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!

Resilience Versus Agility

Just a short thought as we move into this weekend . . .

Simple definitions of resiliency and agility as they relate to your value network might be as follows:

Resiliency:  The quality of your decisions and plans when their value is not significantly degraded by variability in demand and/or changes in your competitive and economic environment.

Agility:  The ability to adjust your plans and execution for maximum value by responding to the marketplace based on variability in demand and/or changes in your competitive and economic environment.

You can take an analytical approach that will make your plans and decisions resilient and also give you insights into what you need to do in order to be agile.

You need to know the appropriate analytical techniques and how to use them for these ends.

A capable and usable analytical platform can mean the difference between knowing what you should do and actually getting it done.

For example, scenario-based analysis is invaluable for understanding agility, while range-based optimization is crucial for resiliency.

Do you know how to apply these techniques?

Do you have the tools to do it continuously?

Can you create user and manager ready applications to support resiliency and agility?

Finally, I leave you with this thought from Curtis Jones:  “Life is our capital and we spend it every day.  The question is, what are we getting in return?”

Thanks for stopping by.  Have a wonderful weekend!

Supply Management Has an Important Role in S&OP

In manufacturing, traditional sales and operations planning is expanding beyond simple supply/demand balancing toward integrated business decision-making.

Service firms are also realizing the benefits of holistic business planning.

Integrated business planning is neither integrated nor complete without supply management which must come to the process with an understanding of the supply risks and a strategy for capitalizing on opportunities.

An integrated plan for the business must be informed by:

  • the relative bargaining position of the firm
  • supplier viability under multiple economic scenarios
  • trends and potential ranges for commodity and other prices
  • supplier and global supply capacities
  • advances in supplied materials or supplier manufacturing technology
  • other relevant context

Supply management must also be prepared to contribute to an integrated decision set for the business with:

  • a comprehensive analysis of total cost of ownership and the business’ sensitivity to each of component
  • strategies for structuring supply agreements to mitigate risk and minimize the cash-to-cash cycle
  • approaches for substituting information for time and inventory
  • sourcing alternatives to support sales and marketing initiatives as well as manufacturing and quality requirements
  • scenarios for reducing lead time and lot size

For more on this, have a look at my related presentation.

Thoughts from IBF Conference

I just left the IBF’s Leadership Business Planning & Forecasting Forum and the Supply Chain Planning & Forecasting:  Best Practices Conference in Orlando, Florida.  I’ll share a few of the thoughts that struck me as helpful here in the hopes that they will help you.

From a panel discussion on organizational design at the Forum, I compiled this key point (adding in my own twist):   S&OP is all about integrated decision-making, understanding inter-related tradeoffs, driving toward bottom-line metrics with cause/effect accountability.

Rick Davis from Kellogg pointed out that  “Integrated planning is less about function than about process.

Rick also emphasized managing the inputs, particularly since data and technology are moving at the “speed of mind”.  Decision-makers need to ask themselves, “Will competitors leverage information better than I will?”

A few keys to success in S&OP include the following (see Ten Sins of S&OP for what NOT to do):

1)      Scenario analysis

2)      Leadership buy-in

3)      Quality feeder processes (my point of view)

4)      Remembering that financial targets and demand plans are different

Rafal Porzucek defined supply chain agility this way:  “The speed to react with predictable costs and service delivery.”  I thought that was pretty good.

The consumer products executives felt that the effort to leverage social media for forecasting was in the data collection phase.  In a couple of years, it may be useful for generating more accurate forecasts.

Mark Kremblewski and Rafal Porzucek from P&G made a compelling case for enabling innovation through standardization – and it made great sense.

Mark also shared a profound understanding of how the key numbers of business objective, forecast and actual shipments relate to each other.

I hope some of these points stimulate your thinking as they did mine.

There were other speakers who shared some great insights.  The absence of mention here is not meant to diminish their contribution.

This week, in the theme of anticipating the future, I leave you with the words of the English novelist and playwright, John Galsworthy, who won the 1932 Nobel Prize in Literature, “If you do not think about the future, you cannot have one.

Have a wonderful weekend!

Leadership Is Not Just Telling Other People What to Do

When I was a young Marine lieutenant, I was taught that if it happened on your watch, it was your responsibility.  The fact that you didn’t know, or someone didn’t carry out your orders, was irrelevant.  Accepting that responsibility with integrity was a critical element of leadership.

In the world of corporation and bureaucracy, and even in the higher levels of the military, this notion seems all but forgotten. 

I recently talked with Dr. Jeannie Kahwajy, founder and CEO of Effective Interactions.  She reminded me that it simply is not good enough to develop the right analytical decision, to give clear direction, have a noble mission, or even to “get” people to do what you want them to do.

You must take responsibility for the end result.  To paraphrase Dr. Kahwajy, we need to take responsibility not only for what we say, but also for how others hear us.  Sound like “a bridge too far”?  According to Dr. Kahwajy, it is not too much to expect of ourselves.  Rather, it is absolutely mandatory and explicitly doable.

To take that kind of responsibility requires a level of humility that allows me to be open to the fact that I may not have 20/20, 360 degree vision at all times.

I might be missing something.  I have to be open to receive insight from others – not going through the motions open –  really open.  And that takes an understanding of my own vulnerabilities, unavoidable myopia, and limitations, together with an understanding of the truth that others can contribute to me as I can contribute to them.

