Wednesday
Mar102010
S&OP and Forecast Accuracy Poll: Part 2
Wednesday, March 10, 2010 at 6:26AM
Is this counterintuitive?
Not really. In S&OP, the forecast has been recast as a Demand Plan. A Demand Plan begins with the statistical forecast and then takes business intelligence from Sales and Marketing. Together, got that TOGETHER, the functions agree on an agreed upon forecast… er… demand plan. This demand plan is then used to drive the rest of the S&OP process. It drives the production schedule, what we order from contract manufacturers, where the goods are staged and in what quantities, and planning for any medium and long term capacity issues. It all starts with the demand plan. The demand plan begins, or should begin, with a statistical forecast.
S&OP puts a discipline and time limit around forecasting, I mean demand planning (why do I keep using the terms interchangeably?). The statistical or base forecast must be done by day X and the demand plan must be done and agreed upon a few days later. S&OP also, when done properly, drives these two very key points:
Having one number to operate off of is so important. Many companies, even to this day, have separate sales, supply chain, and finance “forecasts.” Which one does the company react to and act on? The Sales plans tend to be overly optimistic. Finance, often the voice of senior management, reflect what has been promised to The Street which may or may not be possible to achieve. In the Supply Chain, we believe our plans are the most realistic but we do hedge to prevent creating unnecessary inventory. Who is right? Which plan takes precedence? Organizations cannot act and react in lockstep march toward different numbers.
There is a third point to why I believe S&OP improves forecast accuracy is also key:
It is understandable why respondents to the poll and people commenting on the LinkedIn Group discussion express that S&OP is not necessarily focused on Forecast accuracy improvement. S&OP is focused more so on organization, process, coordination, and schedule. It is this focus that brings about the improvement in Forecast Accuracy as almost a side effect.
This is consistent with our approach at Cadent Resources Group. We believe strongly in using a good statistical forecast as a base. The organization should then focus on special events. The special events are new products, products to be discontinued that are ramping down, and promotional activities.
Statistical Forecast + Special Events = Demand Plan
Lastly, we have emphasized the point that S&OP must be “done properly” to reap these benefits. The only way this has any chance of happening is if there is “Leadership from the top.”
Not really. In S&OP, the forecast has been recast as a Demand Plan. A Demand Plan begins with the statistical forecast and then takes business intelligence from Sales and Marketing. Together, got that TOGETHER, the functions agree on an agreed upon forecast… er… demand plan. This demand plan is then used to drive the rest of the S&OP process. It drives the production schedule, what we order from contract manufacturers, where the goods are staged and in what quantities, and planning for any medium and long term capacity issues. It all starts with the demand plan. The demand plan begins, or should begin, with a statistical forecast.
S&OP puts a discipline and time limit around forecasting, I mean demand planning (why do I keep using the terms interchangeably?). The statistical or base forecast must be done by day X and the demand plan must be done and agreed upon a few days later. S&OP also, when done properly, drives these two very key points:
- A strict schedule of when the base forecast and the demand plan built off of it must be done
- The organization develops and agrees to ONE demand plan
Having one number to operate off of is so important. Many companies, even to this day, have separate sales, supply chain, and finance “forecasts.” Which one does the company react to and act on? The Sales plans tend to be overly optimistic. Finance, often the voice of senior management, reflect what has been promised to The Street which may or may not be possible to achieve. In the Supply Chain, we believe our plans are the most realistic but we do hedge to prevent creating unnecessary inventory. Who is right? Which plan takes precedence? Organizations cannot act and react in lockstep march toward different numbers.
Having more than one Demand Plan or Forecast, call it what you will, only serves to fortify and isolate the functional silos.
There is a third point to why I believe S&OP improves forecast accuracy is also key:
- The base forecast is largely based on a statistical forecast. It is not tampered with… too much. The efforts of the organization are then focused on new products and promotional activities where the statistical forecasts are weak.
It is understandable why respondents to the poll and people commenting on the LinkedIn Group discussion express that S&OP is not necessarily focused on Forecast accuracy improvement. S&OP is focused more so on organization, process, coordination, and schedule. It is this focus that brings about the improvement in Forecast Accuracy as almost a side effect.
- Organization
- Process
- Coordination (OK I will use the word – Collaboration)
- Schedule
This is consistent with our approach at Cadent Resources Group. We believe strongly in using a good statistical forecast as a base. The organization should then focus on special events. The special events are new products, products to be discontinued that are ramping down, and promotional activities.
Statistical Forecast + Special Events = Demand Plan
Lastly, we have emphasized the point that S&OP must be “done properly” to reap these benefits. The only way this has any chance of happening is if there is “Leadership from the top.”
Reader Comments