Sales and Operations Planning (S&OP) is a structured, cross-functional business process that aligns all areas of an organization around a unified set of assumptions to drive coordinated decision-making. The goal of S&OP is to ensure that business plans and objectives are balanced and that financial and operational plans are synchronized. It serves as the critical integration point between strategic planning and daily execution, enabling companies to translate high-level business objectives into actionable plans.

At its core, a mature S&OP is not just a supply chain or operations process. It is a business-wide planning framework that brings together sales, marketing, finance, operations, product management, and supply chain to work collaboratively. The result is a comprehensive plan everyone supports and works toward, reducing misalignment, improving responsiveness, and increasing overall business performance.

The process typically operates on a monthly cadence, with inputs from various departments converging into a final executive review meeting where trade-offs are discussed, decisions are made, and a single, unified plan is committed to.

The Value of S&OP

Implementing and executing an effective S&OP process provides tangible value across the organization. At a high level, S&OP delivers:

• Improved forecast accuracy and demand visibility: S&OP allows companies to move from reactive to proactive planning, reducing surprises and enabling better preparedness for market changes.
• Balanced supply and demand: With cross-functional collaboration, companies can more efficiently manage supply constraints, optimize inventory levels, and meet customer service goals.
• Financial alignment: S&OP ensures that operational plans are financially viable and support the broader goals of the business. It connects demand and supply plans to financial projections.
• Increased agility: The ability to run scenarios and analyze the impact of decisions across the business improves agility in the face of disruptions or demand shifts.
• Enhanced collaboration: S&OP builds a culture of accountability and transparency. It fosters communication across silos and ensures that all stakeholders work from the same assumptions.
• Executive-level visibility: With clear insights into upcoming challenges and opportunities, executives can make informed decisions with confidence.

Organizations with mature S&OP processes often see improvements in service levels, inventory turns, working capital, and revenue growth. But the actual value lies in the enhanced decision-making capabilities and improved alignment across the business.

How to Build a Sales and Operations Plan

Developing a robust sale and operations plan requires a clear structure, defined roles and responsibilities, and a commitment to consistent execution. While tools and technology play a role, the foundation of effective S&OP lies in process discipline and cross-functional collaboration.

Here are key building blocks to consider:

• Leadership commitment: Executive sponsorship is essential. S&OP must be seen as a strategic business process, not just a supply chain activity.
• Defined ownership and governance: Each step of the process should have clear ownership, with defined roles for demand planning, supply planning, finance, product management, and executive teams.
• Calendar and cadence: A standard monthly cycle should be established, with defined inputs, outputs, and meetings for each phase. Concurrent weekly S&OP meetings help manage near-term deviations.
• Unconstrained and unbiased planning: The demand plan should be developed independently of constraints or biases, providing a true reflection of expected demand. Only then can supply plans be adjusted accordingly.
• Data and metrics: Reliable data is the backbone of S&OP. Forecast accuracy, bias, inventory health, and capacity utilization are some of the key metrics that drive accountability and improvement.
• Technology and tools: While not a prerequisite, modern planning tools can enhance collaboration, scenario planning, and automation. However, these tools must support—not replace—a sound process.
• Culture and change management: S&OP is as much about people as it is about process. Building trust, encouraging open dialogue, and reinforcing accountability are crucial for success.

Key Steps in S&OP

A typical S&OP process includes several structured review steps culminating in an executive decision-making forum. Here is an overview of each phase:

Product Review

• Purpose: Align the product and portfolio roadmap with business strategy.
• Activities: Review new product introductions, end-of-life plans, promotions, and phase-outs. Evaluate the impact of changes on demand and supply.
•  Participants: Product management, marketing, R&D, operations, and finance.

Demand Review

• Purpose: Develop an unconstrained, consensus demand plan.
• Activities: Analyze historical performance, market trends, customer input, and promotional plans. Identify risks and opportunities.
• Participants: Demand planning, sales, marketing, and finance.

Supply and Resource Review

• Purpose: Determine how to meet the demand plan with available resources.
• Activities: Evaluate capacity, inventory, procurement, logistics, and supplier capabilities. Highlight constraints and propose scenarios.
• Participants: Supply planning, manufacturing, procurement, logistics, and finance.

Pre-S&OP/Reconciliation Review

• Purpose: Identify gaps between demand and supply, align on scenarios, and prepare for executive discussion.
• Activities: Review financial implications, resolve issues, and recommend decisions.
• Participants: Cross-functional team leads, finance, and planning leadership.

Executive S&OP Review

• Purpose: Make final decisions, approve the consensus plan, and provide strategic direction.
• Activities: Review scenarios, validate financial impact, approve trade-offs, and document decisions.
• Participants: Executive leadership, heads of major functions, and finance.

Concurrent Process: Sales & Operations Execution (S&OE)

While S&OP focuses on the mid- to long-term horizon (typically 3 to 24 months), S&OE manages near-term execution (0 to 13 weeks). This weekly process addresses short-term deviations from plan and ensures agility in responding to real-time changes. Key focus areas include order fulfillment, short-term supply imbalances, and demand shifts. S&OE connects strategy to execution, ensuring that decisions made in S&OP are implemented effectively.

Sales and Operations Planning: The Final Word

In today’s complex and volatile business environment, Sales and Operations Planning is more than just a process—it’s a mindset and an essential capability. Companies that embrace S&OP gain the ability to navigate uncertainty, align cross-functional teams, and drive smarter, faster decisions.

The future of S&OP is one of greater integration, intelligent automation, and real-time visibility. But, at its heart, the success of S&OP will always depend on three things: collaboration, transparency, and consensus.

Organizations that invest in building a strong S&OP process—supported by leadership, informed by data, and aligned with strategic goals—will be better positioned to thrive. They will not only deliver superior performance but also foster a culture of shared accountability and continuous improvement.

In short, Sales and Operations Planning is the bridge that connects strategic intent to operational execution. Done right, it becomes a sustainable competitive advantage.

Do you have questions about demand planning? This guide explains everything you need to know about this complex topic in a simple and understandable way.

What is Demand Planning?

Demand planning is the process of using analytics, data, insights, and experience to make predictions and respond to various business needs. It leverages demand forecasts—not as an end in themselves—but as a tool to highlight opportunities and risks, establish business goals, and support proactive planning across functions.

While demand planning often reports into the supply chain, it is not solely a supply chain function. It is a cross-functional discipline that integrates insights from sales, marketing, finance, and operations to create a consensus plan—a unified view of what is most likely to happen in the market.

Demand planning combines historical sales analysis, market intelligence, consumer behavior trends, and business knowledge to guide actions across the organization. It enables companies to anticipate demand shifts, align resources accordingly, and avoid stockouts and excess inventory, especially in an environment where customer expectations and market conditions constantly evolve.

At its core, demand planning drives better business performance by ensuring that decisions are based on relevant, timely, and collaborative inputs, not guesswork or isolated projections.

Bottom line: An accurate demand forecast provides the information your operations and sales teams need to plan how much product to buy or manufacture to meet projected demand as efficiently as possible with limited waste.

What is the Difference between Demand Planning and Demand Forecasting?

Demand forecasting and demand planning are closely connected but serve different purposes:

• Demand forecasting is the analytical process of using data, statistical models, and judgment to predict future demand. It’s a probability-based estimate of what might happen and forms the foundation for planning decisions?
• Demand planning takes the forecast further by integrating it into the business strategy, aligning stakeholders around a shared set of expectations, and determining the actions needed to respond to that demand.

What Purpose Does Demand Planning Serve?

