Introduction to Forecasting and Demand Planning

Introduction to Forecasting and Demand Planning

Ayman Elrafie, CPIM, CSCP

Hair & Skin Care Demand Planning Manager | Unilever Gulf

Agenda

Forecasting basics.

The demand management process.

The demand planning cycle.

Maintaining a high quality forecast.

The show stoppers.

Agenda

Forecasting basics. The need for a forecast.

The forecast dilemma.

The principles, components, aggregation, sources of data and KPIs of a forecast.




The show stoppers.

The Need for a Forecast

Forecasting in FMCGs is of a great importance to the business:

1. It gives the organization the needed visibility to future demand and requirements, hence capacities, budgets and utilizations can be planned.

2. Forecast is used to ensure products availability OTIF.

3. Used to estimate the financial forecast.

4. Used by business partners in both the upstream and downstream to better plan their resources ahead.

The Vicious CirclePoor Forecasts

Do not see real gapearly on

Forced to do ad-hoc activities

Forced to sell unforecasted bread & butter SKUs

Forecast BiasP&L suffers

Margins suffer as Supply Chain expedites

Stock Availability suffers

Margins suffer as Supply Chain expedites

Trade stock > norms

Working capital increases & SLOBs are generated

TO, Margin gaps increase

Fail to deliver forecast

Senior Management disbelief forecasts

Micro-Management

Short term focus

Lack of Team work

Lack of Empowerment

The Forecast Dilemma

Different functions have different

views of the forecast & expectations

as well!! Key stakeholders are:

Marketing

Sales

Finance

Supply Chain & Operations

Top Management


Marketing: High growth rates and sometimes

exponential especially in the long term.

Intensive promos & innovations.

High budget to make it happen.

Try to maximize the product mix to meet all consumers needs.

I have many great ideas that consumer will love!


Sales: Little bit conservative, and sometimes

pessimistic too.

Probably knows the markets the best.

Always pointing out to stock availability issues and its effect on sales.

Always playing it as safe as possible.

Wishing to have the biggest product mix to fulfill all customers needs.

This month will be a very tough one!


Finance: Looking for a stable growth for the

P&L.

Willing to give the least possible budget as much as possible to promote

Trying to rationalize the product mix to minimize SLOBs.

Hoping to release the minimal possible budget for promotions.

Were about to consume our budget!


Supply Chain & Operations: Looking for a & growth to gain

economies of scale.

Looking for stability to better utilize assets.

Trying to rationalize the product mix to the minimize the changeovers.

Always emphasizing on lead times. This is not abiding with our lead times!


Top management: Looking for achieving the

organizations targets, which are usually very stretched.

Have we achieved our target?!

Target


The best forecast is the one which takes into considerations all the different functions views, concerns and assumptions. And here comes the role of the.

Demand PlanningLets develop it together guys!!

Target

Forecasting Basics Principles

1. Forecasts are (almost) always wrong.

2. Forecasts should include an estimate of error.

3. Forecasts are more accurate for groups than for single items.

4. Forecasts of near-term demand are more accurate than long-term forecasts.


1. Forecast Target.


1. Forecast Target.

2. Forecast is not only used to secure stocks.

To increase the customer service level:

1. Review the stock model:

Increase coverage

Increase safety stocks

Increase safety lead-times

2. Increase supply responsiveness.

3. Insure availability of contingency plans to cover any delays.

4. Revise your forecast.


1. Forecast Target.


3. Forecasts must be timely bounded, with specific time buckets.

Usually a forecast is covering a long period of time. This is primarily used for tactical -strategic decision making purposes.

Time buckets will vary based on the product and the companys requirements, however commonly used time buckets are:

Weeks

Months


1. Forecast Target.



4. Forecast must have a clear ownership.

Developing forecast is a cross-functional responsibility, all participants need to agree on the forecast and reach consensus.

Ideally, the S&OP process insures the consensus and company-wide ownership of the forecast, however some companies holds functions different functions accountable on different forecast horizons as follow:

Short term: Sales

Medium to long term: Demand planning

Promotions and advertising: Marketing


1. Forecast Target.




5. Forecast is based on robust and fact-based assumptions.

Predicting the future is something that we cannot do using quantitative inputs only due to ambiguity, hence forecast consists of qualitative inputs based on the best of our knowledge

Documenting the assumptions and doing our best to quantify them is an integral part of any forecast.


1. Forecast Target.




5. Forecast is based on robust and fact-based assumptions.

6. Forecast must be an unbiased

Forecast should always be a mid-point; where the chances of selling more are equal to the chances of selling less.

A conservative forecast can result in out-of-stocks and missing sales opportunities, while an optimistic forecast can result in higher stocks level and SLOBs

Forecasting Basics Components

All forecast consists of four components that shape it:

1. The basic value:

Which controls the vertical placement of the forecast.



