In today’s disruptive global marketplace, more and more companies are laser focused on supply and demand planning and how to get it right.

This guide explains the two disciplines, their differences, and how they work together. Use the information to build a solid foundation for controlling your inventory in these challenging times.

What is Demand Planning?

Demand planning uses analytics, data, insights, and human 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.

There are two types of demand planning — unconstrained and constrained. With unconstrained demand forecasting, the planner focuses exclusively on raw demand potential, not factoring in possible constraints like capacity and cash flow. This method determines how much you could sell if supply were not an issue. Constrained forecasting, however, considers these factors, creating a more realistic picture.

Businesses should leverage both unconstrained and constrained demand planning to deliver the most value to consumers while keeping costs down.

Essential Considerations in Demand Planning

Businesses must focus on these four areas of demand planning to succeed during this global unrest.

• Historic product sales: What you’ve sold in the past may indicate what you can expect to sell in the future, although that may not always be true. What’s critical to getting things right is to select the correct historical periods and market and economic conditions.
• Internal trends: Using historical data, identify sales trends for one product or group of products.
• External trends: Some factors that may impact a company’s ability to efficiently meet its customers’ needs. These include competition, sociocultural issues, legal factors, technological changes, the economy, and the political environment. (The last two are particularly critical today.)
• Promotional events: When companies run sales, events, or promotions, sales often increase. Demand planning must account for this as well.

Accurately forecasting demand is complex, but businesses must master it during challenging times like today.

What is Supply Planning?

As we covered, demand planning is the process of predicting consumer demand.

Supply planning, by contrast, determines how a business will fulfill demand within the organization’s financial and service benchmarks. It must factor in things like inventory production and logistics. Specifically, it must consider factors like on-hand inventory quantities, open and planned customer orders, minimum order levels, lead times, production leveling, safety stocks, and projected demand.

The five key functions of supply planning are:

1. Business operations is where demand forecasting comes in. Once you’ve calculated the demand, you are able to decide how much inventory you need. At this step, you should know how much product must be ordered and produced.
2. Acquisition involves purchasing materials or final products. Buying supplies is a critical part of having adequate inventory on hand. It requires partnering closely with your suppliers — and their suppliers — especially during uncertain times.
3. Resource management is where companies ensure adequate resources are available and distributed to the correct locations.
4. Workflow of information keeps supply chain management on track by using standardized systems across all departments preventing disconnects.
5. Transportation and logistics pull together all the components of planning, buying, manufacturing, storage, and transportation to ensure an adequate supply of items reaches the consumer.

Practicing supply planning effectively can help keep companies successful during challenging times.

Supply Planning Versus Demand Planning

Demand planning and supply planning aren’t two completely different things. They are actually two halves of a whole.

Demand planning aims to predict how much of a product you need to have available to meet consumer demand. Supply planning determines how to meet that demand within your company’s cost and service rules.

Demand impacts supply, and supply is dependent on demand.

You cannot meet demand without sufficient supply. Similarly, you can’t ensure adequate supply without clearly understanding demand, especially in changing times. You need both to keep your business healthy.

The key difference between the two types of planning are the characteristics of the data that fuels them.

Much of the information used for supply planning is internal or comes from sources connected to the company. It involves analyzing production capacity, time constraints, supply costs, delivery times, storage requirements, and other factors. Because you have relatively easy access to — and control over — supply chain data, it is u easier to master the supply side of the supply and demand equation.

Businesses typically have less control over demand data. While some of it is internal, like historical and seasonal sales records, much is external, like economic trends. This makes demand planning less dependable and more challenging than supply planning.

In short, because supply planning uses more defined and owned data points, it is typically more concrete and reliable. It provides practical direction on how you’ll meet consumer needs. By contrast, demand planning uses less definite and owned information. While certain algorithms and data sources are more accurate than others, forecasting always involves some level of prediction. Supply planning and its practical calculations using more reliably sourced data are typically less volatile.

Another way to view supply planning versus demand planning is to compare their ultimate goals. Demand planning delivers predictions that impact supply planning and other business decisions, while supply planning pays off with inventory optimization.

• Predictions: Demand planning considers a wide array of factors to develop as accurate forecasts as possible. Demand predictions inform supply planning and support other business decisions, such as when to offer promotions or find new vendors.
• Optimization: Supply planning determines how you’ll meet projected demand within your organization’s operational constraints and business objectives. It considers available resources and other factors to develop a plan prioritizing efficiency, cost savings, and speed. The supply plan must align fully with company goals and allow it to take action to achieve them. For instance, if an organization wants to reduce costs for a project, a supply plan might recommend buying materials with a slower fulfillment timeframe. This approach wouldn’t be appropriate for a business driven by tight deadlines.

A balanced approach to demand and supply forecasting is essential for ensuring appropriate stock levels without storing extra inventory, but striking that balance looks different for every business. High-quality data is a key component of both planning types, making analytics and robust supply chain management software and systems especially valuable.

Supply Versus Demand Planning: The Final Word

Supply planning and demand planning aren’t competing factors within a company. Instead, they should be viewed as complementary functions that allow businesses to operate more efficiently and effectively. This is especially critical when operating in dynamic and challenging times like today.

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

What is S&OP?

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

Figure 1: The S&OP Process

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

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

The Global S&OP Process

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Global S&OP Organization

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

Figure 4:  Global S&OP Team

Global S&OP structure.

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

Global S&OP Policies & Procedures

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

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

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

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

Keys to Successful Global S&OP

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

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

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

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

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

Benefits of Global S&OP

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

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

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

As businesses continue to recognize the growing importance of accurate demand forecast planning, so does their need for quality Demand Planners. But how does one go about gaining the knowledge and experience required to be a Demand Planner, and be attractive to employers? As a Supply Chain professional looking to move into Demand Planning myself, here’s my advice.

Get A Foot In The Door

While the job description may be the same, the paths taken to get there can be very different. People enter at a variety of ages and with a variety of educational and professional backgrounds. Within large companies it can be difficult to know which positions to apply for and what attributes are needed for each. The first step is getting in the door with an entry level Supply Chain related role, or a role in a department that has exposure to the S&OP process like Sales and Marketing. Whether you are fresh out of college or changing careers, securing an entry level position is not always as easy as it sounds, even if you are sufficiently qualified. What’s more, some large companies do not hire entry level positions directly, so you may need to find out which staffing agencies have contracts with your company and begin applying.

Be Selective In The Jobs You Apply For

Be relatively selective in the positions you apply for, as applying for every open positon can appear desperate or unfocused –  you don’t want the hiring manager to think you don’t value the position they are trying to fill. More than likely, the first position you are able to land isn’t exactly the dream job you have always wanted but it can be the that all-important stepping stone. Remember, you have time – this profession pays well and the rewards are there, even it may take a while to get there [Ed: See average Demand Planning starting salaries.]

