated employs a global S&OP process divided into three geographical areas – North America, which I manage, is one of those areas. Each geographical area completes tasks on a similar schedule.

Demand Planning has the first six workdays of the monthly S&OP process to report KPIs, revise baseline and/or event forecasts, and review results with key internal partners. Demand Planning finalizes the demand plan, and hands it over to Supply Planning on day seven. Supply Planning creates a replenishment plan by the ninth workday. A pre-S&OP meeting by global region occurs on the tenth workday. The company demands a firm time schedule and fully engaged participants in order to deliver the report on day twelve to our executive S&OP meeting. The director of Global Operations, to whom the Demand Planning and Supply Planning teams report, presents key supply/demand imbalances and any required or volunteered action plans to our executives.

Also, the demand planning function at Hollister separates forecasts into two succinct categories – operational and budgetary forecasts. Operational forecasts consist of combining the revenue and sample forecasts. Revenue forecasts apply to products sold to customers. Sample forecasts apply to products provided to customers and sales representatives free of charge for demonstration and education. Budgetary forecasts consist of an annual plan and a modification of the annual plan during the middle of our fiscal year. My focus will be on the operational forecasting process.

Demand Plan Process: An Overview

The overall steps in the demand planning process remain the same: report KPIs, revise the demand plan, and review the revised plan with internal team members impacted by the changes. These steps occur during the first seven workdays of the month. I suspect this is a common practice in many companies.

For Hollister, I made some minor adjustments to KPI reporting. We still calculate forecast accuracy (error) using MAPE. However, now I include forecast accuracy tolerances by product segments meaningful to the end users including Marketing, Finance, and Sales. In the past, forecast accuracy was tracked to show improvement only. Now, not only do they show improvement but whether the accuracy for the current period is within acceptable parameters specific to a category of products.

As shown in Figure 1, the solid lines represent the upper and lower control limits. These are calculated with a varying range of standard deviations, depending on the business. Every point on the graph shows the forecast accuracy for that period, monthly in this case. The dashed line denotes the current trend.

Reports should be transparent, actionable, and tell the story. Transparency is simple. All Demand Planning reports are available for review by any team member either on a shared hard drive or via our intranet. The above report accomplishes the remaining two requirements. The report details the history of this particular business, the overall improvement not only in forecast accuracy but also in forecasting stability. Forecast accuracy has been improving from around 88% in August 2008 to 92% by June 2011. Not only has accuracy been improving, it also has been consistently getting better. The upper and lower control limits have narrowed to the range of 90% to 94%. This enabled the production team to rely more on forecasts than on their consumption data, to reduce their safety stock level, and to make improvements on their Just-in-Time standards. Also, the report demands action by the forecaster to continually improve results and to identify and repair causes of outliers like the one evidenced in February 2011 (see Figure 1).

Basic reporting is formatted similarly to the S&OP and financial reporting. The sample report later in this article displays this discipline. This maintains familiarity in reporting for the same audience, namely executive leadership. Reporting, including Demand Planning, adopts the corporate standard usually established by Finance.

Revising the demand plan requires considerable attention to avoid pitfalls and to build credibility. Four steps encompass the demand plan revision stage of Hollister’s demand planning process:

• Cleansing and managing historical data
• Maintaining a cyclical SKU-L review
• Managing forecast exceptions
• Reviewing event forecasts

A Good Cleansing

The first step in revising the demand plan is data cleansing. The “garbage in garbage out” theory in computer programming applies here as well. Forecast models, especially regression and exponential smoothing, exhibit sensitivity to outliers or unique events spanning over one or several periods. Neutralizing the outlier or event is the science part. Understanding what caused the outlier or whether the event is extremely important is the art part of demand planning. The demand planner can only adjust outlier(s) or system parameters if the cause is known and understood. For example, a plant explosion in the hometown of a major customer needed our wound care products for numerous burn victims. This was a one-time event because it does not happen every day. The entire purchase is removed from the data. In another example, initial orders by new customers are used not only to stock their shelves but also to cover their demand between order cycles and safety stock. Going forward, they will only replace what they sell. Based on our experience, we expect the future demand of such a customer be approximately 40% of the initial order. Therefore, we remove 60% of the initial demand data. Of course, timing of when sales will begin and when ramping up of demand will occur also requires some adjustments.

