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Demand Management Strategy and Development
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Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 1
Forecasting
And
Demand Management
Strategy
And
Development
A concise writing on the actions needed to begin the implementation of world class forecasting and demand
management program.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 2
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 3
Forecasting
And
Demand Management
Strategy
And
Development
J. Martin R. Roth ECRU Technologies Publisher
A portion of the KNOWLEDGE TRANSFER SERIES
from the WORLD OF LEARNING.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 4
Copyright 2000 by ECRU Technologies, Inc. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the publisher, addressed Attention: Permissions Coordinator, at the address below. ECRU Technologies, Inc. 1475 Terminal Way, Suite E Reno, NV 89502-3225 Ordering Information Orders by individuals and organizations. ECRU Technologies, Inc. publications are available through bookstores or can be ordered direct from the publisher at the ECRU Technologies, Inc. address above or by email to [email protected]. Library of Congress Cataloging-in-Publication Data Martin, J./Roth, R. Forecasting and Demand Management Strategy and Development: A concise writing on the actions needed to begin the implementation of world class forecasting and demand management program / J. Martin / R. Roth. 1st ed. ISBN 1-931186-02-2 (papercover) 1. Science 2. Organization 3. Theory 4. Systems 5. Behavior I. Title First Edition First Printing September 2000 The information included in this book is further amplified when used in conjunction with other books from ECRU Technologies, Inc. Other titles are: Supply Chain Management Direction Strategy and Supply Chain Management Development Strategy.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 5
Contents
1 INTRODUCTION........................................................................................................... 9
2 WHAT DO WE TRY TO ACCOMPLISH?............................................................... 11
2.1 DETERMINE FORECAST-ABILITY OF END PRODUCTS................................................ 12 2.2 INSTALL A FORECASTING TOOL AND PROVIDE TRAINING IN ITS USE........................ 13 2.3 DEVELOP DEMAND MANAGEMENT PROCESS OUTLINE............................................ 13 2.4 IDENTIFY NECESSARY SUPPORT REQUIREMENTS ..................................................... 13 2.5 DETERMINE KEY METRICS ...................................................................................... 14 2.6 DETERMINE TIME / RESOURCES TO IMPLEMENT THE PROCESS................................. 16 2.7 DOCUMENT DETAILS IN PROJECT DOCUMENT ...................................................... 16
3 PROCESS DEFINITION:............................................................................................ 18
THE ORGANIZATION VIEW: ................................................................................................. 18 THE FORECASTING SCOPE.................................................................................................... 20
4 FORECASTING SUPPORT REQUIREMENTS ...................................................... 21
4.1 IT PLATFORM ASSESSMENT..................................................................................... 21 4.2 INFORMATION SYSTEMS AND SERVICES INTEGRATION ............................................ 22 4.3 BUSINESS LOGISTICS AND PROCESSES ..................................................................... 23
5 PROCESS OUTLINE................................................................................................... 25
5.1 UNDERSTANDING THE FORECASTING PROCESS:....................................................... 25 5.2 BACKGROUND: WHAT FORECASTING IS .............................................................. 25
5.2.1 Statistical Forecast.......................................................................................... 26 5.2.2 Demand Management of the Statistical Forecast ....................................... 26 5.2.3 The Forecasting Process................................................................................. 27
5.3 DEFINING WHAT TO FORECAST THE SKU....................................................... 28 5.4 DISCIPLINE AND RESPONSIBILITY ............................................................................ 30 5.5 METRICS MEASURES OF PERFORMANCE ............................................................... 31
5.5.1 Forecast Metrics ............................................................................................. 31 5.5.2 Performance Metrics....................................................................................... 32
5.6 OTHER IMPLICATIONS.............................................................................................. 32
6 FORECASTINGS ROLE IN CORPORATE FUNCTIONS ................................... 33