Demand planning aims to create a realistic and actionable view of future demand so the organization can align supply, resources, and investments accordingly. It addresses critical issues including:

• Strategic planning and assessing risk (long-term planning and S&OP/IBP)
• Finance and accounting (budgets and cost controls)
• Marketing (consumer behavior, life cycle management, pricing)
• Operations and supply chain (resource planning, production, logistics, inventory)

Why Is Demand Planning Important?

In a world of increasing uncertainty, demand planning helps companies stay ahead. Done well, it enables organizations to:

• Improve service levels and customer satisfaction
• Minimize inventory carrying costs and waste
• Respond quickly to supply chain disruptions or market shifts
• Enhance collaboration between departments
• Increase profitability and operational efficiency

Demand planning is not a one-time task but an ongoing, iterative process that requires the correct data, tools, and cross-functional collaboration. It must also be flexible enough to adapt to volatility, whether driven by global events, consumer trends, or economic shifts.

Poor demand planning leads to the outcomes businesses aim to avoid: lost sales, excess inventory, wasted capital, and disconnected teams working from different assumptions. A well-executed demand planning process, on the other hand, builds organizational alignment, reduces bias, and leads to better business outcomes.

Why is it Critical for Businesses to Practice Demand Planning?

Demand planning is not just a supply chain function; it’s a core business process that drives strategic alignment, financial performance, and customer satisfaction. Based on IBF research from 34 organizations across different industries, companies that invest in structured, data-driven demand planning realize tangible benefits across key areas of the business.

1. Improve service and protect revenue: A strong demand planning process helps businesses meet customer needs with greater reliability, ensuring on-time and in-full (OTIF) performance, even in the face of market volatility or promotional spikes. The result? Improved customer satisfaction, stronger brand loyalty, and higher top-line revenue.

Fact: A 15-point improvement in forecast accuracy has been shown to drive on to two percent in top-line sales growth and improve OTIF performance, meaning fewer stockouts and more happy customers.

Demand planning ensures your business doesn’t miss out on sales because of poor availability. It provides the early visibility needed to make smarter inventory and production decisions, keeping your shelves stocked and your customers returning.

2. Increase operational efficiency and reduce cost: Demand planning enables organizations to run more efficiently by minimizing waste, improving resource utilization, and allowing smarter scheduling of production, logistics, and labor. It transforms decision-making from reactive to proactive—letting teams plan ahead rather than scramble in response.

Fact: A 15-point improvement in forecast accuracy can deliver a 2.3 percent or more increase in pre-tax net profit, driven by better operational alignment and cost control.

By aligning cross-functional teams around a consensus forecast, organizations reduce duplication of effort, optimize capacity, and ensure the right resources are available at the right time—leading to smoother operations and lower costs.

3. Manage assets and free up cash: Effective demand planning significantly improves companies’ inventory and working capital management. With clearer insight into what’s actually needed—and when—businesses can reduce excess inventory, lower carrying costs, and avoid the pitfalls of overproduction or fire-sale markdowns.

Fact: For every 15-point improvement in forecast accuracy, companies can realize a 12 percent reduction in inventory, freeing up valuable cash and minimizing waste.

Demand planning ensures businesses are not over-invested in supply, storage, staffing, or space. It helps unlock capital tied up in inventory and directs it toward more strategic, value-added investments.

Demand planning is no longer optional. It’s a strategic necessity. Organizations that invest in robust demand planning processes not only gain greater visibility and control but also position themselves to thrive in a constantly evolving marketplace. With the proper training, structure, and leadership, demand planning becomes a competitive advantage that enables more resilient, data-driven organizations.

Where Does Demand Planning Fit Within an Organization?

Demand planning is a strategic, cross-functional process that touches nearly every part of the organization—from supply chain and operations to sales, marketing, and finance. While its reporting structure can vary, what matters most is how the function is structured, supported, and empowered, not simply where it reports.

Based on IBF research and industry benchmarks:

• 48 percent of demand planning functions report into supply chain or operations
• 23 percent report into the commercial side of the business, such as sales or marketing
• 8 percent report into finance
• 10 percent operate as an independent function or report directly to a business unit owner
• The remaining 11 percent follow other models depending on organizational design.

These variations reflect the flexibility of demand planning—it can reside within different departments, depending on the company’s structure, maturity, and strategic priorities.

But here’s the key: regardless of the reporting line, demand planning must operate as a cross-functional, collaborative, and unbiased process. Its success depends on its ability to engage multiple stakeholders, reconcile competing priorities, and drive consensus to produce a unified, realistic view of future demand.

The Complexities of Demand Planning

Finding and maintaining the perfect balance between sufficiency and surplus can prove especially tricky. It isn’t a once-and-done task. Economic conditions change, and competitive environments constantly evolve.

To address this, demand planning typically requires using demand forecasting to predict future demand trends. This has added benefits, most importantly, heightened company efficiency and increased customer satisfaction.

What are the Key Components of Demand Planning?

Here are the critical parts of demand planning:

Product portfolio management

Effective demand management requires a clear understanding of product lifecycles, from launch to phase-out. Product portfolio management supports this by tracking each product’s stage and showing how changes in demand can impact related items. It also plays a key role in planning new product introductions, helping teams anticipate demand, allocate resources, and support successful launches. With strong portfolio management, companies can better manage transitions, reduce risk, and respond more effectively to market changes.

Statistical forecasting

Statistical forecasting is based on the concept that past history best predicts future performance. It uses complex algorithms to analyze historical data to develop demand forecasts. This exacting process demands accurate data, including eliminating outliers, exclusions, and baseless or inaccurate assumptions.

Sales forecast and overrides

As a process champion, the demand planner plays a critical role in driving consistency, structure, and accountability across the forecasting process. One of the key responsibilities is managing sales inputs and overrides—ensuring that adjustments to the statistical forecast are based on valid insights rather than bias. This involves working closely with sales teams to understand market intelligence, promotions, and customer expectations while also challenging assumptions when needed. The goal is to balance collaboration with discipline, ensuring that overrides improve forecast accuracy and align with broader business objectives.

Trade promotion management

In today’s highly competitive environment, it can be challenging to spark the interest of prospective customers. That’s why sales and other promotions are becoming increasingly common. They often result in increased consumer demand. Trade promotion management helps ensure that these types of programs are properly executed, that there is adequate product supply, and that they deliver all expected benefits to a company.

Demand Planning Methods

Quantitative forecasting methods are the foundation of most forecasting processes, with approximately 74 percent of companies relying on historical data to project future demand. Standard demand forecasting methods are:

• Time series models, used by nearly half of organizations (48 percent), are the most common approach and focus on identifying patterns, trends, and seasonality in historical data.
• Cause-and-effect models, used by 17 percent of companies, link external or internal variables—like price changes or promotions—to shifts in demand behavior.
• Machine learning and AI are emerging tools in forecasting. Currently, about six percent of organizations use them, and as adoption grows, they offer the potential for more adaptive and automated insights.
• Judgmental forecasting, reported by 17 percent of companies, is a qualitative method incorporating expert knowledge, market intelligence, and human insight when data is limited or context is needed.

What is Required to Do Demand Planning Effectively?