1. The basic value.

2. The seasonality:

Which reflect the seasonality of the demand. Seasonality doesn't only mean weather seasonality, but any event affecting the demand seasonality in general. It usually repeats itself year on year.

Examples include:

The back to school season.

The Dubai shopping festival season.

Christmas



1. The basic value.

2. The seasonality.

3. The trend:

It controls the growth of the demand and usually governed by the market growth rates and the organizations market share growth rates.



1. The basic value.

2. The seasonality.

3. The trend.

4. The business cycle:

Cycle are usually long term, and are generally very hard to predict and are macro trends.

Forecasting Basics - Aggregation

Aggregation of forecast is very important especially since the forecasted units are usually too many.

Aggregated products should share the common characteristics and demand patterns.

Aggregation will not only provide more accurate forecast, but it will save lots of time too.

Forecasting Basics Sources of Data

Obtaining data is an integral part in building a quality forecast.

Using fact-based assumptions helps in validating qualitative inputs and quantifying.

Documenting assumptions is an important task that DP must apply.

Forecasting is a mix of science & art, where

underling assumptions resemble the foundation

Forecasting Basics KPIs

Forecast bias

Forecast accuracy

Month-on-month forecast changes

Agenda

Forecasting basics.

The demand management process: The four components of demand management.

The S&OP cycle.

Case study: Managing & Prioritizing demand.



The show stoppers.

The Demand Management Process The Demand Management Process is a process

that weighs both customer and a firms output capabilities, and tries to balance the two.

So basically, it is a process to match demand & supply!

Planning demand

Communicating demand

Influencing demand

Managing & prioritizing

demand

The Demand Management Process Planning Demand:

Planning demand is not only about forecasting, but that is just the start.

It is a plan for action based on consensus over the Demand Plan including assumptions, promotion plans, New Product Introduction plans and pricing plans.

A typical planning horizon is 24 rolling months, which is regularly reviewed on a monthly basis.

Planning demand


Influencing demand


demand

The Demand Management Process Communicating Demand:

Communication must be as early as soon as possible to minimize surprises.

Structure communication to ensure that they occur.

Focus communication to fit audience.

Planning demand


Influencing demand


demand

The Demand Management Process Influencing demand:

Influencing demand describes the activities of the marketing and sales to convince customers to purchase the organization's products.

The purpose of demand-influencing activities is to support the organizations business objective.

Examples of demand-influencing activities:

Settling on the most profitable product mix.

Strategic pricing.

Product distribution.

Promoting the product.

Planning demand


Influencing demand


demand

4 Ps

The Demand Management Process Managing and prioritizing demand:

It is optimizing demand across the system as measured by optimum organizational profit, demand volumes, sales revenue and customer service (including customer retention).

Managing and prioritizing demand must be restricted to appropriate management levels.

Examples of managing and prioritizing demand are: Rationing supply to warehouses or retailers in case

of shortage so that each receive a portion of their full demand.

Prioritizing and changing production schedule to cater for shortage in A class items.

Fulfilling a large, one-time order that would impact regular orders.

Planning demand


Influencing demand


demand

Sales & Operations Planning Sales & Operations Planning (S&OP) is a

decision-making process involving the business leaders and a number of middle managers and specialties.

S&OP Mission is to:

Balancing supply & demand at an aggregate level.

Aligning operational planning with financial planning.

Linking strategic planning with day-today sales and operational activities.

1

Product Review Meeting:

Attendees: R&D & Marketing.

2

Demand Planning Meeting

Attendees: DP, Marketing & Sales.

3

Supply Planning Meeting

Attendees: SP & Operations

4

Financial Review Meeting

Attendees: Finance

5

Reconciliation Meeting

Attendees: All

6

Executive Meeting

Attendees: Board & All.

Plans Information Flow

Demand Plan

Production Plan

Constrained supply plan

Gap closure plan

Sales plan

S&OP Plans

1

Product Review Meeting:

Attendees: R&D & Marketing.

2

Demand Planning Meeting

Attendees: DP, Marketing & Sales.

3

Supply Planning Meeting

Attendees: SP & Operations

4

Financial Review Meeting

Attendees: Finance

5

Reconciliation Meeting

Attendees: All

6

Executive Meeting

Attendees: Board & All.

Demand Plan

Constrained Plan

Gap closure plan

Final Sales plan

S&OP is a robust process, however its success is mainly

dependant on having the right behaviours

Case Study Managing & Prioritizing Demand

The outlook: Home care business in Africa

Rapid Market growth.

Capacity is constraining the demand.