Know The Right People,  And Know Your Stuff

So, you’ve got your foot in the door in a Supply Chain related role. What do you do, now that you are a part of the company? As the old saying goes, “It’s not what you know, it’s who you know”. That is very true – to a point, but what you know is what will get you the job. In that regard, keeping abreast of developments in forecasting and business analytics, and having a solid grounding in the fundamentals of Demand Planning, is important. Read up, consider certification, (I am studying for IBF’s Certified Professional Forecaster Certification) and exchange ideas, so that when interview time comes, you have a grasp of the basics and can demonstrate a passion for the discipline – you’ll have worked hard to get to this point, so make sure the hiring manager knows it.

Network, Network, Network

Networking within your company is extremely important for many reasons and if used correctly can open doors that you never knew existed. Many large companies have volunteer networks within the organization that are always in need of new members. Even things as small as participating in the office secret Santa during the holidays is a way build a reputation as someone people like to work with. You already have a skill set, and networking allows people to realize that.

Talk To Demand Planners And Understand Required Competencies

One thing that I have found very helpful in keeping focused on my goal of becoming a Demand Planner is setting a career path. Go and talk to Demand Planners within your company and find out what their background is and what competencies are key to performing the job at a high level. Make sure to follow up after these meetings for feedback and to continue to stay in touch, as current Demand Planners may be the ones hiring for those positions in the future.

Remember that there are many pathways into Demand Planning so stay flexible with the plan you set for yourself. For example, I started in the Logistics department of my company working with our accounts payable team. This gave me a good foundation in seeing how my company’s products get from our production facilities to our customers and the costs involved in doing so. I now work in Raw Material Scheduling, which provides further contextual knowledge that helps understand Demand Planning, and that will help me once I get there. No matter what position you currently have, there will always be something you can take away from it that will help you down the line.

Get A Demand Planner Mentor

Get a mentor. Find someone who has the Demand Planning position you want and ask them to be your mentor. This may only mean one or two meetings a month for a half an hour but it will allow you to stay plugged into the successes and challenges currently faced by the Demand Planners in your company. It also shows that you are serious about pursuing a career in Demand Planning, and that will be noticed.

Job Shadow A Demand Planner

One problem I come across in applying for my first scheduler/planner position was that I didn’t have any actual experience in the positon except for mock scenarios I had worked through during my undergraduate studies. While these scenarios gave me a general idea of what needed to be done and how the role functioned, I wasn’t able to relate my knowledge to my company’s specific process in dealing with different constraints. How do you gain that experience? The answer is job shadow. Take the time to spend an hour here and there watching someone do the job you are looking to apply for. Ask good questions about their process and ask to sit in on planning discussion meetings even if it is just a conference call and take notes. Find out the biggest hurdles as it relates to Production and Logistics within your company and ask different planners and schedulers how they deal with them. These are the types of answers you can then give in an interview even if you have never actually held the position you are applying for.

Consider A Position in Sales If Demand Planning Isn’t An Option Right Now

What if a planner/scheduler positon isn’t available right now? In speaking to current demand forecasters within my company, all have recommended spending some time in Sales. Learning how market trends are identified through a sales position can give you a well-rounded background for when you become a Demand Planner. While there may be a Sales and Marketing representative in the S&OP meeting, it is good to know how they are coming up with the data they are contributing. Another area would be Logistics. While it is ideal to have an asset producing at 100% capacity 24/7, if the goods are unable to consistently move then that will factor in greatly when producing a demand forecast. Learning the constraints of the shipping methods available will provide areas for improvement as well as better accuracy in the planning. For example, in my company the availability of railcars for shipping and storage is constantly changing production schedules. These logistical concerns affect the demand planning and forecasting of our business.

Finally, stay up to date with the latest trends within demand planning and forecasting. Read the latest news from the IBF and discuss them with your mentor or other planners within your company. Study the capabilities of new analytical tools emerging for forecasters to improve accuracy. Subscribe to blogs and newsletters that are at the forefront of change within the industry of Demand Planning and Forecasting. Doing those things will keep you current and engaged with what those hiring managers are looking for, and before you know it, the job of Demand Planner could be yours.

Visit IBF’s jobs board for the latest vacancies in Demand Planning, Forecasting, Analytics and S&OP. For further information about the role of Demand Planner, Demand Planner salaries, career progression and access routes, visit IBF’s Employability page. 

Simple initiatives add up to big gains. Many professionals feel that establishing a robust demand planning process in an organization is a long and arduous journey. Undoubtedly, there are many challenges, but focusing on some simple steps can make this journey a lot smoother, more enjoyable, and lead to a satisfactory outcome. Here are six simple steps that can go a long way toward ensuring success and a sustained demand planning process with effective demand planning process flow.

Step No.1: Document The Process Roadmap

Depending on the stage of maturity of the demand planning process, an organization has to have a clear and documented process roadmap for improvement, which should include:

A.) Gap analysis of the existing process, and defined/agreed improvement areas along with an outline of future needs and requirements to close the gap.

B.) Priorities of above requirements in stages: short term (3-6 months), medium term (6-18 months), and long term (18 months–36 months). Priorities should be based on quantified benefits that they will bring to the organization. Most process improvement roadmaps focus on qualitative improvements, which should be avoided as much as possible.

C.) Roadmap for each stage. The roadmap should be a SMART (specific, measurable, achievable, relevant, and time bound) output.

D.) Critical Success Factors (CSFs) for each stage. The management team should actively participate, support, and follow up on the CSFs.

Speak the language of the CEO and CFO; that is, strictly in monetary terms pertaining to each demand planning initiative.

Step No. 2: Bridge Cross-Functional Disconnects

This probably remains one of the biggest challenges in a demand planning process. Conflicts of interest, silo approaches to work, lack of awareness, and turf wars are quite common in the corporate environment. However, some simple measures to build cross-functional teamwork and get everyone on board can help. Involve people across functions when developing a demand planning process roadmap. It builds awareness, ownership, and fosters a spirit of partnership. Here is a great article on building relationships and resolving conflict.

Focus on organizational goals of every activity that is being undertaken

Such goals will quickly bring things into the spotlight while generating buy-in from the top leadership. Be it operational meetings, S&OP, business plans, or targets, etc., make sure that the focus on organizational goals is not compromised. It will reduce friction, and actively promote the function critical for business.

Start with the big picture and then work down to the details

Too often when discussions are based on details, the larger picture is lost. Demand planners should lead the discussion starting from a bigger picture, and then move on to details. It is more important to do so when it comes to critical decisions that could cause conflict or inter-departmental friction.

Share success and avoid blame games

This builds trust and ensures that the process is credible and sustainable. One thing that works well is when demand planners start meetings with a note/slide on what worked well as a team and what more could be achieved by working together.

In mature organizations, Sales, Marketing, Supply Chain, and Finance jointly own demand-planning KPIs.