6.1 MARKET & PRODUCT VIEW..................................................................................... 33 6.2 STRATEGIC / CORPORATE VIEW............................................................................... 35 6.3 TIME / SEQUENCE VIEW........................................................................................... 36 6.4 TACTICAL / BUSINESS VIEW .................................................................................... 38 6.5 OPERATIONAL / PROCESS VIEW ............................................................................... 40 6.6 FORECASTING PROCEDURES VIEW........................................................................... 40 6.7 ROLES, RESPONSIBILITIES, AND METRICS VIEW...................................................... 42 6.8 SUMMARY................................................................................................................ 43
7 ROLES & RESPONSIBILITIES DEVELOPMENT ................................................ 44
8 METRICS DEVELOPMENT PROCESS................................................................... 45
9 DEMAND MANAGEMENT DRIVERS..................................................................... 47
9.1 TERMINOLOGY: DRIVERS, ASSUMPTIONS, DEMAND MANAGEMENT...................... 47 9.2 TYPES OF DRIVERS................................................................................................... 49
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 6
9.2.1 External Drivers.............................................................................................. 49 9.2.2 Internal Drivers............................................................................................... 50 9.2.3 Sector Drivers ................................................................................................. 53
9.3 DRIVER IDENTIFICATION.......................................................................................... 55 9.4 DRIVER MANAGEMENT............................................................................................ 57 9.5 APPLYING DEMAND MANAGEMENT RESULTS ......................................................... 62
10 THE FORECASTING & DEMAND MANAGEMENT CYCLE ......................... 64
10.1 DOWNLOAD AND CYCLE START............................................................................... 65 10.2 FORECAST REVIEW & DEMAND MANAGEMENT ANALYSIS ........................................ 66 10.3 CHANGE CONSOLIDATION, FORECAST ADOPTION, UPLOAD....................................... 67
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 7
The Authors
J. Martin is an international consultant providing services in supply chain management, e-commerce, organization change management, and ERP system project management. He has worked with a variety of industries ranging from heavy equipment manufacture, transportation, paper, automobile, healthcare, and electronic components. He has spoken before many industry groups which include AT&T and IBM His educational background includes a B. S. in operations management, M. S. in computer science and a Ph.D. in psychology. He can be reached via email at [email protected]. R. Roth is founder and president of Systems Services International Ltd., providing business management and technology integration services since 1975. Clients are in many industries construction; automotive; communications; space and defense; manufacturing; governments; medical devices. R. Roth and his team have proven their multi-cultural experience and sensitivity in Europe, the Middle East, South East Asia, North East Asia, and North America. R. Roth is a seasoned economist with extensive experience in information technology implementation. He can be reached via email at [email protected]
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 8
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 9
1 Introduction
Accurate forecasting can play a decisive role in an organizations
planning, budgeting and performance monitoring process. The
meanings of forecast" are:
(1) the statistical forecast derived from historic data,
(2) the demand-managed forecast incorporating specific
assumptions into the statistical forecast, and
(3) the process used to develop and control the two former.
Statistical formulae are used to derive the forecast model, baseline,
trend and seasonality of the units as well as predict the likely future
quantities of the units. Historic data that has been accumulated
under past conditions of influence factors (Drivers) such as market
development, promotions, or other company actions are used. If
the past conditions continue to prevail, and if no changes are made
to influence the future development, then the forecasted quantities
are likely to occur. If the actions described are being taken in the
described quantity/value and time and if no other influences will
take effect, then the statistical forecast plus the changes resulting
from the described assumptions [heuristics] will likely occur.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 10
In order to determine whether or not the assumed effect actually
takes place we must:
(1) measure the actual quantities/values observed (i.e. the
new historic data), (
(2) compare the actual data to the demand-managed forecast
data to determine the difference if any,
(3) analyze, in the event of a significant difference between
actual and forecast, the underlying assumptions to
determine whether they were correct.
At completion of the analysis, the resulting new assumptions (more
optimistic/pessimistic, different actions, etc.) must be applied to
the then current statistical forecast.