Effective demand planning is more than just generating a forecast. It’s about creating a reliable, unbiased view of future demand that drives smarter decisions across the organization. Done right, it improves service levels, optimizes inventory, enhances collaboration, and ultimately boosts profitability. However, to achieve these outcomes, companies must establish the proper foundation. Here’s what’s truly required to do demand planning effectively:

• A clearly defined process: An effective demand planning process must be structured, repeatable, and aligned with business goals. It should define all stakeholders’ roles, responsibilities, timelines, and expectations. The process should incorporate steps for data collection, model development, consensus building, evaluation, and communication—ensuring that each cycle produces more accurate and actionable insights than the last.
• High-quality, clean data: The best forecasts are built on relevant, clean, and complete data. That includes historical sales, customer orders, promotional activity, and external factors like market trends and economic indicators. Without trustworthy inputs, even the most sophisticated models will produce unreliable outputs. Demand planners must work with IT and business teams to ensure data integrity, consistency, and standardization.
• Forecasting approach: An effective demand planning process requires selecting the right forecasting approach, whether it’s bottom-up (built from item-level inputs), top-down (driven by high-level business targets), or middle-out (a blend of both, used to reconcile plans across levels). Planners must also determine the appropriate level of aggregation, such as by item, customer, location, or time, based on how the forecast will be used and the level of noise in the data. The planning horizon must match the decision being supported—ranging from strategic (long-term capacity and investments) to tactical (monthly or quarterly planning) to operational (weekly or daily execution). Since no forecast is perfectly accurate, planners should establish acceptable and expected error thresholds and measure forecast performance to continuously improve.
• Cross-functional collaboration: Demand planning is inherently cross-functional, involving input from sales, marketing, supply chain, finance, and operations. To be effective, the process must include a consensus step, where teams align on a final, agreed-upon forecast. This collaboration minimizes bias, integrates commercial intelligence, and ensures the forecast reflects both statistical outputs and business realities.
• Skilled demand planners: The demand planner plays a critical role as a process champion and cross-functional influencer. Strong planners possess analytical capabilities, organizational awareness, communication skills, and the ability to challenge assumptions objectively. They must manage statistical models, evaluate overrides, monitor forecast accuracy, and facilitate dialogue between departments.
• Focus on continuous improvement: No forecast will be perfect, but the goal is to improve continuously. That means measuring forecast accuracy and bias, tracking value-added steps, and adjusting models and inputs over time. Each forecasting cycle should yield better insights and inform more intelligent decisions.
• Executive support and integration into business strategy: Demand planning must be embedded in the organization’s decision-making processes with strong executive support to ensure it has the visibility, tools, and authority to drive change. Gaining buy-in from key stakeholders is equally critical, as it builds alignment, promotes cross-functional engagement, and reinforces the value demand planning brings through improved customer service, operational efficiency, and business performance.

Demand Planning: Best Practices

Once the foundational elements are in place, adopting these best practices ensures demand planning becomes a value-driving process that adapts to change and supports better business outcomes:

• Understand the purpose of forecasting: Clearly define why you are forecasting—whether for financial alignment, production planning, or service optimization—to tailor the process accordingly. Anchor the planning process in key business questions and explicitly state the assumptions driving forecast changes and decision-making.
• Identify demand drivers: Analyze internal and external factors—such as seasonality, promotions, economic trends, and customer behavior—that influence demand patterns.
• Gather relevant inputs across functions: Incorporate insights from sales, marketing, finance, and operations to ensure the forecast reflects a broad and informed perspective. Cleansing and structuring data is essential to ensure accuracy and consistency, providing a reliable foundation for effective forecasting and informed decision-making.
• Track forecast performance regularly: Measure and report forecast accuracy and bias at appropriate levels of aggregation to continuously improve planning effectiveness. Forecast errors and metrics help us identify uncertainty and bias, allowing us to communicate them clearly, prioritize errors in high-value products and items, and improve forecast accuracy through better inputs and process refinement.
• Schedule timely and recurring meetings: Regular forecast review meetings enable collaboration, resolve conflicts, and build consensus around the final demand plan. Demand planning should act as a hub for cross-functional alignment, bringing together departments to drive consensus and accountability.
• Communicate and manage results: Share insights and results across the organization, highlighting successes, identifying gaps, and reinforcing the value of the demand planning process.

What Skills Do Demand Planners Need?

Effective demand planners must combine analytical expertise with business acumen to interpret data and translate it into actionable insights. They need strong communication and collaboration skills to work cross-functionally with sales, marketing, finance, and operations, facilitating alignment and consensus. A deep understanding of forecasting techniques—from time series models to causal methods and emerging AI tools—is essential to building and evaluating accurate forecasts.

Demand planners must also be adept at managing uncertainty and bias, using metrics to identify errors, and continuously improving forecast performance. Critical thinking and problem-solving abilities are key to challenging assumptions, evaluating overrides, and navigating business complexity. Equally important is the ability to act as a process champion, ensuring the planning cycle is structured, repeatable, and aligned with strategic goals. Ultimately, demand planners serve as integrators across the organization, requiring a balance of technical skills, strategic thinking, and emotional intelligence to influence without authority.

The Future of Demand Planning

The future of demand planning is rapidly evolving into a more strategic, technology-enabled, and integrated function that drives value across the entire enterprise. Fueled by advancements in artificial intelligence (AI), machine learning, and predictive analytics, demand planning is becoming more precise, automated, and responsive. These technologies allow organizations to analyze vast amounts of real-time data from sources like point-of-sale systems, distributors, and suppliers, enabling more accurate forecasts and timely decisions that reduce waste and improve customer service.

As forecasting tools become more sophisticated, the demand planner’s role will shift from generating numbers to generating insights, focusing on scenario planning, cross-functional collaboration, and business alignment. Demand planning will continue to integrate with S&OP and IBP processes, connecting operational planning to financial and strategic goals. With global supply chains becoming more complex and volatile, demand planners will be expected to manage greater uncertainty while maintaining agility and discipline.

However, as Eric Wilson of the Institute of Business Forecasting (IBF) cautions, the successful integration of advanced technologies requires more than just investment—it demands alignment with business strategy, proper implementation, and upskilling teams to interpret and act on AI-driven insights. Without these, organizations risk underutilizing powerful tools or making misaligned decisions. Done right, the future of demand planning is not just digitality becoming a central pillar of strategy and competitive advantage.

Demand Planning 101: The Final Word

The world of demand planning is rapidly evolving. However, the reality is that companies that don’t practice it must jump on board. If they don’t, they risk losing out to competitors who do. Demand planning will help you satisfy consumers, run your organization efficiently, and drive dollars to your bottom line.

Leverage the information in this guide—and the other resources available through IBF—to launch and optimize a demand planning practice at your company.

Forecasting is becoming more difficult and less reliable for business planning purposes. Forecasting models are typically developed using historical patterns of behavior and of related events. There is often an unspoken ceteris paribus assumption that all things outside of the model hold constant but this is far reality.

In periods when exogenous forces of change move relatively slowly, such forecast models produce acceptably reliable projections. But the pace of change in exogenous forces affecting business has been increasing rapidly. These exogenous forces of change are increasingly impacting the effectiveness of planning in both the long-term and short-term.

The demand volatility that results leaves us with a choice: We either accept the risks of unexplained variation in our forecasts or adopt hedging strategies and plans that mitigate their effects. Hedging is a means of mitigation in the face of uncertainty. While hedging short-term risk across the company’s functional areas is important, hedging of long-term risks is essential to the very existence of the business. As with every business initiative there is a trade-off. Here it is the cost of hedging risk vs the benefit to be realized from the hedge. So, what are hedging strategies?

Types of Supply Chain Hedging Strategies

In Finance, for example, hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related financial asset. In supply chain activities, hedging is often done trading in the commodities options markets to reduce the effects of price fluctuations in essential materials used to make the company’s products.

Insurance products are also an example. If a company buys property insurance, it is hedging itself self against fires, weather, or other unforeseen disasters. Similarly, this is the case with key-man insurance and officer liability insurance in business. In demand planning and supply chain forecasts and plans, inventory is often used as a short-term hedging strategy for uncertainty. Supplier selection and diversification can also be a hedging strategy. Some risks are insurable, which diversifies the risk sharing. Some risks are not insurable. So, portfolio managers, individual investors, and corporations use hedging techniques to reduce their exposure to various risks that they cannot directly control.

