1 © The Delos Partnership 2003 Demand Planning Introduction

2 © The Delos Partnership 2003 Balancing the objectives Inventory Customer Service Manufacturing Costs Manufacturing Flexibility

3 © The Delos Partnership 2003 Delos Business Model DemandDemandSupplySupply VisionVision PrioritisationPrioritisation SupportSupport InnovationInnovation StrategyStrategy

4 © The Delos Partnership 2003 Why is a Forecast needed ?

5 © The Delos Partnership 2003 Why is a forecast needed ? Design Purchase Intermediate Manufacture Sub-assemble Finish Distribute Cumulative Lead Time Customer Places Order here Forecast needed to cover this

6 © The Delos Partnership 2003 Common Reasons for Not Forecasting I can never make it 100% accurate My business has too many unforeseen peaks My business is different - you can’t forecast it I don’t know who’s responsible for it anyway It’s not in my objectives I’m measured on getting high sales - so who cares about the forecast The factory never make what I forecast anyway Nobody thanks me for it – so why bother ?

7 © The Delos Partnership 2003 Vertical Functional Organisation MD Sales Marketing Technical Operations Finance HR R&DR&D R&DR&D MKTGMKTG MKTGMKTG SALESSALES SALESSALES OPSOPS OPSOPS ACCTSACCTS ACCTSACCTS HRHR HRHR Directors Managers Supervisors/Team Leaders

8 © The Delos Partnership 2003 Impact of Biassed Forecast Increase resources to meet higher demand OVERFORECASTING IS AS BAD AS UNDERFORECASTING More Stocks More Labour More Materials More Plant No Sales Cost of Goods increases OVERFORECASTING GROSS MARGIN GROSS MARGIN Stocks Low Labour Unavailable Short of Capacity Short of Materials Lost Sales Cost of Goods increases GROSS MARGIN GROSS MARGIN UNDERFORECASTING Resources insufficient to meet demand

9 © The Delos Partnership 2003 Who Forecasts ? A forecast is needed to cover the difference between the customer lead time and the Cumulative Lead Time Often the question is simply who does the forecast Sometimes many people do the forecast

10 © The Delos Partnership 2003 Forecasts Provide Business Plan Forecasts Vision and strategy Finance Shareholders Resources

11 © The Delos Partnership 2003 Delos Business Model DemandDemandSupplySupply VisionVision PrioritisationPrioritisation SupportSupport InnovationInnovation StrategyStrategy O n e s e t o f n u m b e r s !

12 © The Delos Partnership 2003 Forecasting - Is There a Definition?

13 © The Delos Partnership 2003 Forecasting – Definition A forecast is a formal request to the Supply Management function… From Sales and Marketing to have the product, materials and Capacity available according to the quantity and At the time that they anticipate the demand will occur from the Customer to ship the product to their premises

14 © The Delos Partnership 2003 Integration CULTURE/ BEHAVIOUR TECHNOLOGY WAYS OF WORKING Consumer And Customer Focussed Simplicity Itself Delivering Shareholder Value

15 © The Delos Partnership 2003 Business Strategy and Financial Effects Customer Service Inventory Manufacturing Costs

16 © The Delos Partnership 2003 The Ten Rules of Forecasting 1.A forecast is necessary for planning supply and supporting financial and business plans 2.A forecast is never going to be right 3.A forecast is wrong because the assumptions were wrong 4.Accountability for the forecast rests with Sales and Marketing 5.Forecasting needs an application of intelligence 6.More accurate forecasting comes from your customers’ customer 7.Forecasts at an aggregate level are more accurate than the detail 8.Effective management of demand is key to managing forecast inaccuracy 9.A written policy for managing flexibility is essential 10.Measuring forecast accuracy will improve the process

17 © The Delos Partnership 2003 Forecast must be supported by Assumptions JulAugSepOctNovDecJanFebMarAprMayJun NUMBERS ! ASSUMPTIONS

