Executive Briefings

There Is No Magic Number for Demand Forecasting

Take a close look at any supply chain - even a single entity within it - and you're likely to uncover a hodgepodge of disciplines, each with its own method for forecasting demand, and each convinced of its superiority over everyone else's. So it only makes sense that companies would dream of coming up with a single forecast upon which all departments could agree.

If only that were possible - or even desirable. The notion of one-number forecasting has been bandied about for a number of years, as the key to managing global supply chains. A simple answer to a complex problem: irresistible. But is it really an answer? Or just a trendy concept with imperfect application to the real world?

Without question, companies need to align their various departments to ensure that all are working from some kind of consensus-based plan. The effort falters, however, when they attempt to impose one invariable demand forecast across sales, marketing, finance, procurement, manufacturing and logistics. Each area is likely to tweak that number to square with its own expectations. Often a departmental calculation will deliberately veer from reality, in order to maximize resources or incentivize a sales force. The result: too much product chasing too little demand. And a carefully crafted forecast that nobody takes seriously.

Still, companies need to have some kind of a starting point. That's what sales and operations planning (S&OP) is all about. It incorporates input from multiple disciplines as a means of synchronizing and unifying the organization.

Nestle USA spent three and a half years implementing S&OP, an effort that successfully drove it from a six-number plan to a consensus figure, according to Geoffrey Fisher, director of demand and supply planning. Still, when it came time to execute against that number, there was a certain amount of "wink-wink" behavior among the supply team.

"There's a lot of value to using one number as a battle cry, but don't forget the actual work [that's required] to get it done," Fisher said at a recent conference of the Institute of Business Forecasting & Planning in Scottsdale, Ariz.

IBF panelist Patrick Bower, senior director of corporate planning and customer service with Combe Inc., called the one-number concept "a bit of a misnomer. You need to have one agreed-upon plan as a baseline ... for supply planning and budget. But it's kind of defined poorly."

What companies ought to be doing, Bower said, is "banding" around a consensus number, with high and low parameters that acknowledge the uncertainties of customer demand.

Jonathon P. Karelse, president of Syncro Distribution Inc., agreed. The debate over one-number planning gets caught up in semantics, he said. What's more, companies need to realize that any number they devise is going to be wrong.

"The important thing is that there's a confidence interval around that number," Karelse said. "You need to plan appropriately for the high side and the low side." Companies can allow sales and marketing to assume the best possible scenario, he added, as long as they "allow for the worst and are prepared."

Coming up with some magic number is an attractive idea, said Bower, but the effort has to be "reality-based." If sales and marketing is setting a "stretch objective," there needs to be a means of determining how the sales plan will dovetail with actual production runs. For better or worse, the real world trumps business objectives every time.

Randy Wilp, leader of global commercial forecasting with Merck & Co., Inc., sounded even more existential. "In my mind, there is no one version of the truth," he said, dashing the hopes of supply chain executives the world over.

At one point, Merck tried the one-number approach to forecasting. "Luckily," said Wilp, "that's been abandoned." Today, the company runs its operation on forecasts, but it works hard to understand the varying demand signals within its own organization, as well as among its supply-chain partners.

The trick lies in achieving "complete transparency" between functional units of a company, said panel moderator Seema Phull of North Find Partners. Lack of that essential element "is what creates the multiple versions of misaligned plans."

So what are the key metrics that a company can use to drive change and coherence in its forecasting efforts? And how can it ensure that it's getting the most valuable input from each function? When Karelse headed up the consumer products division of Yokohama Tire (Canada), he helped launch a company-wide planning effort that included the formation of a Forecast Council. Dream met cold reality when Karelse realized that most of the people on the council didn't want to be there. He began analyzing the net benefit of each contributor's input, "so we could identify whose time we were wasting, and what was causing degradation of the plan."

What Karelse was doing, without knowing its formal name, was engaging in forecast value-add (FVA) analysis, a means of identifying waste in the forecasting process. The lesson was clear: "when you begin measuring it, you can improve it."

The initiative known as Collaborative Planning, Forecasting and Replenishment (CPFR) is widely considered to be a valuable tool for gauging customer demand in retail promotions and other special marketing efforts. But FVA allows a company to scrutinize "the maturity levels of the people you're engaging with downstream, and measure forecasting horizons," said Karelse. "If you just starting rolling in customer forecasts because the customer "˜knows,' it's going to cost you a lot of money."

One fixed number for forecasting? Forget about it. But companies can still achieve internal and external alignment of the planning process through proper measuring, and an understanding of the natural biases that each function holds. As Fisher put it, "You replace one number with one plan."

Next: What companies are looking for in a demand planner.