Identification of exogenous risk factors requires participation of experts from all areas of the business

Executive and senior management are responsible for the strategic and long-term plans of the company and for implementing hedges to deal with risks that exist within these plans. The first step in developing hedging strategies is to determine which forces of change are significant and are materially increasing financial, operational, or other short-term and long-term risk. Identification of significant exogenous factors requires participation of cross-functional members who are experts in the risks related to sales, marketing, operations, product development, demand planning, supply chain, inventory management, distribution, finance, and other key functional areas within the company.

Since these functional areas have unique risk characteristics but also affect each other, it is important to approach the question of material risks in a holistic manner. Any business forecasting and planning efforts will need to consider hedging strategies as they relate to the functional areas individually and collectively. So, structuring a process of cross-functional involvement is important to precluding siloed efforts which do not assess the cross-functional interaction of risk.

Risk assessment is usually initiated by executive management and undertaken by senior management across the functional areas

This risk assessment process phase generally happens as part of the strategic and long-term planning of a company. It is usually initiated by the executive management and is undertaken by senior management across the functional areas. The demand planning and supply chain functions are involved along with other functional areas, but the purpose is to orchestrate and integrate the risk assessments and hedging actions across the company. Finance and FP&A are heavily involved due to the monetization activity that is a part of this effort. Naturally, the finance functions of the company are usually an important part of the higher-level, long-term planning for which senior and executive management are responsible.

Exogenous Risk Categories

Each functional area should develop a list of exogenous risk categories that characterize their functional responsibility. These broad categories could be technological, environmental, competitive, political, financial, demographic, economic, market-related, etc. Within these broad categories, specific significant risks both short-term and long-term can be identified along with the degree of risk (e.g., extremely high, high, medium, moderate), expected effects and results, associated potential costs or profit loss, as well as potential hedging actions that may be considered. Hedging actions should consider resources required and potential costs and benefits of the hedging activities necessary to offset or partially offset the risk.

It is important that FP&A be involved to dollarize risks and actions

It is important that each participating functional area shares its results and findings with the other participating functional groups. Their coming together as a group to review and integrate their combined risk assessments is important in being able to prioritize different risks, assess the collective business effects, determine which can be hedged and to what degree, and to develop a plan of action that addresses the timely hedging of the most significant risk areas. It is important that FP&A be involved to dollarize risks and actions as well as support all of the functional areas in the translation of their findings into financial effects and financial plans.

Real-Life Examples of Hedging Risk

Example 1: Business Software

Let’s look at a real-world example. There is a global business systems company for which the R&D/Product Development function develops operating systems, hardware, and software for sale to multiple business types globally. The company funds these undertakings from an R&D budget that is funded as a percentage of corporate revenue. It was working on a replacement for an existing retail software product that had a tight introduction timeline given the existing product was close to the end of its lifecycle. Designing the replacement solution was complicated because there were multiple types of technology that could be used to build it. This presented uncertainty both in terms of performance and cost to build and roll out the replacement system.

So, the company hedged the technology risk with a multi-path development approach, starting three alternative projects simultaneously, from which the company would select the best option. There were periodic assessments of each project to evaluate progress. A date for a decision was set and, based on the findings, a final technology solution and product design was chosen from the three options and carried through to completion, abandoning the other two projects that did not make the cut.

This allowed the company to meet the market window timeline that was so important to the product introduction, and to choose the best technological alternative to ensure acceptance and product longevity in a competitive marketplace. The cost of the three projects was more than offset by the additional revenue and profit realized by hitting the market introduction window and in having a competitive technology solution.

Example 2: Food Service Industry

Another real-world risk hedge example is from the Food Service industry. There is a large midwestern restaurant industry corporation that had a growth plan for expanding its market penetration through a combination of franchising and company unit market development. It was a publicly traded company on the New York Stock Exchange, and its value in the market was materially influenced by investor expectations for the success of the growth plans of the company.

The company used regional vendors for getting supplies to the restaurant locations and would continue to expand this supply chain as market expansion continued. But there were signature products that were absolutely essential to the financial success of the restaurants, especially as expansion took place into new markets. Insufficient availability of these signature products from third party vendors as expansion occurred was a major risk to the success of the expansion plans.

So, to hedge the long-term Signature Product Risk, the company purchased a food processing operation in a strategic location in the geography of the growth area. The company would operate and control the food processing plant and its operations. It had the capacity to service all of the current locations as well additional locations as market expansion continued. It also had the potential to expand its processing capacity if market expansion exceeded currently planned levels.

As it turned out, this processing plant met market needs for a long period of time and supported the growth strategy, and even went on to expand its capacity as the company went beyond the original expansion plans. This provided a flexible and expandable hedge for the Signature Product Risk that could have affected the company brand positioning, the financial success of the restaurant operating units, and the success of the business expansion programs.

Top management support, buy-in across functional areas, and translating results into activity and financial plans is essential.

The best forum in which to drive the risk assessment and hedging efforts described above is the long-term business and strategic planning of the company. Top management support, buy-in across functional areas, and translating results into activity and financial plans is essential. It can add to the quality and effectiveness of the long-term and strategic planning processes in which senior and executive management is involved. It provides a framework for functional risk analysis, and hedging can be done for short-term risk hedging across the company’s functional areas.

The Bottom Line

As the speed and degree of change continues to become more of a factor in business forecasting and planning —  both short-term and long-term — company success and survival will require processes that are adaptive by nature to the risks that are affecting all businesses today. Hedging strategies are an important consideration in this increasingly volatile business environment. Assess the risks in your business forecasts and plans. Expect the unexpected. And hedge your bets.

This article first appeared in the fall 2023 issue of the Journal of Business Forecasting. To access the Journal, become an IBF member and get it delivered to your door every quarter, along with a host of memberships benefits including discounted conferences and training, exclusive workshops, and access to the entire IBF knowledge library. 

Inventory – can’t live with with it, can’t live without it. Let’s talk about how to balance the competing trade-offs of high service levels, the need to control costs, and freeing up cash – and how to make managing your inventory a whole lot easier.

We want to have sufficient inventory on hand to service customers and maximize sales, especially in a make-to-stock environment. Inventory, is of course, necessary. And there are plenty of reasons to hold lots of it.

Why Inventory is Good

By committing to higher levels of inventory we can optimize batch sizing to lower production costs and cost per item. By ordering more stock/materials we can optimize transportation costs. We can get price breaks by ordering higher volumes on a monthly basis vs lower volumes on a weekly basis.

Having inventory on hand limits fines for late delivery in the case of retailers like Walmart and Amazon. And a high level of inventory limits costs for expediting delivery for stock we didn’t have readily available. Having inventory ahead of a sale is cheaper than having to source it last minute.

The flipside is the cost of tying up cash in stock that isn’t selling. Right now we have a perfect storm of rising inflation where inventory/materials are more expensive to source, debt is more expensive to service, and sales are going down. In such an environment your CFO will be on your back to reduce inventory.

Why Inventory is Bad

Beyond the hard cost of dollars being tied up in assets sitting in storage, there is an opportunity cost associated with tying up capital in inventory. With that extra cash your company could shore up the balance sheet, service debt or deploy it for new initiatives. Storage is also a cost, not just in terms of the space but in terms of people and equipment required for warehousing.

Inventory also comes with damage and pilferage. What’s more, companies with short lifecycles face obsolescence, never being able to shift stock for certain items which have to be disposed of (another cost). Insurance is yet another cost, the premium being paid on the total assets your company holds.