A Cyclical Approach

The second step is developing and maintaining a cyclical SKU review based on volume and variability. I like to think of my SKUs as children; I have 3,200 of them running around needing their own special attention—some more than others. Therefore, SKUs with high volumes and variability are reviewed monthly or semi-monthly (especially new product launches or focus products). Focus products often contain event forecasts. Medium volume products with high variability and vice versa are reviewed on a monthly basis. Products with lower volume and higher variability are reviewed less frequently; that is, quarterly. (See Figure 2)

We use this model for reviews based on item variability.

Figure 2: Forecast Review Based on Volume and Variability

I determine each SKU’s coefficient of variability on an annual basis. The same is true for classifying a SKU’s volume. A-volume SKUs comprise 80% of the company volume. B-volume SKUs make up the next 15% of volume. And C-volume SKUs are the last 5%. However, I calculate a SKU as high, medium, or low volume within each marketing or sales manager’s area of responsibility. In some businesses, total unit volume does not equal the unit volume of one SKU in another business. Focus products qualify automatically for semi-monthly review.

Manage The Exceptions

The next to last step in the process is managing exceptions. This is accomplished using system alerts from APO-DP (SAP’s Advanced Planning Optimizer for Demand Planning) and reporting out of SAP’s Enterprise Data Warehouse (or Business Warehouse or Intelligence) application. Two classifications of alerts or reporting exist—responsive and reactive. Responsive alerts and reporting provides advance warning of what might happen with potential outliers and forecast accuracy challenges. Whereas, reactive alerts and reporting detail what happened. The goal of the process is to be 100% proactive and rarely, if ever, reactive. Time spent in reaction mode is time lost on learning the business and improving the process. Again, I cannot reiterate how important it is to understand what caused a miss in accuracy or an unforeseen outlier.

Review The Event

The last step in the process involves the event review meeting with Sales, Marketing, Finance, and Operations. The level of detail varies depending on how stable an event’s demand is and how knowledgeable the Sales and Marketing team is about the forecasting process. I will comment on this later. If variability is high, then we review at the SKU-Location level. If the event stabilizes, then we review at an appropriate aggregate level according to our company product hierarchy. Forecast accuracy and bias are calculated for each event as well. Again, the reporting must be actionable and tell a story.

Table 1 reveals the story of forecast accuracy of a particular new product launch, which improved only after suffering some performance anxiety. This forecast required investigating why accuracy plummeted after the January 2011 launch. Two causes were identified. One, key customers did not readily adopt the new product similar to its predecessor. Two, customers were unsure how to properly use the new product. As you can see, Demand Planning in partnership with Sales and Manufacturing answered the challenge through forecast adjustments and enhanced customer training.

Monthly Demand Planning S&OP Meeting

The monthly demand planning meeting typically involves representatives from Sales, Marketing, Operations, and Finance. The purpose of the meeting is threefold: Identify supply constraint impacts on event forecasts and timing, close the gap between the demand and supply, and then approve the demand plan. Notice we identify supply constraints only. Hollister, Incorporated develops an unconstrained forecast.

The meeting agenda is divided into three parts: present causes behind any KPI out of tolerance limit, discuss key events with biggest impact on business, and then approve the demand plan. Not only are the causes of KPIs performing outside tolerances presented, but solutions developed or actions to be taken are presented as well.

Regarding the discussion of events, documented observations and any action taken are shared with Operations. This provides Operations (sometimes Finance) an opportunity to ask questions or to share any constraints with Sales and Marketing. Oftentimes, the constraint is known and already responded to.