Marketing & Sales

Operations

Finance

- We can actually sell everything we

make, but we are constrained by the

factory capacity.

- Whenever we push sales we always

have customer service problems

- We keep changing the production

plan which affects our reliability.

- We are always chasing our tails to

meet demand

- They keep cancelling our

maintenance plans which affects our

machines efficiency.

- Margins are too low to invest in

further capacity in the region.

- Allocated budgets for promotions

are not used efficiently due to supply

shortage & constraints.

Target

Top Management

- We are losing

shares and we are

not meeting our

financial targets

Lack of team work and a blame game!!

Case Study Managing & Prioritizing Demand

The action plan: Form a cross-functional team, who are

empowered to take tough decisions. Meet every week to make sure that

everyone is aligned on the updates. Constrain the demand to demonstrated

capacity Increase the price since demand is

constrained. Priority was given to key customers. Reduce the promotions drastically, and

increase the lead time for approving them. Exceptions and late changes are no more

accepted. Put the factorys maintenance plan back in

place. Look for an opportunity to source from

different business unit.

The results:

Margins Sales (value)

Demonstrated Capacity

Customer service level

Fire-fighting mode

Agenda

Forecasting basics.


The demand planning cycle: The eight steps process.

The Bulls-Eye, baseline and building blocks.

The demand variability sources.


The show stoppers.

The Demand Planning Cycle

The demand planning cycle is an eight-steps approach.

In this process, forecast is developed by using the baseline forecasting and the forecast building blocks.

The demand planner is also responsible to communicate the company-wide agreed sales plan.

Analyze sales data

Clean sales data

Generate baseline

Develop forecast

Reach demand consensus

Communicate demand

Constraint demand

Communicate sales plan


Analyze sales data

Clean sales data

Generate baseline

Develop forecast


Communicate demand

Constraint demand


If I had eight hours to chop down a tree, I'd spend six hours sharpening my axe- Abraham Lincoln


This is the step where you are should sharpen your axe, by interpreting the sales history carefully.

Compare actual sales data with the old forecast along with its underling assumptions to identifying what went wrong and what went well.

Analyze year VS year, month VS month, and channel by channel.

Understand the factors that supported sales, and make sure to update your assumptions accordingly.

Look for up-normal demand patterns, and try to understand the root cause jointly with the team.

Analyze sales data

Clean sales data

Generate baseline

Develop forecast


Communicate demand

Constraint demand


The Bulls-Eye Concept

Outliers, such as out of stocks or stock-ups due to price changes

Big events, unlikely to be repeated exactly the same way and worth planning

Normal or routine promoevents, likely to be repeated, but not always worth planning

Pure baseline sales excluding all activities

The Bulls-Eye

The Bulls-Eye

Baseline is the amount of sales with minimal or almost

no support

The Bulls-Eye

Examples can be:- All-year-round promotions- All-year-round TV ads- All-year-round in-store visibility

The Bulls-Eye

These events must be execluded sincethey dont happen all-year, and whenthey happen supporting assumptionschange

The Bulls-Eye

Including such events will lead to a wrong forecast, since these data points

are outliers


This is the part where correcting the history takes place.

From analyzing sales data, outliers and events uplifts are identified.

The most common way to identify outliers is using upper and lower limits (25% of average sales), or by using standard deviation ()

Common root causes of outliers can be: Out of stocks

Competitors out of stocks

Sales prior to price increase rumors

Channel stuffing

Correct the previous data jointly with the team.

Analyze sales data

Clean sales data

Generate baseline

Develop forecast


Communicate demand

Constraint demand


Sources of Demand Variability

Demand Variability

Competition

Seasonal effects

Economic and other external trends

PLC trends and

customers expectations

Bullwhip effect

Promotions

Disasters

Distance


Baseline generation is usually done using statistical forecasting.

Most common statistical modes used to generate baselines are: Moving average & weighted moving average

Seasonal liner regression

Exponential smoothing

Holt-winter exponential model

Validate your baseline with the updated assumptions.

Take into account the seasonality patterns.

Analyze sales data

Clean sales data

Generate baseline

Develop forecast


Communicate demand

Constraint demand



After the baseline is generated, events and forecast building blocks should be included.

Each event should have an uplift (or a down-lift) that affects the forecast.

The challenging part is to determine the incremental volume.

Analyze sales data

Clean sales data

Generate baseline

Develop forecast


Communicate demand

Constraint demand


Demand Building Blocks

Events

Distribution drives

Customer promotions

Consumer promotions

Increased in-store visibility

New Product introduction

Advertisement Price plans

Baseline

Event

Event

Event

Total Fo

recast

The Big Picture - Cannibalization

A promotion or innovation success standalone can make a perfect sense, however there are many external factors that will affect the success of that and an internal one; which is cannibalization.