18 © The Delos Partnership 2003 Forecasting Needs a Simple Process Filter Demand Execute Forecast Capture Actual C O N S E N S U S F O R E C A S T Review Commercial Plans Review Exceptional Demand Hold Demand Review Assumptions written down and agreed

19 © The Delos Partnership Month Moving Average Time Series Forecasting

20 © The Delos Partnership 2003 Forecasting Needs a Simple Process Filter Demand Execute Forecast Capture Actual C O N S E N S U S F O R E C A S T Review Commercial Plans Review Exceptional Demand Hold Demand Review Assumptions written down and agreed

21 © The Delos Partnership 2003 Sales Forecasting: Inputs New Customers New Products Pricing Initiatives Advertising And Promotions Cannibalisation Customers Own Forecast Competitors Activity External Factors

22 © The Delos Partnership 2003 Management of Innovation Stage/Gate Process Formal Process for Managing Project Gate 0 Gate 0 Gate 1 Gate 1 Gate 2 Gate 2 Gate 3 Gate 3 Gate 4 Gate 4 Stage 0Stage 1Stage 2Stage 3Stage 4 Review InvestigateFinancial Case DevelopTestLaunch Forecast Entered into System to drive MRP Forecast Reviewed here For accuracy

23 © The Delos Partnership 2003 Get Input From Customer’s Plans Will require understanding of Customers Plans Needs effective Sales Planning Process May be linked into Customer Replenishment Planning Process

24 © The Delos Partnership 2003 Alignment with Customers Customer Company Customer Now? Future!  Common Language  Their Financial year data  Common measures  Customer Service  Customer Profit  Common logistics Company Customer Common Objectives Common Objectives

25 © The Delos Partnership 2003 Move to Customer Centric Sales Planning Manufacturing Distance Remoteness Research & Development Planning Marketing SalesCustomer Traditional

26 © The Delos Partnership 2003 Move to Customer Centric Sales Planning Manufacturing Research & Development Research & Development Planning Marketing Sales Customer Manufacturing Research & Development Research & Development Planning Marketing Sales Customer Manufacturing Research & Development Research & Development Planning Marketing Sales Customer

27 © The Delos Partnership 2003 COLLABORATIVE PLANNING - PROGRESS Data Exchange Vendor Managed Inventory Co-Managed Inventory Trading Partnership Integrated Planning and Replenishment Ability to view customer data No management process Possibly available on Internet Agreed process for managing inventory (VMI) – supplier’s problem! Supplier schedules provided Agreed process for managing inventory Mutual availability of data and plans in joint systems Supplier schedules provided, and forecasts provided. Mutual sharing of long term plans Full briefing on long term strategy Joint improvement activities Joint forecast review Joint agreement on business plans and inventory strategy Joint improvement activities Time

28 © The Delos Partnership 2003 Hold Customer Review Meeting 1.Review changes 2.Agree assumptions and changes 3.Review products 4.Review customers 5.Review NPD activities 6.Review KPI’s 7.Sign off the forecast

29 © The Delos Partnership 2003 Business Integration Needs a Formal Process  Forecast needs review once a week and once a month  Needs input from Sales, Marketing, and Product Management  Needs input from Supply side  Needs reconciliation with Business Plan Result is a Consensus Forecast

30 © The Delos Partnership 2003 “Tell me how you will measure me and I will tell you how I will behave” “Measure me irrationally and I will behave irrationally” Behaviour issue

31 © The Delos Partnership 2003 Forecast Accuracy  Definition  Purpose  Horizon  Source of Information  Percent of items within a tolerance  Assess the degree of flexibility required by the supply side and to improve the process  Cumulative lead time (= purchasing plus manufacturing LT)  Forecasting module  Sales module

32 © The Delos Partnership 2003 Cumulative Lead Time is key Forecast Cumulative Lead Time Forecast made for here Store this forecast Today JulyAugustSeptember

33 © The Delos Partnership 2003 Store the Forecasts Information stored from forecasting system March 99 - Forecast Prepared by : A Jones Family A Family B Family C Feb Forecast Jan 99 - Forecast Dec 98 - Forecast Nov 98 - Forecast Oct 98 - Forecast Sept 98 - Forecast Aug 98 - Forecast Jul 98 - Forecast

