1. Session 2: Forecasting and the S&OP Demand Forecasting and Planning in Crisis 30-31 July, Shanghai Joseph Ogrodowczyk, Ph.D.

2. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 2 Forecasting and the S&OP Session agenda  The S&OP process: What is it and how does it relate to forecasting?  Ingredients to a successful forecasting process in the S&OP  A diagnostic model for potential issues in the S&OP process

3. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 3 Forecasting and the S&OP The S&OP Process  What is it? The Sales and Operations Plan (S&OP) is a business process implemented by a company to match anticipated demand with anticipated supply A means for all departments involved in the planning and execution process to discuss, debate, and agree to a common set of goals and objectives A series of periodic meetings with cross-functional teams set with an objective of creating synchronized demand and supply plans When implemented correctly, the S&OP process can give the company a holistic view of demand, capacity, product volume and mix, and financial goals

4. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 4 Forecasting and the S&OP The S&OP process  Steps to the process Data gathering  Deciding what historical data to use, how to incorporate new demand/products, understanding the impact of promotional activities, choosing the appropriate external factors Demand management  Using statistical models, inventory, backlog, and actual demand to produce a realistic approximation for unconstrained demand Supply planning  Using resource requirements and capacity constraints to determine the feasibility of maximizing the profit associated with the estimated unconstrained demand

5. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 5 Forecasting and the S&OP The S&OP process  Steps to the process Pre-meeting  Meeting for discussion of demand and supply plans for the purpose of finalizing a consensus production plan with associated recommendations for the executive meeting Executive meeting  Final approval from executive committee with a discussion of alternative scenarios

6. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 6 Supply Chain Rough-cut supply plans Capacity planning reports Operations Plan Unconstrained baseline forecasts Initial demand plans Finance Financial plan Marketing and Sales Sales forecasts S&OP Process Supply side adjustment elements Purchasing Inventory Transportation Warehouse Demand side adjustment elements Product marketing Consumer marketing Pricing Outputs Constrained demand forecast Adjusted supply plan Adjusted financial plan Adjusted demand plan

7. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 7 Forecasting and the S&OP S&OP and knowledge creation  Knowledge creation: “transformation of information from customer, exchange partners, and competitors into actionable knowledge” (Mello and Esper 2007, 23)  During the S&OP, information is collected, distributed, and analyzed among all forecasting and planning groups within a company Each group brings potentially unique information to the process Knowledge creation is accomplished by sharing this information to develop business strategies, new products, and desirable services

8. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 8 Forecasting and the S&OP S&OP and knowledge creation  Three levels of learning Individual Group Organizational  Four attributes of learning Intuition: Recognizing patterns Interpretation: Refinement of ideas to make them understandable Integration: Transforming information into action  Changes in consumer tastes are collected by Sales, and a group consensus is achieved on actions to address those changes Institutionalization: Establishment of routine actions to allow new information to be embedded within the organization

9. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 9 Forecasting and the S&OP S&OP and knowledge creation  Learning within the S&OP cycle The purpose of the S&OP process is to match potential demand with known supply constraints By focusing on the four attributes of learning, an organization can elevate the S&OP from a coordinating business process to a knowledge creating process  Incorporating learning into the S&OP Intuiting: Recognizing patterns  First stage in S&OP is gathering data  Individuals can begin to recognize patterns to external data Interpreting: Refining ideas  Second stage in S&OP is the demand management  Individuals and the groups bring ideas into a forum for discussion and interpretation of useful data

10. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 10 Forecasting and the S&OP S&OP and knowledge creation  Incorporating learning into the S&OP Integration: Transforming information into action  Third step in the S&OP is supply planning  Knowledge integration can be utilized during supply planning when forecasts are translated into operational plans  Can result in changes to marketing plans and other operational activities Institutionalizing: Establishing new business processes to incorporate updated information  Final steps in S&OP are the pre- and executive meetings  Formal methods for sharing information and ideas can be created to support the meetings

11. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 11 Forecasting and the S&OP S&OP and knowledge creation  Incorporating learning into the S&OP Key to knowledge learning is to incorporate the stages of learning into the S&OP process  Training of employees to identify trends and listen to external data sources (customers)  Encourage employees to share insights  Ensure that all ideas are given full consideration in the S&OP process  Publicly recognize employees for ideas that resulted in measurable process improvement

12. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 12 Forecasting and the S&OP S&OP process  Recommended factors for successful S&OP Regularly scheduled meetings with supporting agendas  All pre-meeting work completed  All work is NOT “event driven” Cross-functional managerial support  Team members have authority for decision making  Avoid “silo” forecasting Unbiased baseline forecast  Supply chain can provide a statistical forecast for guidance  Acceptance of statistical methods may require change in management methodology

13. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 13 Forecasting and the S&OP S&OP process  Recommended factors for successful S&OP Metrics for tracking progress  Ensure that the S&OP process is achieving the objectives Supporting technology  Used to collect and manage the input forecasts and the output consensus  Software will support a business process addressing “back- forecasting” (determining revenue/financial goals and calculating the corresponding quantities) External inputs  VMI, POS, Collaborative Planning Forecasting and Replenishment (CPFR)

14. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 14 Forecasting and the S&OP Demand management  How does S&OP relate to forecasting? The common goal is a single number forecast that all departments will use in their processes  Sales and marketing will use to focus on sales channels  Operations will plan production  Finance will set revenue and profit goals Demand management: Business processes designed to produce an unconstrained, information-based, consensus forecast from historical demand and assumptions about future market conditions

15. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 15 Forecasting and the S&OP Demand management  Steps to effective demand management 1. Forecast review, production, and aggregation  Reviewing previous forecasts for patterns of large errors  Produce forecasts and incorporate lessons from previous error patterns  Calculate the total forecasts as well as the individual member forecasts  Aggregation with respect to time, product, and customer dimensions  Collecting the forecasts by volume and by mix

16. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 16 Forecasting and the S&OP Demand management  Steps to effective demand management 2. Addition or updating new product forecasts  Input from key players – product developers, marketing promotions  May be a “range” forecast with lower and upper bounds  Possibility of losing demand for older products  Additional resources to support company goals

17. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 17 Forecasting and the S&OP Demand management  Steps to effective demand management 3. Application of external factors  Macroeconomic conditions, economic crises, etc.  Sales promotions  Anticipated price changes  Changes in quantity or quality of customers  Inventory levels or POS data  Customer or supplier forecasts

18. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 18 Forecasting and the S&OP Demand management  Steps to effective demand management 4. Financial conversion and reconciliation  Convert unit forecast into dollar forecasts  Sales uses average selling price  Production and inventory use standard cost  Gross profit calculations use average margins  Compare financial forecast to business forecast and clearly document the differences  Compare the mix forecast (lower level forecast for planning purposes) to the volume forecast (higher level forecast for strategic purposes) 5. Submission to supply planning

19. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 19 Forecasting and the S&OP Demand management  Recommendations for success Upper-level management support Accountability to forecasters Consensus on unit of forecast Translation key for forecast interpretation Combine statistical forecasts with expert knowledge (marketing, sales) Measurement of forecast accuracy

20. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 20 Forecasting and the S&OP Forecasting as a diagnostic model  Failure to produce satisfactory forecasts can be a signal that the S&OP process needs improvement  Results of poor forecasting indicate a breakdown in the S&OP process Consistent inaccuracy Inability to respond or slow response to changes in product/customer mix Ineffective use of measurement tools Omitted forecasts

21. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 21 Forecasting and the S&OP Forecasting as a diagnostic model  Is it better to have a questionable forecast or no forecast?  Forecasting audits provide insights into barriers to forecast process improvement  These barriers can indicate where the S&OP process can improve  Managerial intervention may be necessary if the forecasting process requires major changes

22. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 22 Forecasting and the S&OP Forecasting as a diagnostic model  Common problems and potential issues Absence of vital information (pricing, new customer forecasts) can be a sign of miscommunication Inability to obtain information may indicate a need for new systems to collect and distribute relevant information Low accuracy or little improvement in accuracy can indicate lack of accountability or lack of education among forecasters Lack of functional forms for models may indicate a lack of understanding of the data, or larger issues revolving around the business forecasting process

23. Session 2 Joseph Ogrodowczyk, Ph.D. Demand Forecasting and Planning in Crisis 30-31 July, Shanghai 23 Forecasting and the S&OP References  Jain, Chaman L. and Jack Malehorn. 2005. Practical Guide to Business Forecasting (2nd Ed.). Flushing, New York: Graceway Publishing Inc.  Mello, John and Terry Esper. 2007. S&OP, Forecasting, and the Knowledge-Creating company. Foresight. Summer: 23-27.  Moon, Mark. 2006. Breaking Down Barriers to Forecast Process Improvement. Foresight. June: 26-30.