An innovation and promotional grid must be always in place to insure that the big picture is there, and in order to be able to asses cannibalization effect properly.

=


Forecast is a cross-functional responsibility, hence final demand plans must be aligned with the team.

Demand consensus is an integral part for a successful S&OP process.

Analyze sales data

Clean sales data

Generate baseline

Develop forecast


Communicate demand

Constraint demand



Communicate the demand to the supply side of the organization as an unconstrained demand plan.

Analyze sales data

Clean sales data

Generate baseline

Develop forecast


Communicate demand

Constraint demand


Demand Plan

Constrained Plan

Gap closure plan

Final Sales plan


Include the supply constraints to reflect reality to your Constrained demand plan

Analyze sales data

Clean sales data

Generate baseline

Develop forecast


Communicate demand

Constraint demand


Demand Plan

Constrained Plan

Gap closure plan

Final Sales plan


Now as the plans are agreed, communicate to the sales team the companys agreed plan

Analyze sales data

Clean sales data

Generate baseline

Develop forecast


Communicate demand

Constraint demand


Demand Plan

Constrained Plan

Gap closure plan

Final Sales plan

Agenda

Forecasting basics.



Maintaining a high quality forecast: 10 steps for improved bias & accuracy

Classification of the losses

The show stoppers.

Maintaining a Quality Forecast

Maintaining a quality forecast is an endless journey:

Validate your baselines statistical model using historical data.

Validate the assumptions related to your events building blocks.

Validate the assumptions related to market & economic insights.

Regularly update and correct your forecast.

Work on improving your FA & FB.

How to Minimize Bias?

Start by analyzing your data along with the assumptions.

1. Investigate top-down VS bottom-up.

2. Investigate VS previous periods and growth rates.

3. Insure sustainable supply for products with bad stock-out history.

Common sources of forecast bias

Regulars Promotions InnovationsWrong

assumptionsStock outs and supply issues

Growth rates

How to Minimize Forecast Error?

1. Eliminate sources of bias.

2. Start a housekeeping cleaning activity.

3. Investigate at a brand level looking for cross-cannibalization.

4. Review your products proportional factors.

5. Analyze your time buckets sales.

6. Post analyze your promotions and innovations.

7. Rationalize your product mix portfolio.

Quick win

Quick win

Classify the Losses

Forecasting is a journey and forecasting quality improvement is a continuous improvement process. Hence prioritizing your effort is so important, and this can be done through:

Sales variation & forecast accuracy matrix

ABC classification for FUs (by forecast error, volume, value, etc..)

Ad-hoc requestsThe most sophisticated forecast & the one in its

simplest form will both fail to reflect reality, if they are not

updated and validated periodically

Classify the Losses - The Sales Variation & Forecast Accuracy Matrix

Identify what is the average sales variation.

Identify the coefficient of variation using sales variation divided by average sales of product.

Plot a scatter diagram between the forecast accuracy & the coefficient of variation.

Divide your graph to four zones

Classify the Losses - The Sales Variation & Forecast Accuracy Matrix

Zone A: Well done! Keep up the good job.

Zone B: Try different mathematical model.

Zone C: Collaborate with sales and start digging further as there is a big room for improvements.

Zone D: Try to minimize the sales variation.

Zone A

Zone B

Zone C

Zone D

Quick win

Classify the Losses - ABC

Work smart by classifying your forecast errors based on ABC classification, as the As will result in a significant improvement to the forecast quality

Quick win

On the average the A items represents 70% of the issues and are lessthan 20% of the total

count

Classify the Losses Ad-hoc Requests

FMCG business is a very dynamic business, where consumers, customers and competition are always changing the rules of the game.

Examples of ad-hoc requests might be : Unplanned customer order

Counter promotion

Welcome plan for a competitors launchDocument

assumptions & late change &

exceptions

Agenda

Forecasting basics.




The show stoppers.

The Show Stoppers

1. Shortage of talent and high employee turnover.

2. Data quality & availability.

3. Complex portfolio.

4. Team discipline.

5. Too many meetings.

6. Corporate politics.

7. Inefficient use of the systems.

Summing-up

DP is not only about SC.. It is somehow a position taking into account all different functions views and reflecting reality to the forecast.

Forecast is crucial for success in the FMCG business.

Always stick to the forecast basics and principles.

Forecast is a mix of science and art, but always do your best to validate and quantify the assumptions

Tailor youre the forecast quality KPIs to better fit your needs.

Behaviors are the key of the success of the demand management and the S&OP processes.

Show stoppers are always there, it is up to you to make it happen.

Email: [email protected] Profile: Ayman Elrafie

Introduction to Forecasting and Demand Planning

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