So there are advantages to holding inventory and disadvantages to holding inventory. Finding a balance between the two that is right for your company is the holy grail of planning.

Lean Into Your Company’s Priorities

If you’re thinking I want on-time, in-full to be 99%, I want to have 24 turns a year, I want to have less than one week’s worth of inventory in stock, and I want to maximize my margin – wonderful, everybody wants that! One of those objectives, one is going to win, and it is up to you to decide which is most important. What are your company’s objectives? In the Cost-Service-Cash triangle, your company will naturally lean into one dimension more than the others, and it’s up to you make the trade-offs that support enterprise strategy.

Prioritize customer service, and your costs will increase and cash will be tied up. Prioritize cash, and you’ll have to accept that customer service will suffer and costs will increase. Prioritize lower costs, and service will decrease and cash gets tied up. Which dimension you need to prioritize most will inform your safety stock levels.

Stop Self-Inflicted Uncertainty Now!

There are certain things companies do that unintentionally introduce demand uncertainty, making it more difficult to know the required safety stocks. There are certain supply planning actions we can take to make inventory management more effective.

Beware Demand Shaping: IBF research reveals that a 1% reduction in uncertainty equals a 6% reduction in my safety stock. Dynamic pricing and promotions shift demand, causing uncertainty that has makes inventory management more complicated. While promotions may be necessary, there are consequences to adding in that demand variability.

Reduce your lead times: It’s not just about demand forecasting; proper supply management pays dividends when it comes to reducing the cost of holding inventory. On average, every 1% reduction in lead time results in a 0.95% percent reduction of safety stock.

More SKUs equal more inventory: I can’t believe that some people don’t understand that logic. More SKUs serving the same demand adds uncertainty without increasing the top line. A 10% reduction in SKUs represents a  5% reduction in safety stocks.

Lower your service levels for a given customer: Some customers won’t necessarily need the service level you’re providing, meaning that you can afford to carry less inventory. What does customer X really need, and what can you reasonably get away with?

Improve your supply chain planning at IBF’s Supply Chain Planning Boot Camp in Nashville, TN, from August 9-11, 2023. Learn best practices across demand management, supply planning, S&OP, distribution planning, inventory models, and more. Register your place.

The standard S&OP process is a critical collaboration between sales (demand), production (supply) and leadership. However, when you look over the entire organization, key functions are frequently not represented such as Marketing, Finance, and others. While supply and demand are at its functional core, they exist within a greater context that is underpinned by Finance. Having a broader understanding of the financial environment in which S&OP decisions are made is key to an integrated and mature planning process.

The Financial Context

Demand planning and the S&OP process are tightly focused on inputs and outputs. What is increasing or decreasing demand? What factors are impacting supply? How is competition impacting pricing and margins? While these questions are important, sole focus on these fundamental components can obfuscate a larger context in which the business operates. Other business concerns exist that are dependent on the S&OP process including some that are ‘top-of-mind’ items for Finance professionals. The term “voice of the customer” is a common phrase used in business and, for the finance professional, these “voices” are specific to key stakeholders: the owner(s), the bank, and management.

The Owner(s)

The voice of the owner is shaped by three main factors: ownership composition, ownership priorities, and owner involvement.

Ownership Compositions: These vary from a single proprietor to limited partnerships to publicly traded companies with thousands of stockholders. Each of these ownership types present their own unique characteristics and challenges. Levels of access will vary from direct access and communication with a single proprietor to very limited access in the case of a corporate board of directors. Regardless of the challenges presented by limited access and communication, Finance has a responsibility to represent and convey those concerns and interests as they work alongside their functional partners within the company.

Owner Priorities: These take on different forms. Excluding non-financial considerations, owners are looking to increase the return on their investment in different ways. Some owners are very focused on short-term returns such as cash flow to see how quickly they can break even or a positive cashflow to finance their lifestyle or other investments. Other owners are focused on long-term growth of equity and/or overall business valuation. Their strategy is focused on building up a business as a long-term investment or for future acquisition. Finance’s role is to ensure the focus of the owner is reflected in both the presentation of information as well as strategic alignment.

Owner Involvement: This is an outcome of ownership composition. Under sole proprietorship, and even limited partnerships, direct involvement by the owners is extensive as they take an active role in the daily operations of the business. In larger businesses, less direct involvement at all levels of the business by the owner is common. The role of Finance here is to assist the owner in getting the information they need to make decisions in the format and frequency they prefer. The voice of the owner in cases of more direct involvement is very apparent, so Finance is in more of a supporting role.

The Bank

While the voice of the owner permeates all levels and areas of the business, the voice of the bank is isolated to Treasury and/or Finance functions. However, the implications of financing structures touch all parts of the business to some extent. Managing the requirements of financial terms and conditions requires coordination and communication with many functional areas who either contribute to, or are impacted by, these financing facilities. With that in mind, there are three main points that help to better understand the realities and requirements of financing.

Risk: While the business focuses on positive performance measures such as profitability, growth, cost control and equity, the bank uses these measures to determine the degrees of risk to the bank. The responsibility of Finance includes monitoring the cash and assets on which the collateral is based to ensure that the bank is satisfied relative to the financing.

Limited Understanding: Where many businesses only work with one bank, banks serve many clients. The result for the bank is that they have limited time and resources to dedicate to deeply understanding the business of each client. In consideration of this, Finance needs to clearly understand what information is important to them and mirror that focus through our analysis.

Covenants: Most financing facilities include requirements by the bank that the business maintain minimum performance standards. These focus on the business’s ability to maintain sufficient free cash flow and equity, manage the collateral, and other financial measures. These requirements may in some cases constrain the company’s ability to spend cash at certain times, limit the ability of the owner to access equity, and so on.  For businesses that are highly cash sensitive, coordination with production, purchasing and sales to monitor and manage cash flow is critical.

The Management

Finance works within and around management of the business but is uniquely positioned to interact with many, if not all, functional areas of the business. As such we have an opportunity serve as their eyes and ears. While individual managers have concerns specific to them, most in management have two main concerns: “What am I responsible for?” and “What is expected of me?”.

To support their concerns, we look out for situations or developments that will impact their departments that we can bring to their attention. We also look for ways that we can assist management in supporting what they are responsible for and/or expected of. Finally, Finance is presented with opportunities to assist management such as determining financial requirements for new ideas, projects, or initiatives.

These voices are always present and shape the lens through which Finance views the S&OP process. More than just another seat at the table, Finance has the ability and responsibility to inform, advise and contribute to the S&OP planning process beyond what is obvious to those native to S&OP.

How S&OP Can Support Finance

One of the best pieces of advice I received regarding my work in Finance is to “Know your business”.  This means getting beyond the financial statements, models, and ratios to really understand the nature of, and details within, the various functions of the business. To this end, the subject matter experts within S&OP are a tremendous resource to those of us in Finance.

Educating and informing your Finance person in the realities and nuances of your functional area can pay massive dividends. In so doing, you can become a true business partner to those in Finance and other functional areas as well.

How Finance Can Support S&OP

As mentioned before, Finance has the ability and responsibility to inform, advise and contribute to the S&OP planning process. We can accomplish this in several ways.

• Leveraging our exposure to a wide range of functional areas, we can help facilitate cross-departmental collaboration
• By bringing a fresh perspective we can ask probing questions to get to the root cause or key concept of a topic or situation
• We can provide feedback on the financial impact of their business decisions including things like cash flow, margin, and P&L impact as well as implications for financial covenants
• Incorporate financial constraints to long-term projections or forecasts.
• Help align to key financial metrics
• Advise on exploring new opportunities

Nearly every business decision has a financial component or impact and that’s where your local Finance person can add value and support.