Comment on This Article


Keywords: supply chain, supply chain management, inventory management, inventory control, logistics management, supply chain planning, supply chain forecasting, retail supply chain, sourcing solutions, supply chain risk management

If only that were possible - or even desirable. The notion of one-number forecasting has been bandied about for a number of years, as the key to managing global supply chains. A simple answer to a complex problem: irresistible. But is it really an answer? Or just a trendy concept with imperfect application to the real world?

Without question, companies need to align their various departments to ensure that all are working from some kind of consensus-based plan. The effort falters, however, when they attempt to impose one invariable demand forecast across sales, marketing, finance, procurement, manufacturing and logistics. Each area is likely to tweak that number to square with its own expectations. Often a departmental calculation will deliberately veer from reality, in order to maximize resources or incentivize a sales force. The result: too much product chasing too little demand. And a carefully crafted forecast that nobody takes seriously.

Still, companies need to have some kind of a starting point. That's what sales and operations planning (S&OP) is all about. It incorporates input from multiple disciplines as a means of synchronizing and unifying the organization.

Nestle USA spent three and a half years implementing S&OP, an effort that successfully drove it from a six-number plan to a consensus figure, according to Geoffrey Fisher, director of demand and supply planning. Still, when it came time to execute against that number, there was a certain amount of "wink-wink" behavior among the supply team.

"There's a lot of value to using one number as a battle cry, but don't forget the actual work [that's required] to get it done," Fisher said at a recent conference of the Institute of Business Forecasting & Planning in Scottsdale, Ariz.

IBF panelist Patrick Bower, senior director of corporate planning and customer service with Combe Inc., called the one-number concept "a bit of a misnomer. You need to have one agreed-upon plan as a baseline ... for supply planning and budget. But it's kind of defined poorly."

What companies ought to be doing, Bower said, is "banding" around a consensus number, with high and low parameters that acknowledge the uncertainties of customer demand.

Jonathon P. Karelse, president of Syncro Distribution Inc., agreed. The debate over one-number planning gets caught up in semantics, he said. What's more, companies need to realize that any number they devise is going to be wrong.

"The important thing is that there's a confidence interval around that number," Karelse said. "You need to plan appropriately for the high side and the low side." Companies can allow sales and marketing to assume the best possible scenario, he added, as long as they "allow for the worst and are prepared."

Coming up with some magic number is an attractive idea, said Bower, but the effort has to be "reality-based." If sales and marketing is setting a "stretch objective," there needs to be a means of determining how the sales plan will dovetail with actual production runs. For better or worse, the real world trumps business objectives every time.

Randy Wilp, leader of global commercial forecasting with Merck & Co., Inc., sounded even more existential. "In my mind, there is no one version of the truth," he said, dashing the hopes of supply chain executives the world over.

At one point, Merck tried the one-number approach to forecasting. "Luckily," said Wilp, "that's been abandoned." Today, the company runs its operation on forecasts, but it works hard to understand the varying demand signals within its own organization, as well as among its supply-chain partners.

The trick lies in achieving "complete transparency" between functional units of a company, said panel moderator Seema Phull of North Find Partners. Lack of that essential element "is what creates the multiple versions of misaligned plans."

So what are the key metrics that a company can use to drive change and coherence in its forecasting efforts? And how can it ensure that it's getting the most valuable input from each function? When Karelse headed up the consumer products division of Yokohama Tire (Canada), he helped launch a company-wide planning effort that included the formation of a Forecast Council. Dream met cold reality when Karelse realized that most of the people on the council didn't want to be there. He began analyzing the net benefit of each contributor's input, "so we could identify whose time we were wasting, and what was causing degradation of the plan."

What Karelse was doing, without knowing its formal name, was engaging in forecast value-add (FVA) analysis, a means of identifying waste in the forecasting process. The lesson was clear: "when you begin measuring it, you can improve it."

The initiative known as Collaborative Planning, Forecasting and Replenishment (CPFR) is widely considered to be a valuable tool for gauging customer demand in retail promotions and other special marketing efforts. But FVA allows a company to scrutinize "the maturity levels of the people you're engaging with downstream, and measure forecasting horizons," said Karelse. "If you just starting rolling in customer forecasts because the customer "˜knows,' it's going to cost you a lot of money."

One fixed number for forecasting? Forget about it. But companies can still achieve internal and external alignment of the planning process through proper measuring, and an understanding of the natural biases that each function holds. As Fisher put it, "You replace one number with one plan."

Next: What companies are looking for in a demand planner.

Comment on This Article


Keywords: supply chain, supply chain management, inventory management, inventory control, logistics management, supply chain planning, supply chain forecasting, retail supply chain, sourcing solutions, supply chain risk management