Step No. 3 Build Organizational Awareness and Commitment

In business nothing speaks better than money! The best way to build awareness and commitment is to quantify your goals and objectives clearly and in financial terms. Speak the language of the CEO and CFO; that is, strictly in monetary terms pertaining to each demand planning initiative.

A.) Talk about how each percent improvement in demand planning accuracy can contribute to the company’s profitability. To accomplish it, we have to improve forecast accuracy, say, from X% to Y%.

B.) If focusing on product life cycle management, then quantify the probable financial benefit arising from improving its process.

C.) If implementing a collaborative planning process with a customer, then quantify the benefits in financial terms that are likely to accrue to both the company and the customer.

Step No. 4: Define Key Performance Indicators

KPIs (Key Performance Indicators) are not to measure people. They are the indicators of process performance. The idea behind KPI measures is to focus on improvement and improvement alone. I have seen many organizations where people calculate KPIs only for evaluating the performance of individuals, and/or for a management presentation. Similarly, I have seen people looking for avenues to improve KPI scores if they are linked to compensation. All this dilutes the purpose of KPI measurement. Here are a few of my suggestions:

A.) Review KPIs regularly and religiously. Look for ways to improve the process. Evaluate the process, and identify its root causes. If low KPIs require focus on capability development (people, skills, knowledge etc.), then concentrate on developing those capabilities

B.) Make sure that the demand planning process’s performance is linked across functions, and KPIs are owned across functions. In mature organizations, Sales, Marketing, Supply Chain, and Finance jointly own demand-planning KPIs.

C.) Every month put the KPIs on display where everyone can see how things are going. What is shared is seen. Very often KPI measures are not shared adequately or frequently. If they are visible, they are likely to be discussed. That is a start!

A tool or system by itself does not solve any problems. People do. Training is necessary to ensure that the organization is benefiting from their applications.

Step No. 5 Implement Required Systems and Tools

A robust IT infrastructure and tools help improve productivity and profitability. It is imperative to understand the learning curve required in implementing a forecasting tool or a demand planning setup. Here are a few things that should be kept in mind while implementing systems and tools:

A.) Ask yourself what incremental benefit you will get by implementing a given tool. Make a business case with quantified financial parameters. Only if you are convinced should you proceed to make a request for such a tool.

B.) Don’t implement half measures. In many organizations with advanced ERP systems, the biggest chunk of forecasting continues to be done in MS Excel. Either invest in smart affordable Excel-based forecasting applications available in the market, or invest in training and resources needed to make the most from the existing ERP systems. A tool/system by itself does not solve any problems. People do. Therefore, investment in training and development is necessary to ensure that the organization is benefiting from their applications. Such investments often add up to millions of dollars, and should not be wasted.

Step No. 6: Manage Change

A demand planning process should be equipped to absorb change in the business environment. Typically, the process is challenged when a business is not heading in the right direction. At other times, when business is good, the process might not get proper attention. So managing the change is critical. To accomplish that you must:

A.) Sell demand planning to your organization, while understanding fully your business environment.

B.) Communicate, communicate, and communicate regularly. At least once a quarter share with your stakeholders process roadmaps, tangible benefits arising from it, successes achieved, improvement areas, etc. Do so positively and with zest.

C.) Make sure that demand planners are seen as high performing individuals in an organization. No role allows the kind of business visibility that a demand planner gets in an organization—from customers to production and suppliers. To attract talent, sell the demand-planning role as a stepping-stone for bigger strides in your organization.

D.) Rotate your demand planners once every two to three years. Give them a new category to handle or assign new responsibilities to them. The demand-planning role is a high pressure job and can get very predictable if the process maturity in an organization is high. It can get monotonous after two to three years if the job is not redefined properly.

E.) In tough times, the leadership function should assume the role of guiding the demand planning process. They should ensure that the process is not challenged for quick gains. In a volatile business environment, it is critical that the demand planning role is duly recognized for the value that it can bring to the organization.

These simple steps can add significantly to the value of the organization. I hope readers will find them useful and insightful enough to put them to practice!

This article originally appeared in the Journal of Business Forecasting Winter 2011/2012 issue. To receive The Journal of Business Forecasting and other benefits, become an IBF member today.

I must admit I was wrong.  I recently helped pen an article in the Journal of Business Forecasting (JBF) Fall 2017 edition entitled “Why Is the S&OP Process Stuck in Third Gear?”. The truth is most Sales and Operations (S&OP) processes are not stuck at all – they don’t even get out the starting block and are stuck in park. 

I believe one of the major reasons why so many companies struggle to get started, or not succeed at traditional S&OP, is they fail to understand the magnitude and scope of the task at hand. To help understand why so many firms fail at S&OP, I will explain not what S&OP implementation is, but what it isn’t.

• S&OP is not a supply chain procedure – it needs to be a business process.
• S&OP is not a project – it needs to be a continual development.
• S&OP is not about adjusting plans – it needs to become the way you create strategies.
• S&OP is not about change – it needs to be transformational.

There is a misconception about what constitutes change versus what it means to have deliver transformation. Many companies have a good idea of how to manage change, but most organizations continue to struggle with transformation. Change means implementing finite initiatives, which may or may not cut across the organization. Organizational transformation and a fully implemented S&OP process is altogether different. The objective of transformation is not just to execute a defined change initiative, but to reinvent the organization, change the culture and behaviors, and discover (rather than create) a new process and new way of planning.

You will need to be a model of “extreme leadership” to keep people energized even as the challenges mount in front of them.

Transformation Management Instead of Change Management

As opposed to change management, transformation is far more challenging for two distinct reasons. First, the future state is a concept you start with, and the final process is achieved through effort, and sometimes, trial and error. This makes it difficult to “manage” transformation with pre-determined, time-bound and linear project plans. Second, the future state is so radically different from the current state that the people and culture must change to implement it successfully. New mindsets and behaviors are required.

Understanding this distinction is crucial to knowing why some organizations fail to get the traction needed for transforming to an integrated business planning process or to a successful S&OP process.  Treating your journey like a traditional change management project may provide incremental improvements which can be sustained with ongoing thought, effort, and persistence but it will be difficult to sustain.  What you may need is a transformation management process that shifts the entire organization into a new way of thinking and planning that sustains itself.

Make continuous efforts to ensure that the transformation is seen in every aspect of your organization

Transformation management is a more complex process which varies according to each individual organization’s needs. There will be different approaches taken depending on a wide range of factors including the type of organization, the S&OP objectives and the external environment. To help you on your journey the following are the twelve process steps for transformational management and the factors critical for S&OP success.

Transformation Management 12 Step Process

1. Admit you have a problem: For transformation to happen, it helps if the whole company understands there is a problem and thinks we need a solution. Develop a sense of urgency around the need for new or improved Business Planning Process. This will help you spark the initial motivation to get things moving. If many people start talking about the transformation, the urgency can build and feed on itself.