The current demand plan is compared against the previous demand plan, the annual plan (AOP), and the mid-year adjustment. At times, it is necessary to share causes behind any larger-than-normal increases or decreases. For example, Category H, as shown in Table 2, would require explanation regarding an increase of 12.4% over the previous month’s demand plan. In this particular case, Sales won a new contract with a high volume customer.

What About The Rest Of The Month?

With regard to performing the above tasks, the balance of the month is spent monitoring performance (including going over the response-based alerts and reporting), managing forecasts on an as-needed basis (adding new product forecasts, adding or adjusting new events, or adjusting existing baseline), and mentoring internal customers on demand planning process and procedures. Every interaction offers the opportunity to reinforce basic principles, such as forecasts should reflect expected sales not a method of inventory management. As alluded to earlier, the training and understanding of internal partners is part of the process.

This article originally appeared in the Journal of Business Forecasting, Spring 2012 issue. To receive the Journal of Business Forecasting become an IBF member today. 

“26 years of experience is working against him. He figures anything big enough to sink the ship they’re gonna (sic) see in time to turn. The ship’s too big with a too small rudder. Everything he knows is wrong.”
– Brock Lovett, in the 1997 movie Titanic

This quote by Bill Paxton’s character in the movie Titanic played over and over in my head on my flight home to Chicago last October. Hours earlier, I had finished presenting my company’s process at the IBF conference. When I finished, no one queried about my process. They inquired about my knowledge rolling out SAP’s Advanced Planning Optimizer (APO) — on which I had made only a three second comment. This bothered me. I realized I could become that captain. I had 17 years of experience with companies like Target and Lands’ End working against me.

Then, much like that iceberg, an epiphany struck. I realized the process I discussed was the process we use at Hollister, Incorporated, which relied too heavily on my past training. Demand Planners spend their days portraying themselves like Switzerland between two warring factions: The creators of demand (Customers, Sales, and Marketing) and the satisfiers of demand (Procurement, Manufacturing, and Logistics). I rarely struggle with being the neutral country when managing the demand plan. But, I misplaced my sensibility to remain neutral between my internal (sometimes external) customer and the forecasting and demand planning process.

I would spend the next five hours of my long journey home soul searching. I remember my Operations Management professor explaining why Japanese automakers perfected the process while their American counterparts struggled. Sakichi Toyoda developed a technique called The Five Whys. Basically, they would identify a problem like, perhaps, a sudden acceleration issue. Then the engineers would ask the first why: Why are these particular Toyota models accelerating suddenly? The electronic throttle control system failed. Why did the electronic control system fail? And the whys would continue. If no more questions of why could be asked, then it was assumed the engineer arrived at the root cause. I have applied this technique often in my personal life as much as in my professional life.

Seeing the Iceberg

And so it began. I do not recall the exact thought process. However, I noted two consistent patterns multiple times while working through the Five Whys. First, the answers were self-centered: They all started with “I,” not “we.” Experience overpowered internal customer needs. It created a blind spot to developing communication and reporting, both of which are supportive of effective business interactions. I know my audience. Did my reporting and communication reflect the audience needs? Or am I communicating what I think they need? Clearly the answer was the latter.

The telltale symptoms of this communication illness supported my concern: Recent attendance at the Demand Planning S&OP meeting has started to wane; internal customers have started to reschedule established monthly meetings; and, above all, meetings that used to last 45 minutes to an hour are now down to 30 minutes at most.

Second, the simplified process was a reaction to data integrity issues. The data view was high enough that it obscured potential problems. My reaction should have been a well-planned response. While the forecast accuracy at my company improved at a product line level to 90%, opportunities abounded in other areas, like improving event forecast metrics and developing a SKU level review schedule based on accuracy, bias and variability. So, did I produce accurate and trustworthy forecasts? Is there room for doubt? Again, the answer was the latter.