This process should be performed at least monthly, to achieve a
reasonable measure of actual performance early enough to
implement any corrective action. Companies may have thousands
of SKUs (Stock Keeping Units) subject to independent demand.
Clearly, forecasting all of them would require a tremendous effort.
Consequently, a selection process must be put in place to forecast
only meaningful data. Criteria for the selection could be any SKU
defined for forecasting purposes as any measurable unit that can be
extracted and/or composed from historic data.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 11
The forecast process will result in improved business forecasts
accuracy if, and only if, the organization implements the process in
a disciplined fashion. Assumptions must be noted in detail; their
correctness must be analyzed; corresponding changes must be
defined.
This necessitates two implementation tools:
(1) a description of the forecast process (from timing through
data extraction, analysis, note taking, to applying changes),
and
(2) assignment of responsibility for each step in the process.
Typically, companies develop roles and responsibilities for the
process, and incorporate them into the position descriptions of the
responsible functions.
2 What do we try to accomplish?
This book outlines, at a high level, the forecast and demand
management process. It is intended as a comprehensive
summary, and as a guideline for developing your own work-in-
progress to be modified and amended as you progress with the
implementation.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 12
Note that the forms referenced in this book, and shown as
examples, easily can be created in electronic format. This will
enable company-specific modifications to be made, and the forms
can be used as a blueprint for the development of automated
recording and tracking facilities.
This book is not a primer on statistical forecasting, forecasting
methodologies, or related theories. Numerous publications are
available that cover these subjects.
2.1 Determine Forecast-ability of End Products
As a first cut it is necessary to determine which independent
demand (the end products as sold to customers) are in effect
forecast-able with applicable forecast model, trend, seasonality
etc., and determination of A, B, etc. classification. This provides
the base for focus on the most important products. Spending 80%
of your effort on the top 20% of your products produces
measurable results, quickly!
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 13
2.2 Install a Forecasting Tool and provide Training in its use
Forecasting is best performed using automated tools. Ideally,
several forecasting applications available in the market, should be
tested and evaluated. After installation, the system can be used for
forecast processing (both initial statistical forecasting and
subsequent demand management), and as a training tool for
personnel.
2.3 Develop Demand Management Process Outline
The forecasting and demand management process starts with
processing the historic data, and ends with the preparation of
forecast data (including demand management input) for the next
period.
This book comprises the process outline. It can be used to develop
your own action plan.
2.4 Identify necessary Support Requirements
Requirements covering organization functions directly involved in
the forecast and demand management process (i.e. departments,
managers, etc.), as well as such requirements that need to be
addressed but are outside the scope of the topic, are identified.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 14
Directly involved functions and their roles are described in this
document. Others need to be identified and documented as part of
the development process. Note that the organization should
address these requirements reasonably urgently, as the quality and
timing of many forecasting and demand management activities are
directly influenced by them.
2.5 Determine Key Metrics
Metrics measure the difference between established targets
and actual performance against these targets. This necessitates that
both target and performance are quantifiable in the same unit of
measure. Example:
a) TARGET: Improve Sales, month-over-month, by
10%
b) PERFORMANCE: Improved sales by $ 100, $110, $ 121,
etc.
Does this imply the target has been met? No since the
performance unit of measure (dollars) is different from the target
unit of measure (percent). Under these conditions, seemingly
conclusive data is meaningless or worse, misleading. The fault in
the example could be corrected in either of two ways:
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 15
a1) TARGET: Improve Sales, month-over-month, by
10% BASED ON $ 1000 start
b1) PERFORMANCE: Improved sales by $ 100, $110, $ 121,
etc.
OR
a2) TARGET: Improve Sales, month-over-month, by
10%
b2) PERFORMANCE: calculate based on following actual data:
Sales in Month1 Month2 Month3 etc.
Sales$ 1000 1100 1210 etc.
Sales% 100% +10% +10% etc.