2. Engage Leadership: Engage leaders and stakeholders, rather than seeking sponsorship, where the sponsor’s role is open to interpretation. Engagement is a process of being actively involved, and being seen to participate in the process at every level.

3. Form a Powerful Coalition: S&OP is about collaboration and you need a solid team. For transformation, you need to bring together a coalition, or team, of influential people whose power comes from a variety of sources, including job title, status, expertise, and political importance.

4. Listen First: Stakeholders have insights to provide regarding the transformation being proposed, and you provide the opportunity for those insights to be shared. Strive to listen and you may not only find good ideas that contribute to the overall vision but also a substantial amount of goodwill with people involved in the transformation.

5. Create a Vision for Change: A clear vision can help everyone understand why you are asking them to do something. When people see for themselves what you are trying to achieve, then the directives they’re given tend to make more sense.

6. Show Passion: You will need to be a model of “extreme leadership” to keep people energized even as the challenges mount in front of them. One the most important characteristics of a sucessful business planning process and transformation management is the ability to have a positive outlook and belief in what can be achieved.

7. Continuous Engagement: The “S&OP Journey” is a significant part of an everyone’s experience during transformation, and when managed well, it sets the right platform for motivation and expectations. Understand that communication is a marathon, not a sprint. You can’t say everything about the S&OP Process all at once. This means that you should focus on communicating small, focused messages on a regular basis to targeted audiences.

8. Training: Develop a new set of skills across the organization, including relationship building, interpersonal communication, conflict resolution and coaching/mentoring. This includes building out functional capabilities in areas like demand planning and finance and augmenting skill sets and professional training as well.

9. Be Able to Adapt: Put in place the structure for change, and continually check for barriers to it. Removing obstacles will empower the people you need to execute your vision, and it can help the transformation move forward. The ultimate vision may not change, but the route to success will require continuous adaptation to overcome obstacles and exploit opportunities.

10. Credibility: Nothing motivates more than success. Give people a taste of victory early in the transformation process. Within a short time, frame you will want to have some “quick wins” like improved planning for a holiday or key customer, or reduction of inventory that your company can see. Without this, critics and negative thinkers might hurt your progress.

 11. Transparency: Setting expectations and providing transparency throughout the S&OP journey can go far in minimizing conflicts and keeping everything on track. With a transparent process, people know what is happening and why. They feel more involved and trust the direction you are going in. 

12. Anchor the Changes in Corporate Culture: Finally, to make any S&OP process or any transformational project stick, it should become part of the core of your organization. Your corporate culture often determines what gets attention, so the impact and process must show up in everyone’s day-to-day work. Make continuous efforts to ensure that the transformation is seen in every aspect of your organization. This will help give the S&OP process a solid place in your organization’s culture. It’s also important that your company’s executives continue to support it. This includes existing staff and new leaders who are brought in.

The New Reality

Everyone agrees that change management is important. But many people underestimate the challenge of implementing a mature Sales and Operations (S&OP) process and the transformation that must take place inside the organization for its success. This type of transformation is far more unpredictable, iterative and experimental than traditional project or program management, and consequently entails much higher risk. The key elements needed to build success are understanding why you are changing, a clear vision of the final outcome, good stakeholder engagement and flexibility to adapt the process to meet the business need and strategic initiatives. Done well, transformation is a shift in consciousness. In fact, transformation creates a new reality.

In most companies, Enterprise Resource Planning (ERP) provides the informational backbone needed to manage day-to-day tasks and processes. The system connects programs from business functions (Finance, Marketing etc.) into one program that runs off one centralized database. In short, it connects different areas of a business, allowing for sharing of information, faster processes and crucially, centralized decision making. The result? Cost savings, improved forecasting in supply chain and superior strategic decision making.

ERP allows for integrated planning across the functional areas in an organization, allowing us to better meet demand with supply

ERP Is Designed To Support Modern Business Management

To understand what ERP is and does requires an understanding of how business management has evolved. Managing a large company can be done in one of two ways. One approach is to essentially decentralize the company around autonomous units. This way, each entity operates as a satellite, working independently from a sales and manufacturing standpoint and sharing products developed by the research centers. These units are not coordinated operationally or strategically. This is largely the way the companies operated prior to the standardizing initiatives that began the 1990s. The other approach to managing a large company is based on integration and coordination so that different parts of the business act as one whole, regardless of geographic location. The benefits of this are significant, but achieving it relies on successful implementation of ERP and effective change management.

Enterprise Resource Planning Software

ERP systems vary according to the vendor but typically they are intended to support functions in Finance, Manufacturing, Logistics, Sales and Marketing, and Human Resources. As demand planners, forecasters and S&OP professionals, we are interested in ERP because it allows for integrated planning across the functional areas in an organization, allowing us to better meet demand with supply. By working to the same information and having a system that allows for effective collaboration on a global scale, we can serve customer needs faster and more cost effectively. If implemented properly, ERP can:

• Reduce inventory
• Standardize manufacturing processes
• Improve visibility in order flow
• Integrate financial information and customer information
• Speed up the whole order fulfillment process

I see the evolution of ERP systems in much the same way as car models evolve. Automobile manufacturers introduce new models every year or two, making minor changes and refinements. Major changes are much less frequent, perhaps every 5 to 8 years and the same is true of ERP software. ERP vendors are constantly looking for ways to improve the functionality of their new software, so new features are often added. Many of these minor changes are designed to improve the usability of the software through a better user interface, or added features that correspond to the ‘hot’ idea of the time. Major software revisions that involve changes to the structure of the database, changes to the network, or computer hardware technologies, are made only every 3 to 5 years

Process reengineering is more difficult to achieve than the implementation of ERP computer hardware and software

Implementing ERP On A Global Scale

I was part of a multinational company with 35,000 staff and several manufacturing plants across different countries. An ERP system was implemented to manage the coordination of the manufacturing, sales and research facilities around the globe as new products were developed and introduced. Developing and deploying a new product is a complex process, requiring marketing plans and manufacturing coordination, and an ERP system facilitates this, coordinating different areas of the business to make the process as smooth as possible.

ERP Software Is Only The Start

The decision to move to an ERP system is only one part of true enterprise integration. Reengineering processes to fully utilize the integrated information support is essential. In practice, process reengineering is more difficult to achieve than the implementation of ERP computer hardware and software. Moreover, if processes are not changed to support the software, the ERP system will create additional work for people rather than less.

Global Policies For Implementing ERP Systems Are Crucial For Success

I highly recommend adopting a set of global polices that are documented and included in users’ handbooks. Create a common set of measures to guide change management across each function and location. This should contain a comprehensive set of policy activities, measures, and goals that define how manufacturing, planning and control system activities are evaluated.