34 © The Delos Partnership 2003 Record the Actual Actual Demand – September 2000 Family A TOTAL670 Demand = orders received required for despatch in month

35 © The Delos Partnership 2003 Forecast Accuracy Report – by Tolerance Forecast Accuracy = 3/7 = 42 %

36 © The Delos Partnership 2003 Forecast Accuracy Report - MAD GroupProductForecastActualError% Error Product Group A Product Product Product Total % Product Group B Product Product Product Product Total %

37 © The Delos Partnership 2003 Forecast Accuracy Above Target

38 © The Delos Partnership 2003 Measure the bias in Forecasts Bias is the biggest cause of either inventory or shortages Bias also causes mistrust

39 © The Delos Partnership 2003 Impact of Biassed Forecast Increase resources to meet higher demand OVERFORECASTING IS AS BAD AS UNDERFORECASTING More Stocks More Labour More Materials More Plant No Sales Cost of Goods increases OVERFORECASTING GROSS MARGIN GROSS MARGIN Stocks Low Labour Unavailable Short of Capacity Short of Materials Lost Sales Cost of Goods increases GROSS MARGIN GROSS MARGIN UNDERFORECASTING Resources insufficient to meet demand

40 © The Delos Partnership 2003 Measure the Bias of the Forecast Actual should be normally distributed around the forecast Statistics on Safety stock don’t work if not..

41 © The Delos Partnership 2003 Forecast Quality and Bias Graph Forecasts to display Bias Bias

42 © The Delos Partnership 2003 Review Changes in Forecast Over Time – Waterfall Chart JulAugSepOctNovDecJanFebMar Jul Aug Sep Oct Nov Dec Jan Feb Mar = Actual

43 © The Delos Partnership 2003 Review forecast accuracy over time Does forecast accuracy improve/ get worse as it gets closer to a month? Forecast Accuracy Over Time

44 © The Delos Partnership 2003 Accountability  Sales  Marketing  Demand Manager  Logistics  Manufacturing  Finance Who is accountable for the Forecast ?

45 © The Delos Partnership 2003 Performance Targets Objective Target Milestone What would your target be ?

46 © The Delos Partnership 2003 What to Do With the Measure Improve sales planning Improve links to customers Implement DRP/EDI Look at product range Alter design of products Stock at lower level in BOM Review safety stocking strategy Review capacity strategy

47 © The Delos Partnership 2003 Customer Service Customer service requires measurement of a number of different factors, e.g. –On time in full –Number of complaints –Time to process enquiries and orders –Quality of deliveries - right first time

48 © The Delos Partnership 2003 Customer Service  Definition  Purpose  Horizon  Source of Information  Number of orders delivered to required date to customers’ premises  Flexibility required to meet customer needs  MTS - none  MTO - product lead time  Sales order entry

49 © The Delos Partnership 2003 Source of Data At point of order entry record –Customer promise date –Customer required date Store away first promise date and first request date

50 © The Delos Partnership 2003 Source of Data At point of delivery record actual delivery date and time

51 © The Delos Partnership 2003 Customer Service Report - Against Request Date Customer Service = 2/6 = 33 %

52 © The Delos Partnership 2003 Customer Service Report – Against Promise Date Customer Service = 6/6 =100 %

53 © The Delos Partnership 2003 Commentary  Customer service suffered from shortages of raw materials  Transport company’s performance being reviewed Customer Service Report Customer Service

54 © The Delos Partnership 2003 Accountability Sales Logistics Distribution Manufacturing

55 © The Delos Partnership 2003 Performance Targets Objective Target Milestone What would your target be ?

56 © The Delos Partnership 2003 What to Do With the Measure Review promising process Review service agreements Review supply chain Look at inventory policy Review customer profile/desires Review distribution chain Review transportation policy Review manufacturing strategy Talk through with the customer

57 © The Delos Partnership 2003 Key principle What gets measured is what gets done What gets measured is what gets done