Not too long ago, I wrote an article for the Journal of Enterprise Resource Management, entitled, “Don’t Manage a Supply Chain, Lead a Value Network”.  I was mostly trying to emphasize the fact that supply chains are dynamic and interconnected, and that as such, they require more insightful leadership than the more simplistic concept of a supply chain.  However, the contrast between management and leadership remains even more dramatic.

Leadership is not telling other people what to do. 

Leadership is not telling other people what to do.

(No, that’s not a typo.  It just seems like a hard concept for us to grasp.)

Leadership is humble, responsible and demonstrated through service.  An organization can cultivate leadership throughout its ranks, but it takes real leadership at the top.  I think that the fun and effectiveness quotients of that kind of an organization will blow away those without a culture (I know – way overused term) of leadership.

We can all be leaders.  More than that, we have an obligation to be leaders.

Dr. Kahwajy tells us that leadership and effective interaction are a science and you can be taught how to do it every time.  Her work and services are worth a look.

Let me apologize on the record for failing to properly articulate her ideas and their value.

Leadership is essential to integrated decision-making (think S&OP).  Integrated decision-making is about considering all the relevant tradeoffs and eliminating blind spots to any tradeoffs or risks.  Integrated decision-making requires integrated decision thinking and quality analytics.  Effective analytics, require the analyst to be a leader as well.  See related thoughts here and here.

For this weekend, I leave you with these words from Peter Drucker, “No institution can possibly survive if it needs geniuses or supermen to manage it.  It must be organized in such a way as to be able to get along under a leadership composed of average human beings.” (http://www.leadershipnow.com)

Have a wonderful weekend!

Leading for Profit

My guess is that you may have already read the book, Islands of Profit in a Sea of Red Ink by Jonathan Byrnes.  He suspects that 40% of your business is unprofitable, but nobody knows because your metrics are aggregate and profitable transactions subsidize the rest.  Byrnes’ book is replete with insights for managing profitably, including:

 

 

  1. Identifying unprofitable business is job one. 
  2. The big question, then, is how to manage for profitability (or value) going forward. 
  3. In most companies, no one is responsible for managing the interaction of key tradeoffs to increase profitability to its full potential. 

Managing your company’s assets for increased profit is the essence of supply chain management.  To that end, product development, marketing and selling, forecasting, supply chain design, capacity and production planning, and sourcing must be orchestrated as interrelated processes.  This requires cross-functional coordination enabled by advanced analytics that explicitly and simultaneously evaluate many critical tradeoffs, giving you the head start you need to seize new areas of profitability.

I see three sequential priorities for transforming the supply chain management of an enterprise:

1)      Profitability profiling by product and customer, down even to the invoice level.  Combined with a pricing power/risk and margin leakage analysis, this identifies where prices can be immediately increased and where costs to serve some customers need to be slashed, yielding an immediate impact.

2)      Detailed analysis of the decisions that are driving the unprofitable or marginally profitable transactions

3)      Designing improved, integrated decision and planning processes as well as the tools to sustain the them, enabling the capture of new areas of profitability

For the weekend, I leave you to ponder this quote by Byrnes, “Middle management excellence is the key leverage point for great performance.”

Thanks for stopping by.  Have a wonderful weekend!

Ten Sins of S&OP (Part 3)

This is the final post in a series of three on the “Ten Sins of S&OP”.  Hopefully, these “sins”, (not necessarily in order of priority) dealing with key attributes of an effective S&OP process, will be both instructive and practical, but from the literary gimmick of what not to do.

7.  Track lots of metrics for each business function.  S&OP process stakeholders must jointly be held responsible for a few shared metrics that drive profitable business and enterprise value for your company within your industry.  At a minimum, they should include revenue growth, margin growth, and inventory turns.  Metrics within each function should directly drive these.  The dangers in establishing metrics for the S&OP process are in setting too many metrics, metrics that are not clearly understood, and metrics for which there isn’t shared responsibility.

8.   Only include sales and manufacturing in the S&OP process.  Omitting key stakeholders like finance, marketing and even procurement from participating in the process can create blind spots in the business plan, the whole point of which is to avoid such blind spots by creating an integrated decision set that is informed by the identification of risks, scenarios and alternatives.

9.  Focus on detailed product mix.  The purpose of S&OP is to determine, as a company, the best way to make money in the coming quarters.  The primary focus here is on volume – volume of sales and the resulting implications for capacity, inventory, sourcing, working capital, etc.  These are “big picture” issues and therefore, primarily questions of how much you will sell, source, make, store, deliver, etc.  Where constraints in manufacturing or risks in sourcing impact decisions about what to sell in order to make the most money in future quarters, then product mix (i.e. which portion of the business to pursue to what extent) at an aggregate level becomes relevant.

10.  Don’t worry about having solid “feeder” processes.  To avoid “sin #4”, you need to have robust supporting processes that deliver quality output to the S&OP process.  While forecasting is a business requirement, you need to have a functioning demand planning process for S&OP (see Forecasting vs. Demand Planning) in order to validate and reconcile quantitative and qualitative forecasts, determine the range and confidence of future forecasts, evaluate forecast accuracy and bias, estimate the magnitude of previously unmet demand, coordinate demand shaping requirements with promotional activity, collaborate with customers, etc.   All of the work from the “feeder processes” such as demand planning and supply planning builds the foundation for delivering a complete picture upon which to base an S&OP decision set.

Thanks once more for reading Supply Chain Action.

This week’s quote is from the first sentence of chapter one of Jonathan Byrnes’ book, Islands of Profit in a Sea of Red Ink, The most important issue facing most managers is how to make more money from their existing business without starting costly new initiatives.

I’m a little late with this post, so I hope that you are having a wonderful weekend!

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