Deployment of this common set of policies to all manufacturing units provides a shared vision of manufacturing excellence around the world and allows you to see which areas are doing what is required, and which need improvement. Further, processes as well as measurements and goals are also commonly based on the those defined in the policies.

Implementing new technology is straightforward compared to getting people to adapt to new roles

Golden Rules For ERP Implementation

• Ensure top management visibly supports the project at Kickoff, status meetings etc.
• Hold firm on project scope and management expectations.
• Assign ownership of deliverables to business leaders.
• Effective change management and user training is imperative.
• Have a solid, integrated project plan down to the people/task level so everyone understands their responsibilities.
• Work to critical path delivery dates and make timely decisions.
• Develop management performance objectives that are tied to savings and deliverables from the start.
• Avoid interfaces wherever possible.
• Always challenge consultants to do better than the timeline and set high expectations for the entire project team.
• Ensure knowledge transfer from consultants to internal employees.
• Document procedures and ensure they are part of end-user employee tasks.
• Whenever possible, change process before technology.
• Do not underestimate the “people change” side of the equation. Implementing new technology is straightforward compared to getting people to adapt to new roles, responsibilities and measurement systems.

How Much Can You Improve Demand Planning, Forecasting and S&OP Through ERP?

The value of ERP to a company depends to a great extent on the potential savings that can be derived from the ability to centralize information and decision making, and the synergies obtained from quick access to information from multiple functions in the company. Everything thing you do throughout this process must contribute to these fundamental ideas.

When it comes to improvements in operational performance, results vary greatly since much depends on how well the company handles the implementation process. But benefits should be gained from the elimination of redundant process, increased accuracy in information, superior processes and improved speed in responding to customers’ requirements.

Last week we looked at cutting inventory through improving inventory quality (getting rid of obsolete or low value stock) and reclassifying mislabelled inventory. Once you’ve done those those 2 quick fixes, the next inventory cutting initiative is testing for forecast bias and reviewing products in transition. Like last week’s Quick Hits, these will yield fast results without much in the way of research, tools, or infrastructure changes. Removing forecast bias should yield measurable inventory reduction results in just two to three months.

Testing for Forecast Bias

Forecast bias is a problem in many organizations. The perpetual challenge in demand planning is to balance the aspirations of Sales and Marketing with reality as reflected in consumer sales and factory shipment trends. When aspirations consistently exceed the reality, bias is the result.

Supply chain planning typically begins with a forecast, and if it is overstated it creates excess inventory. Conversely, consistently understating a forecast (or “sandbagging”) causes a bias as well. This can lead to expediting, schedule cuts, and other detrimental supply chain behaviors. While targeting bias seems to be the realm of a longer-term forecast improvement project, measuring forecast bias often drives fast and significant change in both inventory reduction and forecast error levels.

Measuring bias requires only a modest effort, usually focused on report building, and can be implemented in a relatively short period of time. It’s a perfect quick-hit opportunity. For those not already familiar with measuring forecast bias, there are a number of different ways to calculate this metric; our experience suggests that simple rules are the best. One quick test is to track any item that has been over or under forecasted for three months in a row (in the same direction).

A directionally biased item becomes a ‘problem item’ if the average deviation or error over the same three months is greater than 25%.

Identifying Problem Items

If this is your first venture into measuring bias, you should expect 60%-70% of all items to have some level of directional bias. Of course, it may be impossible to track bias for a potentially large number of items, so you may want to manage the bias measure by exception, using a secondary filter to reduce the list of bias items to those where the directional bias is most significant. The typical secondary filter is aggregate error – the summing of forecasts and actuals to arrive at an error percentage over the course of three months. In one of the simplest implementations, a directionally biased item becomes a ‘problem item’ if the average deviation or error over the same three months is greater than 25%. Again, this is a simple rule of thumb that may not apply well to all businesses.

As you might expect, the number or percentage of biased items is a meaningful S&OP measure. Figure 1 shows the number of biased items (problem items) above a 25% error threshold on a two month lagged forecast with three months of consecutive directional error. Making biased items a key measurable in the forecasting process improves the quality of a forecast. In turn, a better quality forecast is more likely to help drive down inventory levels.

Once you work through some of these questions, you may present the bias information in your demand consensus process for root cause analysis and correction

Figure 2 shows how the total inventory level (and specifically the finished goods inventory) dropped significantly over the same time as the number of bias items was lowered. This works, and it works well. So, how do you get started? First, you need to create a bias measure that works for your company. Looking at historical data can help you determine the number of directional forecast misses over time. You will need to determine a relevant level at which to test for bias in an item, brand, product grouping, or category, and/or what percentage of a miss represents bias for your organization. Most business leaders start with 25% as a measure, and then shift the percentage up or down depending on what they think is best for their organization. Once you work through some of these questions, you may present the bias information in your demand consensus process for root cause analysis and correction. Implementing a simple test for forecast bias can pinpoint unmet aspirations within a forecast and help you quickly reduce inventory levels within 2 to 4 months. Again, this is one of those cases where measurement can help change business behaviors.

To actually reduce the inventory, the best strategy is to create a report of biased items, review them in a demand consensus meeting, and then report them in the Executive S&OP meeting for an appropriate action. Clearly explain that the data reveals bias and is causing excess inventory and a drag on profitability, using the hard data in the report to support your argument.

All too often, product portfolio decisions are made without facts or are based on simplistic rules or metrics such as annual revenues.

Keep an Eye on Products in Transition

As items progress through the normal product life cycle of introduction, growth, maturity, and decline, there is a need to constantly evaluate how these products are planned. Each phase brings its own expectations. A product at launch needs a great deal of inventory and flexible capacity because of the uncertainty of demand. Items at maturity or in decline need their inventory to be optimized as demand is much more certain and reserve stock is not needed. Inventory is at greatest risk during the early introduction phase and in the later phases of decline— often called the long tail of the product life cycle—where sales volumes have dropped so low as to be considered for discontinuation, either through a voluntary market withdrawal or by the loss of a key customer or two.

Product Rationalization To Cut Low Value Items

There are two challenges in managing inventory throughout the long tail. The first is correctly determining product rationalization, that is, deciding which products should stay in your portfolio and which should be discontinued. The second challenge is managing the exit of those products slated for removal. In some industries, products move through life cycle phases seemingly in the blink of an eye. Yet even in industries that specialize in introducing new and improved products each year, it is not uncommon to find poorly defined processes for anticipating/ determining and managing product discontinuation. Likewise, the processes for managing planning parameters that determine inventory utilization through the end of the product life cycle are often equally deficient.