My experience indicated a high level of personal credibility. But that was not enough. My forecast accuracy was consistently at or above 90%. That was not enough either. There were symptoms of credibility illness as well. Despite my best forecasts, a production planner decided to produce less of a key item—a familiar tale with a familiar outcome. Marketing pushed up a new product launch date assuming the forecast would continue to be higher than demand. There were definitely outwardly signs of discord.

Here I had a communication and credibility opportunity — even after 17 years in the forecasting and demand planning field.

Whoa! Wow. Really? Nah. (Sigh.)

There were two reasons for that sigh. First, I stepped outside O’Hare airport to a stunning 40 degree drop from where I was only 200 minutes earlier. Second, I realized that I had awakened something that could not be quieted. Have you ever gone into the garage only to organize your toolbox? Once you get there, thoughts migrate to organizing the gardening tools. Hours later, your entire garage is spotless even though the “Honey-do list” had only called for straightening the toolbox. Well, I realized I would have a very clean and organized garage soon.

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Crossing the Rubicon

This moment was much like Julius Caesar’s decision to cross the Rubicon River. The decision was a defining moment. If he stood on the shore, it would mean surrendering his governorship. On the other shore, it would mean treason against the Roman Senate already fearful of his popularity. Roman historian Sueronius noted Caesar approached the river with trepidation. I knew I had to cross it — without a doubt.

With two important identified concerns, I embarked on a journey of reinvention and re-invigoration. How did I accomplish this? I challenged everything. No process or report was satisfactory. I criticized every aspect of my responsibilities. What value does this report, process, or responsibility bring to the corporate mission and the bottom line? Who does this report or process serve? Can any decision be made from my output? How can Demand Planning become invaluable to this company?

In practice, I relied on everything I knew, and doubted nothing. I am successful. Some of my accomplishments achieved million dollar status. I pulled together great ideas from past career successes, reviewed manuals and documentation, and reread performance reviews for more ideas.

For innovation and inspiration, I reviewed every IBF presentation for the past three years — ones I personally attended and others I did not. This was therapeutic as well. This confirmed that I was not alone with these outwardly simple yet inwardly difficult challenges. I reviewed notes in the margins. If you are not already doing so, I recommend downloading all the presentations prior to attending an IBF conference. The slides provide insight on not only the main focus of the presentation but also a feel for the presenter’s expertise.

In refreshing my education, I reread Chaman L. Jain book, “Fundamentals of Demand Planning & Forecasting,” which is often referred to as the “Demand Planner’s bible.” For those preparing for certification as a Professional Forecaster, this book is highly recommended. I concur for two reasons. One, this book comprises the best of the best in business forecast practices. While the non-technical could be viewed as subjective, common themes resonate throughout the individual articles like the proper role of statistics, communicating forecasts to management, and factors for success in this infant career field. Meanwhile, other sections serve as a good refresher on statistical know-how.

As a companion to the Fundamentals of Demand Planning & Forecasting, the quarterly Journal of Business Forecasting has become another source of re-education. The articles in this publication, built on previous editions, keep readers current on pressing topics and are a wonderful source of brainstorming ideas. I often scribble new ideas in the margins of my copies of this journal.

As the brainstorming, collecting of ideas, and pulling together notes continued, I realized this is not starting over. This is not about ignoring what got me to this point in my career. This is about allowing wisdom to guide me in determining relevancy of an idea or note. For example, while CPFR with my previous company was an extremely useful tool, it does not apply to my current company’s business model (yet). In my opinion, the medical device industry has not reached the level of collaboration like that found between big box retailers and their manufacturing partners.

Also, some ideas were not financially or technically plausible yet. And I stress “yet.” I identified these constraints specifically by de-constructing the obstacles preventing me from achieving execution. In my business, we forecast customer purchases separately from sample requests from sales reps and clinical nurses. This functionality is available in North America only. I want to expand this ability to forecast sampling needs to the rest of our global business units. This expansion requires additional resources. However, finance rolled out a new system that could use the ability to separate revenue from sampling demand. Plus, I showed our German team members the functionality. They would like to forecast demand separate from sampling as well. So, the momentum is building. I expect to achieve this in the next 18 months. In the end, the aforementioned effort generated ideas that generated ideas that generated ideas, and so on.