Key Learnings From An Integrated Approach

About two years ago my company went through a restructuring of our teams where departments were reorganized, and a new group was created which we call the commercial team. The idea was to bring together the three legs of the stool on which the business operates: Supply, Sales, and Finance. With the managers of Operations, Sales, and Finance, our objective was to more closely align our work to improve controls, functional and market performance, and financial results through continuous improvements. We work and collaborate continuously together instead of just within recurring S&OP process cycles. Together, we do deep dives into each other’s functional areas to discuss issues and gain a better understanding. We are collectively responsible for all commercial operations and performance of the business and this shared responsibility fosters greater levels of teamwork than what you might normally expect from a siloed departmental structure. While not all businesses can replicate this commercial team approach in the same way we have, the principles foundational to this approach can be applied and the benefits can be realized.

The point is that the S&OP process should be just the start of a journey towards a deeper and more collaborative planning process that both digs deeper into each aspect of the business as well as expands beyond the traditional functional areas to incorporate and consider the broader implications. Of those, the financial considerations of the owner(s), the bank, and management are a great place to start.

To learn the fundamentals of business forecasting and demand planning, join us for IBF’s Chicago Demand Planning & Forecasting Boot Camp from March 15-17, 2023. You’ll learn how to forecast demand and balance demand and supply from world-leading experts. Click here for more information. 

What is Business Forecasting?

Business forecasting is the process of using analytics and experience to make predictions about future customer/consumer demand. The goal is to go beyond knowing what has happened to arrive at the best assessment of what will happen in the future so a company can make optimal business decisions, whether that be operational or strategic. Business forecasting incorporates a lot of different data and viewpoints, uses forecasting tools for modelling, and generates numbers (forecasts) that be used in multiple areas of the business.

What is Demand Planning?

Demand planning is the process of identifying and managing customer/consumer demand for a company’s goods or services and formulating responses to meet that demand. The idea is to balance demand and supply, i.e. serving the customer with the products they want while optimizing the operational elements that go into it.

People use the terms ‘demand planning’ and ‘forecasting’ almost synonymously but there are some differences. Demand planning is the process that drives operational supply chain activities like resource planning, production, logistics, and inventory policies. Forecasting generates the numbers used to inform those activities.

Demand planning is typically manifest in cross-functional processes like Sales & Operations Planning (S&OP) or Integrated Business Planning (IBP) that bring different functions together to decide on what the company can deliver and manage the trade-offs between Production, Supply Chain, Finance, Sales & Marketing etc.

Whatever you call it, you’re trying to predict what a company will sell in the future to successfully be able to supply it when it’s needed.

What Happens When a Company Doesn’t Have Good Forecasts?

If you have bad demand forecasts you may make poor decisions. If you underestimate demand, it can result in lost sales or, even worse, lost customers. If you overestimate demand, it can mean wasting money on inventory you can’t sell and tying up capital that could be better utilized elsewhere.

With a good forecast you give the customer what they want, when they want it, thereby maximizing sales and helping deliver on the strategic goals of the company. With an idea of what’s going to happen before it occurs, you can set inventory policies, set production schedules, determine investments, predict market impacts, control costs, and understand the lifecycles of your products.

What are the Key Steps in Demand Planning?

Demand planning is about more than just a number – it’s a process with a lot of different elements.

Data Collection: Data can come from multiple sources. We must understand what exactly is out there as far as inputs and insights and know how we can bring those into the forecast. Data typically includes historical sales data and qualitative information from Sales about key customers and from Marketing who can reveal how promotional activity will impact demand.

Data Analysis: The data you get won’t always be clean and usable in its current format it will require some preparation before analysing it. We need to look for anomalies in the data as well as formatting issues, determine what data is relevant and what isn’t, and make sure we’re using the right amount of data.

Forecast modelling: Multiple time series methods can be used to take the data, extrapolate it forward, and arrive at a forecast. Increasingly companies are turning to advanced systems to do machine learning and AI which use a wider range of data and automate much of the process.

Gaining Consensus: A challenging part of the process for a lot of companies is arriving at one number used by the different functions. You need everyone on the same page in terms of what you think is going to happen in the future – and collaboration is fundamental to this. This where collaborative planning forums like S&OP and IBP come in.

Communicating the forecast assumptions: This is often overlooked. We need to explain the expected result (forecast) and the reasons behind as this is key to those forecasts being trusted and therefore used across the business.

What Data is Used in Business Forecasting?

It can be internal data such as sales orders, or external data which a lot of companies are starting to look at now. External data includes customer information, macro information, and demographic data, as well as causal information like sales promotions or weather data.

Data is either structured (easily managed in a spreadsheet and easily accessible) or unstructured (not easily managed in a spreadsheet and often difficult to access). Unstructured represents over 85 percent of the data out there and includes data from social media comments, product reviews, and audio and video content.

What Forecasting Models are Used in Business Forecasting?

There are a lot of different models available. This is because there’s a lot of different types of data out there which require different forecasting approaches. At one extreme we have pure qualitative and knowledge based judgements. This could be a sales team giving their own estimate of sales and then you’re aggregating those things up. At the other extreme you have pure quantitative approaches like machine learning with less human judgement and intervention.

In the middle there are various types of Time Series methodologies and causal models. There’s no right or wrong model or approach – rather we must choose the best approach for the data we have and the resources and time we have to generate a forecast. According to IBF research, right now most companies use Time Series types of data in their modelling and their preferred method is exponential smoothing. Does that mean exponential smoothing is the best? Not necessarily, but it is versatile method and it’s good for a lot of Time Series data.

What is Bias in Forecasting?

Bias is consistent over-or under-forecasting. It can be conscious or unconscious. For example, Sales may always forecast higher sales numbers because they want the inventory on hand in case they make the sale, or Finance may always push the number down to to avoid tying up cash in inventory. Whether it is high or low, bias is dangerous and gives a false picture of the future. It creates bad decisions and deteriorates the trust in the forecasting process. Bias is actually often worse than uncertainty.

To learn the fundamentals of business forecasting and demand planning, join us for IBF’s Chicago Demand Planning & Forecasting Boot Camp from March 15-17, 2023. You’ll learn how to forecast demand and balance demand and supply from world-leading experts. Click here for more information. 

As much as I hate the term, we are in a new normal, Remote working has changed how we work, and it has had big changes for S&OP/IBP. Given demand planning is by nature collaborative and driven by the human element, can these processes survive in the age of remote working?

I recently posted on LinkedIn why I think this is a problem. But it seems I am in a minority because all the planning professionals who responded said that S&OP is doing just fine, and even thriving in this new normal.

Personally, I think it’s having a negative impact on S&OP. Research shows that without face-to-face interaction, trust diminishes, and trust is key to the collaboration we need for S&OP. But that’s just me and there are always two sides to every story. I spoke to two S&OP/IBP leaders to get their differing viewpoints on this issue. Read their key points below so you can decide for yourself.

The Case Against Remote S&OP: Andrew Schneider

Andrew Schneider is an expert in demand planning and supply chain transformation, having led and implemented IBP processes at Medtronic and Ball Corporation.

“Working has changed with Webex, mind mapping, online collaborative documentation etc. but a conversation hasn’t taken place within IBP to discuss how a day in the life of the Demand Planner has changed. In this remote way of working, some people don’t participate in meetings, power players emerge, some webcams are on and others are off. There’s no discussion about how IBP should work in this new environment – we’re just trying to get through the grind.”