Portfolio management meetings address items as they transition through all phases of the product life cycle—from the ideation to discontinuation

Portfolio Management Review Meeting Should Control Excess Inventory

To meet these challenges, some S&OP process models include a step called the portfolio management review meeting. Within these meetings, the product portfolio is discussed in detail, including discussion regarding current ideas for products as well as those that are in the launch phase. If your firm’s S&OP process doesn’t include such a meeting, you should consider instituting one. Portfolio management meetings address items as they transition through all phases of the product life cycle—from the ideation to discontinuation. A monthly dialogue on the product portfolio can be an enormous leap forward in providing a forum for tracking product strategy and execution. Within portfolio management review meetings, many firms are beginning to use detailed analytics to properly target items for deletion off the long tail. All too often, product portfolio decisions are made without facts or are based on simplistic rules or metrics such as annual revenues. Using a rigorous approach to identify products for discontinuation on an ongoing basis enables the company to shorten the supply while facilitating effective management of obsolete inventory. Once a product is identified for potential discontinuation, supply planning assumptions such as fill rates and batch sizes can be tuned downward to reduce raw and packaging inventory exposure and risk during the final run-out.

Reviewing Stock Levels For New Products Is Crucial

Managing the supply planning parameters during the course of a product life cycle is particularly important. As an example, at one consumer products firm it was commonplace for supply chain planning to carry an additional 35 days’ worth of forward coverage inventory for all new product introductions after the initial pipe fill. The company intentionally carried excess inventory at product launch because of the uncertainty about demand early on. The company was more concerned about having available inventory to support a successful launch rather than the holding cost.

As you might expect, there were multiple examples where this supplemental-coverage inventory was never adjusted downward during the post-launch because there was no process in place to routinely review planning parameters. Under normal circumstances inventory targets are reduced to standard, steady state coverage levels, but with personnel changes and focus shifting toward the next new product launch life cycle, these planning parameters are overlooked, resulting in excess inventory.

Keeping An Eye on Products in Transition requires at least a quarterly review of planning parameters for all products less than two years past the launch phase while also conducting a similar examination of those items nearing the end of their run. Special attention should be reserved for products on the long tail of their life cycles, since these items need focused corrections in their planning parameters as their demand recedes. The adjustments in these parameters should be made with a goal of limiting inventory exposure in the event the market collapses for a product or if key customers drop the product completely.

This is where a portfolio management review meeting can add tremendous value in anticipating and managing slow and no-turn inventories. Many companies review each and every planning parameter, at least once a year. This should be the minimum review. If your company does this, great! The quick hit opportunity in this case is a very detailed one time review of all inventory policy settings for both finished goods and components.

These two initiatives are quick and highly effective. Despite minimal effort, they can resolve systemic problems that place cost burdens on your company. Next week, we’ll be looking at Waste and Yield Percentages and QC Hold Time. Stay tuned!

—————————

This article has been adapted from the Journal of Business Forecasting and Planning, Fall 2011 issue. To receive the Journal of Business Forecasting and other benefits, become an IBF member today.

Seth Godin, bestselling author of the books Tribes and Linchpin, once said in an interview that if you can only do what someone else tells you to do and nothing more, then they can find someone (or something) cheaper than you to do it. If you can creatively think through problems, present solutions and make decisions, then you’re a resource that can’t be replaced.

The Institute of Business Forecasting (IBF) asked professionals a few months back a few simple questions to gauge where people in the profession saw Demand Planning and forecasting in the year 2025. A summary of the report came out in the Winter issue 2017/2018 of the Journal of Business Forecasting (JBF). This and other articles will look deeper at those answers and what the future may hold in regard to people, process, and technology in the realm of Demand Planning.

While we did not ask directly if the role will be fully automated in the future, we did ask what the core competencies for the role will be in the year 2025. This sees a changing and possibly elevated Demand Planning role, one that evolves from analyst to a master of orchestration and provider of insights.

Where do You Fit In The Digital and Demand Planning Revolution?

According to many industry observers, we are today on the cusp of a Fourth Industrial Revolution. Developments in previously disjointed fields such as Artificial Intelligence and Machine Learning, robotics, advanced analytics, 3D printing, and cognitive technology and deep learning are all building on one another. The Internet of Things will help tackle problems ranging from Supply Chain Management to Operations. Concurrent to this, the digital revolution threatens to not just give us more data, but do your job faster, better, and cheaper than you do it.

What does this mean to us, will we be replaced? Your view of a demand planning robot of the future really depends on how you view your role today. If you are only doing what someone else tells you and aggregating data, or relaying what the forecasting system is generating, then they can find something cheaper. If we just need a number, technology can do this faster and more efficiently with greater number of inputs and more accurate outputs.

If you view Demand Planning as discipline that uses data, forecasts and experience to estimate demand and provides solutions for various business needs, then you are the next generation and ahead of the curve.

For the last few decades or more, a forecaster’s role has been considered primarily to provide an accurate single point estimate to a supply chain based on history and inputs from sales people. The fact is that the entire business, not just supply chain, needs insights into what will happen and the focus should be on growing profitability of the enterprise. This requires more complete, detailed analysis and quicker answers. What we are seeing today is that the Demand Planning role is changing and we need to migrate from Big Data to big answers.

We Conducted a Survey Into The Future of The Demand Planning Role And Here’s What You Said

The ability to apply quantitative insight to the wider business context is crucial to the future of the demand planning role.

This was clear as well in the results from the recent online survey conducted by IBF in September 2017. Unsurprisingly, the number one soft skill needed for Demand Planning was Advanced Decision Making (first choice for 34 of the 200 respondents).  I say not this is unsurprising because we are seeing this theme play out across multiple functions (like in FP&A) and is becoming a wider business need. Right after Advanced Decision Making comes our ability to Synthesize Data and Information, followed by Analytics. These top three needs captured almost half (42%) of all responses.

So what does this say about the role of Demand Planning in the future?

The Demand Planner Of The Future Will Be The Story Tellers Who Use Numbers As Their Language

As I mentioned in an earlier post, “My Case for A Centralized Forecasting Process”, Demand Planning can help provide synergies to many other functions and is uniquely qualified and positioned to help a company paint a fuller picture of what is to come. In that article, I referred to us a storyteller who uses numbers as their language. This is seen in the survey with Analytics which received a combined total of 85 first, second and third choices, placing it as a joint top priority. This is not analytics in the sense of a data junkie and a wizz kid at algorithms, but someone who has the ability to develop and plan analytics projects including gathering and visualizing data in response to business needs.

The Demand Planner Of The Future Will Not Report To Supply Chain

It may not (and I believe it won’t) be a Supply Chain role but will be elevated to a more unbiased centralized function with specialties that support multiple purposes and enables decisions making across the organization. The focus of Demand Planning will be more on sales enablement as well as wider ‘business enablement’. When you have more than a dozen people acting as decision-makers and influencers and competing priorities for their time, attention and money, having the right information at the right time to provide context and direction is highly valuable – and that is where the Demand Planner should come in.