Consequently, a system of metrics must be developed if the
company is to have accurate and meaningful performance
measurement capability.
Ironically, forecasting is the business process that least lends itself
to performance measurements. The reason: forecasting is a
scientifically calculated prediction of future sales UNDER
CONDITION THAT the assumptions and resulting actions that
were effective in the past and are reflected in the data history, will
REMAIN UNCHANGED. Yet it is the purpose of the demand
management process, to lead to assumption corrections and
different action conclusions. Paradoxically, the forecasting and
demand management process is most successful if actual
performance continually exceeds forecast, either with positive
(such as for sales) or negative (such as for costs) trends.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 16
Initially, the success of the forecasting process, itself, usually is
measured by determining whether actual sales for the forecast
period were equal to the forecasted sales for that period (or within
a pre-determined percentage-band around the forecast, e.g. +/-
5%). In the long term, this inadequate measure should be replaced
by metrics aimed at business functions leading to, and resulting
from, the forecasting/demand management process.
2.6 Determine Time / Resources to implement the Process
Once the Action Plan is drafted, for planning, training and
implementation actions resulting or identified in this project phase,
a high-level estimate of required efforts and likely time frames can
be developed.
2.7 Document details in Project Document
Throughout your project, issues will be identified that are out of
scope of the topic but will require addressing in the short term.
SKU (Stock Keeping Unit) planning and related Information
Services requirements are a good example. All project-related
information should be documented in clearly identifiable separate
binders, such as:
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 17
a) The Forecasting and Demand Management Process
Implementation Manual
b) The Forecasting System Implementation Manual
c) The Forecasting System User Manual
d) The Training Plan (which might be combined with process
scripts)
e) The Action Plan
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 18
3 Process Definition:
Forecasting and corresponding performance monitoring are an
integral part of most organizations management functions. A
high-level indication of such functions can be represented as
follows:
3.1 The Organization View:
Note that forecasting and related functions (such as order
fulfillment, customer satisfaction, etc.) ultimately relate to virtually
ConcurrentDesign
Cash Management Credit Management
Dat
a Pr
ovis
ion
& A
cqui
sitio
n
Network /Security
Management
Data BaseAdminist-
ration
ApplicationsManagement
EDI & e-commerce
Hardware Utilities/MonitorsSystem Software
Demand ManagementChannels, Relationships,
Promotions, Events Forecasting / ModelingProduct X, Quantity Y,
Delivery Z
Product PlanningGroups & Families, Form,
Fit, Function, Cost
EDM - Engineering DataManagement
Design, Specifications,Revisions
Items / Kits / Assemblies
Bills of Materials
Routings/Ass'y Instruct./ Process Formul.
Joint Specifications &Development
Laboratory / Prototyping
Inventory / ServicePolicy
Product Structure,Configuratiog, Pricingn,Variants, Std. Costing
Suppliers / Vendors(& their Suppliers)
Suppliers / Vendors(& their Suppliers)
ConcurrentDesign
Constraint Planning
MPS - MasterProductionScheduling
Purchase Orders /Contracts
RCCP - Rough CutCapacity Planning
CRP - CapacityRequirements
Planning
MRP - MaterialsRequirements
Planning
FCP - Finite Capacity /FFC Finite Forward
Scheduling
Process &Production Management
& WIP Control
SFC - Shop Floor ControlLine, Cell, Job, Repetitive,
Process
Maintenance - preventiveand remedial
Production Orders
Sales Force / Automation
Sales Orders / Entry &Billing
DRP - DistributionRequirements
Planning
PRP - ProjectRequirements
Planning
Bid / Contract -Contracts Management
Parts / SubassembliesManagement
Inbound Logistics
Product InventoryManagement
Distribution / OutboundLogistics
(VMI?)