There’s no discussion about how IBP should work in this new environment

“Before were able to collaborate interpersonally, come to decisions and influence people which is huge in S&OP. How much of that takes place outside of the formal demand review or supply review? Now you’re lucky if you can catch somebody on instant messenger or teams, or getting them to review something buried in their inbox.”

“There needs to be a very intentional focus on redesigning the ‘day in the life’ and how we do our jobs with digital collaboration tools. It’s continuously evolving but I’d say in my own process I think we’ve taken a step backwards.”

A lot of ideas get parked because  people feel like they missed the opportunity to speak

“I think engagement is a challenge. There’s all the cordialities of being in business with active listening and interpersonal dynamics. People in a conference room might step over each other but it’s a case of “Okay, you go first and I’ll come back with my input” and it works. In video calls it’s almost like a walkie-talkie – it’s one person talking at a time and a lot of ideas get parked because  people feel like they missed the opportunity to speak.”

We need development of team dynamics and coaching to make sure that folks have their voices heard

“If you took a shot clock of who talks for how long in a video call, I’m sure you’re not going to find an even curve – you’re going to find a classic gaussian curve where those power players dominate speaking time. We need development of team dynamics and coaching to make sure that folks have their voices heard.”

“On the positive side, there are so many digital collaboration tools out there and it’s become more accepted to have pre-submissions on a Webex hit list for the meeting. That stuff is great right as long as you have skillful facilitators that circle back to those topics.”

“I think training is so important on to overcome the discomfort of being able to speak over someone with a higher title on a video call, for example. As a coach of other IBP leaders one of the best soft skills you can have is a deft touch – not just what you say but how you say it. The way you interject, being concise, and being able to have a powerful statement are all great skills of an IBP leader and I don’t see those things being facilitated in this new norm.”

The Case For Remote S&OP: Kevin Reim

Kevin Reim is supply chain leader, having worked as Director of Supply Chain Planning at PepsiCo and VP of L’Oréal’s US Supply Chain. He is currently VP of L’Oréal’s Fulfilment Center Operations. 

“In this new hybrid work environment where folks are working more from home, people have gotten used to it and as long as you have the right stakeholders on the call right, there’s no degradation in the S&OP process from what I’ve seen.”

“In our executive S&OP meetings over the last couple of years, we’ve had to learn to work in a new way and it actually makes for a more efficient meeting. People are happy that it’s made meetings a little bit shorter. If meetings previously took three hours, now we’re getting through he same amount of content in an hour and a half. It’s because people are coming prepared.”

As long as the right people are there, it works

“As long as the right people are there, it works. In some cases we’ll cycle GMs in and out of the meeting as their particular brands come up. All stakeholders are there, it’s collaborative and we make decisions out of it, so it works.”

“There needs to be that that personal interaction, though. Whether virtual or in person you still need those face-to-face relationships and that where the hybrid model comes in.”

“What was difficult was when somebody started in the company in the early stages of the pandemic, then it was hard for them to break in but once folks started coming back to work and this new hybrid model emerged it’s become the new norm and it’s working just fine.”

Go out of your way to  meet one-on-one because you really have to establish yourself

“You’ve got to establish those relationships. Go out of your way to meet for coffee or meet one-on-one because you really have to establish yourself. You can manage some of those relationships remotely but there is no substitution for meeting face-to-face and to build that trust that when you get to a meeting everybody’s comfortable making decisions.”

And there you have it. The key themes are that yes, remote S&OP can work but extra work needs to be done to build and maintain the relationships needed for collaboration and, ultimately, to drive decision making. Setting expectations for how meetings work and defining the role of the Demand Planner in the remote age would also add value, as well as thinking about how leaders can manage teams effectively in this new environment. It also shines a light on the importance of best practices; they are now more important than ever to ensure engagement and a robust process. Stay tuned next week when I will share some tips to make your remote process as effective as possible.

I will be speaking at IBF’s Business Planning, Forecasting & S&OP/IBP Conference in Amsterdam from November 16-18. With dozens of workshop sessions, panel discussions and networking opportunities, it’s the biggest and best event of its kind in Europe. Click here for more details.

In the 1990’s when I was with Baxter Healthcare, we implemented a statistical forecasting solution for our European affiliates. In going through the user training I was intrigued by the functionality around aggregate level forecasting and the improved accuracy achieved.

The example they used was a company manufacturing bicycles. Rather than forecast the demand for different colors of a particular model the company would aggregate historical demand at the model level and then run their statistical modelling.

At this aggregate level the forecast accuracy was much better and downstream painting could be driven by Make to Order with much shorter lead times, a reorder point (ROP), or through a disaggregation technique for the higher level forecast.

At the time I was managing the European distribution of sterile surgical gloves and was excited about trying this approach. We had two SKU’s for each of the eight sizes for the five different types of surgical gloves, each with ten languages. We sourced these 80 SKU’s from our Malaysian manufacturing site into our European distribution center in Belgium and then shipped weekly to our twenty affiliates based on their actual inventories, forecast, and safety stock target.

I started by building a pyramid structure in our forecasting tool that allowed me to aggregate historical demand for these 80 SKU’s. I then began forecasting at this level each month and compared to the sum of the affiliate forecasts.

The results were astounding and I was able to demonstrate a greater than 20 point improvement in forecast accuracy using this method. I easily convinced my boss that we should use these forecasts for our manufacturing site in Malaysia.

I then calculated a ROP for each affiliate for each SKU based on historical demand variability and lead times and developed a dBase application to calculate weekly replenishment quantities based on actual inventory and the ROP. Getting commercial buy-in for this approach took more time but we did get agreement.

I also met monthly with our European product manager to ensure that any market intelligence was captured on top of the statistical model. This process worked so well that we were able to tell our affiliates that they no longer needed to spend time forecasting these products. We also well over achieved on our inventory targets.

A few years later I moved to our biotech division. I remember when my boss needed to provide a projection of QIV European sales for a blockbuster hemophilia product and asked me how much I thought we would sell.

I aggregated historical demand at the three dosage form levels, 250 AU (activity unit), 500 AU and 1000 AU lyophilized product in vials. I ran the statistical models and told him 90 million AU’s. Actual QIV sales came in close to 100 million IU’s and my forecast was much better than what he had received from Finance in the affiliates.

Since those days I have been with three different biopharmaceutical companies and have built a large network across the industry. It amazes me that not once have I seen this technique applied to improve forecast accuracy.

For many products the bulk unpackaged tablet, capsule, vial, syringe is the same across many markets and even globally. By aggregating demand at this level and then generating a forecast biopharmaceutical companies would be running their most constrained and expensive manufacturing operations with a much more accurate demand signal.

It goes without saying that this approach would have a profound impact on inventory levels. I am not suggesting that it be applied carte blanche but it should be strongly considered for any product from 3 – 5 years after launch through to late stage lifecycle.

With this approach one could use one of the strategies I mentioned above for downstream packaging and distribution. Make to Order would not work in this industry but reorder point is an option or using a technique to disaggregate the tablet/capsule/vial/syringe forecast down to the country level.

Sometimes driving S&OP towards decision making is challenging, with meetings often focused more on the here and now than looking forward, especially when the economic environment is so uncertain.

The pandemic highlighted the importance of collaboration, consensus and transparency in this process and, if we weren’t aware before, the criticality of using S&OP to make timely and effective decisions. So, how do we optimize S&OP for decision making?

The Challenges of Planning in the Current Environment 

I have been involved in S&OP since 2005 and am currently implementing S&OP at DS Smith, a global packaging company. S&OP is all too often an update forum where we talk about previous performance and a one number plan. With the challenges presented by COVID and the Ukraine war scenario planning is critical, so a business has a response to factors that may become reality. This reduces the all too common firefighting loop that businesses find themselves in. I have seen, however, that functions don’t always like giving up their power of decision making to a collaborative, cross-functional forum, partly because they feel that they alone have the depth of knowledge to make decision relating to their functions, and partly because they can make decisions quicker if they operate outside the S&OP cycle.