The Demand Planner Of The Future Will Focus More On Pre And Post Analytics

The Demand Planner of the future may not be the statistician and programmer you may think we need in the digital world of tomorrow. The truth is that as technology continues to advance, it will not be the creators of the algorithms who will be in high demand but interpreters of them. We see this point clearly illustrated in the survey results; skills like Software Engineering count for only 1% of peoples’ first choices, and Mathematics and Statistics are also low down in the list of priorities.

This is not to say highly sought-after skills like knowledge of R and Python and advanced analytical programming are not needed today but it does provide a glimpse into the Demand Planning role of the future. What will be in more demand is the pre and post analytics that provide insights into what questions to ask, and assist in communicating the impact of the results to the business. These are two soft skills that may never be replaced by machines and are indeed likely to be in greater demand than ever before.

While clearly all of these soft skills or core competencies are important, judging from the responses and what we are in our own organizations, the Demand Planner of 2025 will be an elevated role that will creatively think through problems, present solutions, and make decisions.  And most of all, you will be a resource that can’t be replaced.

——————————

The survey data referred to in this article is based partially from The Institute of Business Forecasting’s (IBF) online survey “Future of Demand Planning and Forecasting”, conducted between September 1, 2017 and October 24, 2017.  The survey focused on three key areas of people, process, and technology as it relates to the demand planning field in the year 2025. The survey consisted of 4 high-level opinion questions asking respondents to rate their first, second, and third choice for each question. Each question had a keyword, along with a definition of that word of how it was to be interpreted for this survey. There were no incentives other than the opportunity to advance the body of knowledge in the profession and we received over 200 responses from people involved or related to the forecasting and demand planning functions.

If you would like to contribute an article to Demand-Planning.com, submit your details and suggested topics to the editorial team here.

The Journal of Business Forecasting Winter 2017/2018 Issue is available now for download. Below is a letter from the Editor, Professor Chaman L. Jain, revealing why this issue comes at an especially important time in the evolution of business forecasting, demand planning and analytics.

Dear Professional,

We are living in a world where market dynamics are constantly changing. Markets are exploding with new products, channels of distribution are proliferating, competition is getting more intense, and consumers are less loyal and more demanding. To survive and grow in these markets, companies must adapt, and that is exactly what they are doing. In spite of unprecedented challenges, 2/3 of companies report operating margins and revenue growth of 15% or more. The question is, what tools and methodologies are behind this remarkable growth, and how can they be translated into greater efficiency and profitability?

The answer lies in the fact that innovations like Big Data, Predictive and Cognitive Analytics, Machine Learning, Quick Response Forecasting, and Social Sensing have evolved from the conceptual to the real. Products are now “’self-aware” and Facebook data is being successfully leveraged to predict demand. The advancements we have been talking about for years are being successfully leveraged as drivers of growth. We as demand planners and S&OP professionals are no longer asking ourselves what tools of the future will be, but how we implement those tools today for superior demand planning and forecasting.

In this climate of exciting change, there remain some constants: people, process, and technology. People remain key, not least because automation in our field will, ironically, require more people to enter the field to fill a variety of new job functions. But that is not to say these elements are not evolving; software, not forecasters, will prepare forecasts based on pre-determined criteria, and information will include unstructured data gathered from social media.

Journal of Business Forecasting and Planning

Given the advent of automated forecasting software that models, predicts, advises and learns, demand planners will not be directly involved in preparing forecasts. Soon, the responsibility of demand planners will be to build consensus around forecasts, and then communicate that to upper management for action. They must, however, know what kind of forecasts are needed and how to evaluate them. Data scientists, working under demand planners, will use their skill and technology to gather more insight from data, such as what consumers really want and why, and how they feel about our products. This insight will feed decisions that optimize revenue and profit.

Because of the increasing share of new product sales and the expanding role of e-commerce businesses, new processes must be added to manage demand because they require different approaches and strategies. Further, market dynamics are rapidly changing, and so must our plans. To detect market changes quickly and act on them, planners need to shorten their planning cycles. Strategic planners no longer have the luxury to meet just once a year – they now have to meet more frequently. Furthermore, disruptions in both supply and demand are occurring much more quickly and are costly, requiring yet more and better processes to manage them.

Tools such as data mining, artificial intelligence, predictive analytics, and Hadoop will improve market intelligence, which will help in making better decisions. Virtual assistants such as Siri, Cortana, Alexa, and Watson will help in running different scenarios and producing outputs at the click of a button to arrive at an optimal solution. Last year, H&R Block deployed Watson to assist its staff in filing tax returns. The key objectives were to reduce tax liabilities of clients and file the return correctly so that they get the refund as soon as possible. This will help the company to improve its client retention rate. To train Watson, IBM fed 74,000 pages of federal tax codes and thousands of tax-related questions pulled from the H&R Block’s 60 years of tax return data. This technology is remarkable, and is directly transferable to  both demand planning and forecasting.

Since market changes are coming thick and fast, we need to detect market signals early enough to act. Some authors in this issue are already suggesting viable and practical ways to make this happen. To speed up the process of forecasting and, consequently, decision making, Larry Lapide proposes Quick Response Forecasting, and Charles W. Chase proposes Edge Analytics. The technology required to implement these concepts is almost here.

As with all changes, there is opportunity and risk, and hope and trepidation. Yes, technology will eliminate some jobs, but it will create others. An increasingly unavoidable truth is that demand planners and forecasters will transform into data scientists, and that presents an exciting new world of opportunity. We are at a pivotal moment, let’s embrace it.

Happy Forecasting!

Chaman L. Jain, Editor

Featured Articles

1. Event-Driven Planning: An Inflection Point for Operations Planning
By Gregory L. Schlegel

2. Building the Link Between Data and Supply Chain Performance in the Digital Age
By Alan L. Milliken

3. Preparing for Demand Planning in 2025
By Eric Wilson, CPF

4. Digital Transformation: Three Skills Demand Managers Must Have
By Peter Chisambara

5. Quick Response Forecasting: A Blueprint for Faster and More Efficient Planning
By Larry Lapide with Eric Wilson, CPF

6. Real-Time Demand Execution Anticipating Demand at the Edge
By Charles W. Chase, Jr., CPF

7. The Move to Defensive Business Forecasting
By Michael Gilliland

8. Supply Chain Digitalization — Delivering Sustainable Cross-Functional Change
By Neil James

9. I (am) Robot—Future Proofing Your Demand Planning Career
By Andrew Schneider, ACPF

10. CAPEX Predictive Analytics Confirm Renaissance in Animal Spirits
By Evangelos Otto Simos

11. U.S. Economy Defies Conventional Wisdom, Enjoys Non-Inflationary Full Employment Growth
By Jamal Nahavandi

This special issue of the Journal of Business Forecasting is available free for members via the IBF members area. Not a member? Then get a preview of this issue of the journal or become a member today and receive all JBF issues free and a host of other benefits. 