Replenishment /Distribution Centers,
Vendor ManagedInventory
Order FulfillmentOrder Fulfillment
ConcurrentDesign
Documentation
Materials Issue QA & StagingLabeling, Packaging
Actuals / CostAccounting
Standards &Metrics
Budget - P/L &Performane
Targets
Payroll / Human Resources Asset Management
Finance - GL, AP, AR
Hours Accounting BackflushingCompletion Reporting
LegacyManagement
Package Evaluation &Blueprint for Change
Project Implementation
Budget, Planning,Costing
Metrics &Measurements
Training & HelpDesk
Rollout Mgmt
Y2K Review
PackageImplementation
Related Topics
Performance MetricsPerformance Metrics
Continuous UpdatesALL Areas
Customers (& their Customers)
Customers (& their Customers)
Supply Chain Mgmt
Damaged and ReturnedProducts
Damaged and ReturnedProducts
Customer Service,Technical Services,
Maintenance
Customer Service,Technical Services,
MaintenanceClaims and RefundsClaims and Refunds
External Events / Trends
Transition Management
Distributors / VMI
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 19
all functions in the company. Accurate forecast data can drive
production and financial planning, logistics and distribution
management, service and parts management.
For the topic, the scope is limited to forecasting proper. This
includes the forecasting process, and the application of demand
drivers. It excludes any of the uses of forecast data, such as for
MRP (Materials Requirements Planning), production and
purchasing planning, etc. Forecasting can be considered a stand-
alone function concerning methodology, training, and process
execution. However, without translating the forecast results into
usable manufacturing planning data, and without monitoring the
accuracy of periodic forecasts and making corresponding policy
adjustments, the efforts expended on forecasting would be wasted.
Forecasting proper includes the activities in the periodic cycle
from accepting historic demand data through statistical
forecasting and demand management to providing forecast and
demand-managed data to other systems and functions. This
process is graphically represented as the High-Level Forecast
Process Flow: Note that the following explanations and
descriptions are based on this representation of the forecast and
demand management cycle.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 20
3.2 The Forecasting Scope
Keep Record ofAssumptions and
Bases
Applic. 1X
Applic. 2Y
Applic. nZ
Systems and Applicationsthat store / provide data
Historic Data,Definitions,Calendars
extracted fromApplications Files
FlatFile X1 of n
FlatFile Y2 of n
FlatFile Z3 of n
Common Format suitable forForecast Processing
History File
ForecastingSYSTEM (1)
StatisticalForecast
(Snapshot - IFnothing is done
then...)
Apply "DriverUpdates" to theforecast data =
DemandManagement
Driver 1,Location 1
Driver X,Location 2
Driver Z,Location n
Keep Record ofAssumptions andBases - update as
needed
ForecastingSYSTEM (2)
ManagedForecast
(Snapshot -IFDemand Mgmtapplied, then ..)
Generate "FlatFiles" with Forecast
Data for sourcesystems andapplications
FlatFile X1 of n
FlatFile Y2 of n
FlatFile Z3 of n
MONITOR forDelta (FC/Actual)
Cycle as needed
High-Level Forecast Process Flow - HL-FC-Flow.vsd - 03/06Jan00 - RR
Periodic: ActualData Reports
StatisticalForecast
(Snapshot - IFnothing is done
then...)
ManagedForecast
(Snapshot -IFDemand Mgmtapplied, then ..)
"Driver" data usedto manage the
forecast process
His
toric
Dat
aEx
tract
ions
(mon
thly
dat
a)
Use
of f
orec
aste
d da
ta in
oth
er s
yste
ms
and
appl
icat
ions
"History" may be a single file, ormenu selection of multiple files
Forecast Scope
MultipleRegression
Analysis(occasional)
Create Operating Environment for ForecastingTools, on the Target Platform
Perform initial Data Setup and ForecastCalculation
Start-Up Data
Set-up and InitializationProcess (one-time)
Cyclical ForecastingProcess (monthly)
ForecastOutput Format
for MRP,Reporting etc.