Reaching the Other Shore

Those ideas were rounded up and siphoned through for relevancy and execution. With these, a succinct and disciplined approach emerged.

• Reporting format must match the corporate financial standard
• SKU by location (SKU-L) should be maintained at appropriate intervals based on volume and variability
• Naïve forecasts should be used as a performance measurement
• New product forecasts must be scrutinized for plausibility
• Marketing and/or product managers must be accountable for KPIs
• Targets should be clearly defined on all reporting
• Event forecasts should be identified and measured
• Executive summaries should be created for presentation at monthly Demand Planning meeting

With all these, transparency will be achieved, communication will be improved, and credibility will be increased.

The final output, a part of executive summary, should include detail of any metrics that may be out of tolerance, follow-up actions, the demand plan numbers, the important event opportunities/risks, and an event summary by country. The format of the Demand Planning executive summary is modeled after the Pre-S&OP reporting. The overall look and feel of the report should align nicely with the overall S&OP process as well.

I surveyed my internal customers about the previous demand planning process. I will solicit their opinion about the new one in August. This was not a walkabout where one strays out alone; rather it is an effort supported by feedback and championed by management. I look forward to comparing the feedback of both processes. So far, the feedback has been positive.

When I arrived at Hollister nearly four years ago, the monthly Demand Planning S&OP meeting consisted of reviewing past performance with limited attention to future events. While historical performance confirms the validity of past efforts, it does not necessarily guarantee predictors. Event management better determines the future.

Today, the process and its reporting mostly focus on the future. They narrow in on the opportunities and risks facing the company. They communicate those opportunities and risks. They provide us the discipline to make adjustments only as necessary.

So I am grateful to my audience last October in Orlando and to the IBF for the opportunity to expose a process in disrepair — to reveal the tip of an iceberg. Unlike the Titanic, I now possess a bigger rudder to proactively avoid that collision by communicating course corrections based on credible reporting. I look forward with renewed enthusiasm for the Demand Planning field. What trans-forecasting journey will the next 17 years unfold?

As published in the Summer 2011 issue of the IBF’s Journal of Business Forecasting (JBF). All Rights Reserved.

Mike Kelleher - Hollister

Motivational speaker Lou Tice called it a “Scotoma”—an area of partial alteration to one’s field of vision.  Allstate Insurance represents something similar in one of it’s television commercials featuring a man by the name of “Mayhem”.  In this particular ad we see Mayhem clinging to the side of an unsuspecting woman’s SUV claiming to be her blind spot. Acting as the woman’s blind spot in her car he tells her its all clear to change lanes however, when she proceeds to change lanes she crashes into another oncoming truck.  How can this so called “blind spot” affect a company’s demand planning & forecasting process or even the bottom line?  If this blind spot impacts management, could it impact the entire team?

The answer is yes it can.  I had been working in the forecasting and demand planning fieldfor 17 years when I discovered that I was the blind spot, the Scotoma, in the process.  I came to understand that I had allowed my wealth of experience to overshadow the needs of the company.

In the session I will be giving at IBF’s Supply Chain Forecasting & Planning Conference in Scottsdale, AZ you can hear not only some of the warning signs of a potential blind spot but also how to re-energize ideation in yourself and others in order to eliminate the blind spot or neutralize its effects.  I will also provide five important qualities that reporting should contain, and I will touch upon the qualities of a great forecaster as well.

We are fortunate to enjoy the world of forecasting.  Forecasting mixes the discipline of science with the beauty of art.  I hope you will join me in generating ideas and lighting a new path to success.

Michael Kelleher
Chief Forecaster – North America
Hollister

Hear Michael Speak at IBF’s