In the first of this mini-series, Pat Bower of Combe Inc. reveals the quickest and easiest ways to reduce inventory. Detailing the preferred methods used by leading S&OP professionals and consultants, he discusses how to cut poor quality or obsolete inventory for significant cost savings. Read on for quick improvements that can be leveraged easily in any supply chain focused organization. This week Pat discusses the two easiest inventory reduction initiatives: improving inventory quality and inventory classification.

Identifying Easy Targets For Inventory Reduction

As a consultant hired looking to improve supply chain efficiency in many different businesses, I would look for inventory reduction opportunities that could be implemented without much in the way of research, tool, or infrastructure changes, with the intent of yielding measurable inventory reduction results within a two-to three-month time frame. I call these Inventory Quick Hits. But where do these opportunities lie? In most cases, Quick Hits are a subset of the below inventory reduction solutions, but are narrower in scope and focus:

1. Improve inventory quality by reclassifying R&D inventory and removing junk inventory.
2. Testing and get control over forecast bias.
3. Keep an eye on products in transition so you can manage supply chain parameters reflective of their phase in the product life cycle.
4. Examine waste and yield percentages as well as QC (Quality Control) hold time.
5. Examine “actual” buy-side tolerances.
6. Investigate size, component, and formula consolidation opportunities. Look for easy-to-implement product and component.

Quick Hit 1: Improve Inventory Quality

Inventory has many classifications: active, slow-moving, obsolete, and inactive or run-out mode. Inventory that turns quickly and is actively sold is thought to be of high quality, while inventory that is slow moving, has no turn over, is obsolete, or residual is considered low quality. This “junk” or low-quality inventory is a favorite target of inventory consultants trying to reduce inventory. Slow-moving inventory has low volume sales or consumption relative to on-hand inventory. It simply does not turn over that fast or frequently. There are countless potential reasons why inventory is slow moving.

It’s possible that inventory turns slowly because of batch sizing, where each production run makes a large portion of an annual forecast, or because the product’s demand is slowly eroding, or for other reasons. Reducing slow-moving inventory requires a reassessment of supply chain parameters such as batch sizes, EOQs (Economic Order Quantity), and the like.

By contrast, obsolete inventory has no demand, and is often a combination of residual finished goods and leftover components. Obsolete inventory has lost the primary customer base, and the only sales opportunities it has are typically in distress or closeout channels. Run-out inventory is typically a combination of finished goods and components that are still being sold, but clearly are at the end of the product life cycle. Inventory is often placed in a run-out mode to help reduce the final inventory liability and may be kept as an active finished good, even with a greatly reduced customer base as a placeholder for a new product introduction. Run-out inventory usually requires a greater understanding of what the total inventory liabilities are as well as the possible disposal options. Inactive inventory generally has no raw material or packaging consumption for some period of time, typically six months to a year. It is not uncommon for ongoing finished good sales to be maintained for a variety of reasons, including trying to exhaust raw and packaging liabilities, or to cater to a niche market, or a special customer.

Analyse Inventory Holding Costs Vs. Potential Liability Savings

Eventually, when the finished goods or components are exhausted, the product ceases to exist, and the raw and pack components will be inactivated. In one company, for example, we observed there was a considerable inactive inventory for components sold into foreign affiliate markets. Despite the fact that components were ordered in the smallest possible increment, a single production run yielded enough finished goods inventory to cover demand for a couple of years. These unused components sat idle for a number of years waiting for the next production run. An analysis of inventory holding costs vs. potential liability savings are typically a first step in determining whether the inventory should be held. Most planning systems (ERP or SCM) have some variation of reporting tools for slow or not-moving, obsolete and excess inventory (often referred to as SLOB) that planners can run to examine any inventory that has not been used in the last 12 months or more, or that has exceeded coverage tolerances. Such reporting is very helpful in targeting inventory that falls into the junk classification, yet in our experience it’s often under-utilized. The quick-hit opportunity for inventory reduction is really focused on becoming very familiar with this reporting.

Understand Why Inventory Is Not Turning

Certainly, finished goods inventories should be examined, but the real opportunity is usually with the raw, pack, and component inventory left unused for 12 months or with excess coverage. There are many reasons why this excess inventory exists, including discontinuations, poor EOQs, packaging changes, and formula changes. The real magic in this suggestion is not to simply toss out the old inventory, but to get to the root cause of why inventory is not turning, and see if there are ways to correct the problem from a planning perspective. To get a better grasp of this “junk” and to create a unified metric for inventory quality, you may want to use tools that provide an Inventory Quality Ratio, (IQR) in which active inventory (net of excess, slow-moving, inactive, or obsolete) is divided by the total inventory.

In a newly developed S&OP process, the inventory quality ratio (IQR) can be an important metric used to track overall inventory values. Some companies have a very high percentage of slow-moving, inactive, or obsolete inventory. When I was consulting, it was not uncommon to see clients with low-quality inventory in the range of 25% to 50%. Periodic reviews and measurement of inventory quality, followed by purging the warehouses and plants of useless products, is among the simplest ways to reduce inventory.

Quick Hit 2: Reclassify R&D Inventory

This is a bit of a variation on the “cleanup of junk inventory” theme. Inventory should be properly classified from an accounting perspective and yet it is not uncommon for companies to accidently place inventory used for research and development purposes into an active (everyday use ) status. For example, a company that makes mixes, compounds, or blends chemistry may have a slew of random R&D chemicals, materials, or components that have been mistakenly classified as active production inventory. The list of companies with misclassified inventory includes more than just big industrial/commodity chemical companies— OTC pharma, cosmetics firms, health, beauty, and even food manufacturers blend chemistry. How does inventory get misclassified?

Cut 2% Of Misclassified Inventory Right Away

Sometimes inventory is ordered using the wrong accounting code, and sometimes-unused production inventory (mostly chemical compounds) of obsolete products are saved for a future R&D use. Either way, this inventory is often sitting on the books in an active status yet has no consumption or use against it, historically or planned. A full review of inventory may reveal a number of these odd ducks; one such review at a client revealed that over half of the inventory saved for future R&D use was expired and unusable, even for research purposes. While the percentage of this type of misclassified inventory is relatively small (usually within 1%- 2%), experience has taught us that most of it serves little useful purpose and occupies valuable storage space, making it a relatively easy target for reducing your total inventory tally. A full review of all active items with little to no consumption over the last year or more is likely to turn up in some of these stray inventory exceptions.

These two quick hits are easy targets for inventory reduction, and should be your first port of call when attempting to streamline inventory. They often provide significant cost savings in a relatively short amount of time, and with relatively little effort. Next weeks Quick Hits are Testing for Forecast Bias and Keeping An Eye On Product Transition. Stay tuned!

This post has been adapted from an article that appeared in The Journal of Business Forecasting, Fall 2011 issue. To receive the Journal of Business Forecasting, and wide range of other benefits, become an IBF member today.

Do you want to write for www.demand-planning.com? Then submit your article ideas and the Editor will get back to you.