Sales Input
OperationsInput
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 21
4 Forecasting Support Requirements
Forecasting and Demand Management are business functions
which require extensive cooperation between functions and tasks.
The forecast frequency itself (which depends, in turn, on the nature
of the business) usually is monthly. However, all related activities
must be performed and completed within a very short time frame.
If the forecast is not completed within at most two or three days
after month-end closing, the forecast intelligence could become
useless as not enough time would remain in the period for sales
and operations to take forecast-inspired actions.
To operate in this compressed time fence, three specific business
areas must be addressed.
(1) IT Platform Assessment
(2) Information Systems and Services Integration
(3) Business Logistics and Processes
4.1 IT Platform Assessment
Most of the forecast-related data can be collected from existing
systems, supplied from front-end input prepared by sales persons
and other functional heads, and distributed via existing information
systems. Therefore, the information technology platform should
be analyzed to determine its suitability as a support platform.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 22
Specifically, this involves:
Inventory of and Access Mechanisms to Hosts, Servers,
Networks, PCs
Capabilities and Use of Extranet, Intranet, Internet, Virtual
Private Networks, etc.
Host and Server Interfaces capabilities and functions, for
data feeds and use
Interim Data Structures (data warehouses, data marts, etc.)
to facilitate focused data management
Development of Platform Architecture document with
Training and Development Plan
4.2 Information Systems and Services Integration
Forecasting is a tool consisting of limited and specific-purpose
software applications that perform only one set of functions:
assessing historic information, classifying items, determining their
forecast-ability, and forecasting anticipated future quantities (of
units, dollars, etc.) based on supplied history.
Specifically, the forecasting tool set does not address issues such
as how the SKU (the item or part) is defined, how the data is
massaged during extraction from the host data bases, how it is
summarized, and how transitions from old to new SKUs will
be accomplished.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 23
For all these capabilities, the organization relies on its Information
Services department or provider. Specifically, this involves:
Design and implementation of pre-processing capabilities
Design and implementation of post-processing capabilities
Split-and-Bypass-and-Merge (Windowing) requirements
design and implementation
Cutoff, Transfer and Balance Management between host
applications and forecasting
Generational File Maintenance for Simulation, Restart,
Backup and Restore Purposes
Support and Analytical Software such as Multiple
Regression Analysis, automated Data Feeds (Duns, Dodge,
etc.)
On-line Documentation Support Capabilities for instant
access to assumptions, action decisions, etc.
Development of IS Support Structure Architecture document
with Training and Development Plan
4.3 Business Logistics and Processes
Forecasting has a very intimate relationship with other business
functions. For example, the independent demand quantity forecast
for any one product and period, will depend not only on historic
data but also on the companys decisions such as customer service
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 24
levels, safety stock requirements, distribution points and supply
logistics, etc.
To link these functions to the forecasting and demand management
process, it is necessary to define their contributions to the process,
through business logistics mapping. Typically, this involves:
Development of Business Functions Matrix with focus on
FC/DM
Organization Skills Assessment (Forecasting, Statistics,
Data Analysis etc.) and Training Development
Roles and Responsibilities Development and Position
Description Updates to reflect contributions
Updating of Compensation / Incentives programs to reflect
weight of FC/DM and related functions
External Interfaces Considerations such as reporting (SEC),
compliance (documentation), etc.
Automating Integration of FC/DM into the Business Flow
Development of to-be business process flows with
Training and Development Plan
Without these support processes firmly developed and in place, it
will be difficult, though not impossible, to maintain the discipline
of preparing monthly forecasts, reliably, with reproducible analysis
and assumption options.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 25
These support functions are excluded from scope of this book -
they should be included, at a high level, in the Action Plan.
5 Process Outline
5.1 Understanding the Forecasting Process:
The term forecasting often is mis-used as a set of statistical
formulae, as a sales predictions process, or as an educated guess
as to what might happen. Properly used, forecasting can play a
decisive role in the organizations planning, budgeting and
performance monitoring process. Therefore, an outline of what
forecasting really is, is required.
