A Demand Plan Sanity Check: Five Best Practices

Sch 1There is a process that is fast becoming a necessary and key component of both demand planning and sales and operations planning.  I have heard it described as “forecastability”and “demand curve analysis”, among other terms, but, here, I will call it a “Demand Plan Sanity Check” or DPSC for short.  I am seeing this across industries, but particularly in consumer products.  The concept is simple – how does one identify the critical few forecasts that require the skill and experience of demand planners, so that planner brainpower is expended on making a difference and not hunting for a place to make a difference.

At a minimum, a DPSC must consider the following components:

  1. Consideration of every level and combination of the product and geographical hierarchies
  2. A very high quality quantitative forecast
  3. A statistically developed range of “sanity” out through time
  4. Metrics for measuring “sanity”
  5. Tabular and graphical displays that are interactive, intuitive, always available, and current.

If you are going to attempt to establish a DPSC, then you need to incorporate the following five best practices:

1.  Eliminate duplication.  When designing a DPSC process (and supporting tools), it is instructive to consider the principles of Occam’s razor as a guide:

– The principle of plurality – Plurality should not be used without necessity

– The principle of parsimony – It is pointless to do with more what can be done with less

These two principles of Occam’s razor are useful because the goal is simply to flag unreasonable forecasts that do not pass a statistical “sanity check”, so that planners can focus their energy on asking critical questions only about those cases.

2. Minimize human time and effort by maximizing the power of cloud computing.  Leverage the fast, ubiquitous computing power of the cloud to deliver results that are self-explanatory and always available everywhere, providing an immediately understood context that identifies invalid forecasts and minimizes the need for planners to sort through and compare massive amounts of data manually and individually.

3. Eliminate inconsistent judgments By following #1 and #2 above, you avoid inconsistent judgments that vary from planner to planner, from product family to product family, or from region to region.  A DPSC tool should present the minimum essential data that will flag forecasts with questionable validity for planners so that they can leverage their skill, experience and intelligence on these exceptions rather than trying to apply their individual assessments to many different sets of data in order to identify the exceptions.

4. Reflect statistical realities.  Any calculations of upper and lower bounds of “sanity” should reflect the fact that uncertainty grows with each extension of a forecast into a future time period.  For example, the upper and lower limits of “sanity” for one period into the future should usually be narrower than the limits for two or three periods into the future.  These, in turn, should be narrower than the limits calculated for more distant future periods.  Respecting statistical realities also means reflecting seasonality and cyclical demand in addition to month-to-month variations.  It also means capturing the actual variability in demand and forecast error so that you do not force assumptions of normality onto the sanity check range(s).  Among other things, this will allow you to predict the likelihood of over and under-shipment.

5. Illustrate business performance, not just forecasting performance with “sanity” ranges.  The calculation of upper and lower “sanity” intervals should be applied, not only from time-period to time period, but also cumulatively across periods such as months in the fiscal year.

If you are engaged in demand planning or sales and operations planning, I’d like to know your thoughts on performing a Demand Plan Sanity Check.

Thanks again for stopping by Supply Chain Action.  As we leave the work week and recharge for the next, I leave you with the words of John Ruskin, “When skill and love work together, expect a masterpiece.”

Have a wonderful weekend!

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About Arnold Mark Wells
Industry, software, and consulting background. I help companies do the things about which I write. If you think it might make sense to explore one of these topics for your organization, I would be delighted to hear from you. I am employed by Opalytics.

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