In my world, the focus is now much more short term as well as on assumptions for the longer term horizon as we’re unclear as to what the next year to 18 months will look like. Selling patterns are different to pre-pandemic and what I’m finding now is that we need a very good S&OE (Sales & Operations Execution) process running alongside S&OP.

Where to Make Decisions, S&OP or S&OE?

With that, it’s important to define where we take decisions – in the shorter-term S&OE or in the longer term, more strategic S&OP process? Having very defined S&OE and S&OP processes stops people from ‘going rogue’ and making siloed decisions.

In the packaging world linked to FMCG, volumes have reduced compared to pre-pandemic. As a result, we’ve had to make some very quick decisions. Do we stock build, turn off capacity for example? If so, we can’t wait for the S&OP cycle. Tactical decisions, tackling the next month’s view, are then taken care of. This reassures people across functions that the key tactical decisions are being taken in a timely manner, and thus stops them going ‘off-piste’. Communication of these decisions is also a critical part of ensuring alignment across the business.

You may well find that maintaining your existing S&OP cycle in this current environment is having negative impacts on your business. If I see an upturn in demand, I want us to be ready for it so we don’t miss out on sales – S&OE helps with that.

Don’t Make S&OP More Tactical, That’s What S&OE is for

I find that data is the challenge at the moment; things are changing so much that we can make a decision one week, and by next week the assumptions behind that data have changed and don’t support that decision anymore. Assumptions behind market behavior are changing with us coming out of COVID, people coming back to work, inflation, and the war in Ukraine. All of that creates demand volatility.

We need to be on top of all these fluctuations, increasing the importance of shorter term decision taking, but leaving the S&OP process intact so we’re not constantly changing the longer-term strategy based on tactical decisions.

You have to keep the shorter and longer-term planning approaches separate. I caution against making S&OP more tactical – it’s not designed to be agile. It’s about identifying gaps. So, regardless of whatever is happening in the short-term we don’t change our targets and budgets, and so we shouldn’t change our S&OP.

Tips for Keeping S&OP Meetings Focused On Decision Making

Constant reinforcement of what S&OP is for is key to keeping focused on decision making. At DS Smith we do the ‘what-ifs’ – what are the realistic likely scenarios that we need to model that executives need to make decisions on, when would these decisions need to be taken, and what are the financial implications of those scenarios? It’s about coming back to the gaps and closing them in good time. For me it’s about discussing how we use inventory, how we use our capacity so there are no surprises relative to the plan.

Identifying best and worst-case scenarios allows us to close the gaps ahead of time so we don’t have to make tactical decisions. This helps delineate S&OP and S&OE, keeping the right level of decision making in the right forum. If we do need shorter term, and tactical decision making then we take that to S&OE.

S&OP stakeholders don’t always read the meeting pre-reads so if there are decisions that need to be made coming out of the next S&OP meeting, I’ll meet the main participants individually ahead of time and walk them through the desired outcomes. In week 4 before S&OP, I might book an hour with the key people which can then be canceled if not needed.

This is harder with remote working – gone are the days of going up to somebody in the office for a quick chat and setting expectations ahead of meetings. With remote working I find people’s diaries are completely full, so arranging a Zoom call is difficult. Going back to just phoning people as and when helps rather than trying to book peoples’ time.

Educating S&OP Stakeholders for S&OP Maturity

Driving S&OP as a powerful decision-making process requires constant improvement and education. As an S&OP lead, I always keep an eye on our S&OP maturity and where we are in our evolution. I sometimes engage consulting firms to gain a clear picture of where we are and what it’ll take to progress to the next step. Every step needs some education – there’s no shame in bringing in outside experts; after all, some messages are better delivered from the outside than in.

From my point of view, as someone responsible for this education, it is just a case of getting the budget to do it. I always follow a change management approach where we do the initial education with coaching and hand holding, then we run the process, then we have a review. For example, last year with DS Smith we launched S&OP in April, then in October we had a ‘what’s working and what to improve’ review. This helps with the buy in of those involved in the process, and helps me understand what they need as an outcome of S&OP.

The Bottom Line

To conclude, it’s worth remembering the key elements of successful S&OP. Keeping focus on the below will facilitate the decision making it is designed to achieve:

Collaboration: Bringing cross-functional teams together to drive a one-number attitude with clear timings for decisions based on scenarios coming to life

Transparency: Explaining on what you know and what you don’t across functions and extending that attitude to your trading partners

Consensus: Making decisions together that benefit the business as a whole

 Join us in Orlando for IBF’s Business Planning, Forecasting & S&OP/IBP Conference from October 18-21. With 2 maturity level streams, you’ll find the specific knowledge you need to implement or improve S&OP/IBP, and level up your planning skill set. With great networking and socializing in a wonderful Florida setting, it’s the biggest and best event of it’s kind. Register now to avail of Super Early Bird pricing.

Businesses run in an environment of change and evolution that has multiple dimensions – Economic, Sociological, Political, Competitive, Regulatory, and Technological. At the very heart of the drive for business success is the customer/consumer demand for the company’s products. Indeed, a company’s revenue is a mirror reflection of said demand and all factors that affect it. Understanding consumer behavior, therefore, is of paramount importance.

Demand for a company’s products and services ebb and flow with a complex mix of seasonal, cyclical, and life cycle effects. As Forecasters and Demand Planners, how do we best structure our forecasting and planning efforts in this fluid and often volatile environment?

1. Gather Information From Market Facing Colleagues

This is to discuss ideas with those who are interacting both directly and indirectly with customers and consumers. We want to explore their experience and thinking regarding why and how purchase decisions are made, and what they think the most important considerations are in the purchase decision process. Marketing, Sales, and Product Management professionals can be especially helpful in their perspectives.

The primary purpose of this is to not only evaluate key factors that may help us to forecast, but to explain the variation in patterns of demand that have been historically experienced. Analytics methods – both qualitative and quantitative – are valuable tools that help characterize and explain purchase behaviors of both customers and consumers.

2. Review Qualitative Inputs

Review the findings from our discussion with our colleagues in Marketing, Sales, and Product Management. This can be a collaborative forum or meeting/s that happen ahead of the formal S&OP process. Organize their insight about sources of demand variation and gain consensus from the various stakeholders. This is a forum for feedback and exploration that can refine the conclusions, challenge our hypotheses, and prevent misconceptions about customer and consumer behaviors.

3. Create Scenario Models 

Once we have an understanding of the different demand drivers, we can generate scenario models that incorporate said demand variables. Scenario models help us understand how demand for our products will look in different situations that may arise in future.

For example, we could generate models with unique assumptions regarding periods of economic growth, economic recession, business cycle stages, product lifecycle stages, demographic shifts, population rates of change, product pricing, supply chain issues, business sector consolidation, and more.

Pick the assumptions that are relevant to your business and you’ll have an understanding of what could happen in different scenarios. Adaptation to rapidly changing conditions means that we should not think of purchase behavior from a steady-state or static perspective. We need to have a portfolio of explanatory and forecast models that we can access to quickly pivot and adapt.

Conclusion

It is important that we understand our customers and consumers. We should understand their motivations, needs, purchase decision process, and probable response to changing conditions affecting them. We should create scenarios of behavior under a variety of alternative assumptions.

We should be observant. We should be ready. We should be prepared. The above approach improves the performance of demand forecasts, supporting the company in its efforts to increase operational and financial performance.