Archive for November, 2011

To improve the supply chain process, focus on your demand forecasting process, and the rest will fall into place. – by Deryl Emerson

November 25, 2011

One of the areas we emphasize at Oracle through a suite of supply chain applications called Demantra is the vital importance of Value Chain Planning. Better demand-planning, and more accurate sales forecasting processes, are integral first steps toward any effective supply chain strategy.

I recently read a case study by Rogelio Olivia and Noel Watson entitled Cross-Functional Alignment in Supply Chain Planning about an anonymous consumer electronics developer and distributer based in Northern California. In this article, I will try to relate some of their observations that were proven to be effective steps toward improving their overall supply chain management process.

Sales, marketing, finance, manufacturing and supply chain operations must anticipate demand and reconcile their forecast predictions to reach a consensus. As competition increases, and markets and supply chains globalize, the process of collaborating and reconciling your demand predictions becomes that much more challenging, but increasingly important.

The article mentions improvements in recent years in cross-departmental interfaces, such as those between Purchasing & Manufacturing. But broader-reaching integration, they argue, among more departments is needed.

This case study also found a collection of different incentives among these related departments (Finance, Sales, Operations, and Marketing), which was not only quite common, but often lead to contradictory goals. For example, Sales might have a tendency to overstate their projections to ensure operations maintained adequate levels of inventory, even if this might negatively impact finance.

This particular company, however, decided to ignore these differences, and focus solely on implementing a new supply chain planning process, rather than trying to adjust their incentive roadmap.

This collaborative demand-planning methodology is often referred to today by industry consultants as the Sales and Operations Planning Process (S&OP). The article further defines this process as a means to facilitate demand planning, master planning and the flow of information between them.

Master planning seeks the most efficient way to fulfill demand by facilitating purchasing and materials requirements, production, and distribution planning. Demand planning focuses on the customer, predicting future demand from scheduled orders, prevailing market conditions, and marketing & sales activities such as promotions, or new product launches. A basic S&OP process facilitates the transfer of information from demand planning to master planning.

The subject of this case study was an anonymous consumer-electronics company which sells to big box retailers such as Best Buy, and uses Asian based contract manufacturers to make their products. They also had global distribution centers in North America, Europe and Asia.

To improve their supply chain management effectiveness, this company adopted a new forecast planning process to create and maintain a Business Assumption Package (BAP), for managing their price plans, product intros & sunsets, and anticipated market trends. It is important to note that participants in this BAP process included senior leadership from marketing, finance, sales and operations.

The BAP was discussed and updated each month, and used as the basis for the following 3 forecasts:
• Top Down Demand Forecast (Macro) – Weighted more long term
• Bottom Up Demand Forecast (Micro) – Weighted more short term
• Statistical Inference Forecast (extrapolating past sales results) – reference point for first two forecasts to further investigate and justify any significant deviations

The final consensus forecast was provided to the Finance Dept every quarter, which, in conjunction with the BAP, revised their financial targets, and reconciled their pricing and promotion strategies to meet their financial goals or analyst expectations. Once Finance approved the final forecast, it was released in order to generate the Master Production Schedule (MPS).

Whereas in the past, these forecast planning meetings often resulted into contentious disagreements, the new forecast planning process not only brought about a much more constructive discussion between the impacted departments, as their stake in the accuracy of these forecasts was carefully reviewed and adjusted monthly, but the resulting operational improvements were dramatic.

Now that all the functional stakeholders were actively involved in developing and assessing the product offerings and promotional plans, there was more procedural quality in the planning process, more accountability, and as overall by-product of this new process, an improved incentive alignment was realized.

• Forecast efficiency improved from 58% to 88%
• Dramatic increase in inventory turns
• Excess & obsolescence costs decreased

The article expands on the concept of procedural quality, in other words, the soundness of the judgments and inferences drawn to help develop and validate their forecast plans.

Procedural quality suffers when incentives and priorities can bias the plan. But their new process, by involving all the stakeholders, and regularly updating and validating their projections, and by incorporating the three different forecasts, transformed a more dubious process into a much more collaborative one. Each stakeholder better understood their counterparts needs and assumptions, had more faith in their results, which in turn, better aligned their actions.

Additionally, by combining three forecasts into a single, evolving consensus opinion, accuracy improved. It also provided for extensive validation across the all the departments, increasing awareness of the aggregate needs and goals of the global enterprise. Customer feedback from sales & marketing, for example, was equally weighted alongside input from operations and finance regarding product offerings and promotions. This fostered more constructive collaboration in reconciling their differences, which was in stark contrast to the contentious arguments that had characterized their prior meetings. Each department began to appreciate their respective resources and constraints, and how their functions impacted one another.

As a more collective, open, and transparent process, ownership of the plan spanned all stakeholders, fostering trust, and better adherence to the plan, and thereby promoting better alignment of overall goals and objectives.

So, when considering improvements to your supply chain, before you do anything, try focusing your efforts first and foremost on your demand-forecasting process, and you may be surprised how vital this critical first step impacts the rest of your supply chain management execution.