5.2 Background: What forecasting is
For the purpose of this book, we distinguish three specific
meanings of forecast. They are:
(1) the statistical forecast derived from historic data,
(2) the demand-managed forecast incorporating specific
assumptions into the statistical forecast, and
(3) the process used to develop and control the two former.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 26
5.2.1 Statistical Forecast
Statistical formulae are used to derive, from quantitative history of
independent demand for units, the forecast model, baseline,
trend and seasonality of the units, as well as a prediction of the
likely future quantities of the units. Historic data has accumulated
under past conditions of influence factors (or Drivers) such as
market development, promotions, or other company actions.
Consequently, the statistical forecast derived from this data, has
a narrow meaning:
IF the past conditions continue to prevail, AND IF no changes
are made to influence the future development, THEN the forecast
quantities are likely to occur.
5.2.2 Demand Management of the Statistical Forecast
To make the forecast more meaningful as a predictor of the
future, decisions must be made about the factors that influence
demand, the strength of these factors, and their likely impact on
future demand. For example: a targeted promotion estimated to
cost $ X for a specific market, will result in a Y% one-time sales
increase in that market, for a period of four months, commencing
one month after the start of the promotion. In practical terms: the
forecast quantity/value for the future periods 2, 3 and 4 would have
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 27
to be increased by Y%. The resulting demand-managed forecast
has the following meaning:
IF the actions described are being taken, in the described
quantity/value and time, AND IF no other influences will take
effect, THEN the statistical forecast plus the changes resulting
from the described assumptions, likely will occur.
5.2.3 The Forecasting Process
In order to determine whether or not the assumed effect actually
takes place, the following steps are required, at least at the end of
period 4 (in the above example):
a) Measuring the actual quantities/values observed (i.e. the new
historic data)
b) Comparing the actual data to the demand-managed forecast data
to determine the difference if any
c) In the event of a significant difference between actual and
forecast, analyzing the underlying assumptions to determine
whether they were correct. (Note that several assessments
must be made to determine, inter alia, whether there may have
been a systemic error in the assumption, whether the assumed
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 28
effects where weaker, stronger or in a different time frame than
expected, etc.)
d) At completion of the analysis, the conclusions drawn must be
noted (with the original assumptions), changes about the
assumptions must be noted, and the resulting new assumptions
(more optimistic/pessimistic, different actions, etc.) must be
applied to the then current statistical forecast.
This process should be performed at least monthly, to achieve a
reasonable measure of actual performance early enough to
implement corrective action if necessary.
Note that the repetitive period refinement of assumptions forces
the organization to continually improve its analysis and
conclusions process, thereby increasing its knowledge of
customers, markets, the competition and other influence factors
(drivers).
5.3 Defining what to forecast the SKU
In many instances, companies have thousands of SKUs (Stock
Keeping Units) subject to independent demand (by customers in
the market). Clearly, forecasting all of them would require a
tremendous effort. In most cases, the result would not be
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 29
significantly different than when only 25% (or some other
measure) of the SKUs would have been forecast. Consequently, a
selection process must be put in place to forecast only
meaningful data. Criteria for the selection could be:
a) SKUs that have the greatest effect on results. Typically,
about 10% of all SKUs account for more than 35% of sales,
with another 15% accounting for an additional 25% of sales.
Forecasting these 25% of all SKUs (often described as A and B
items) will result in a meaningful forecast of 60% of sales.
b) SKUs that allow the best possible assessment of influence
factors. In many instances, relatively few large customers
account for a very large proportion of all sales. Therefore,
seeking to influence demand by these few customers will have a
large effect on anticipated sales. Similarly, a few product
models out of thousands of end items, components and parts,
are much easier to control and forecast, than the total
population of thousands of SKUs.
Note that the definition of SKU changes with the desired degree
of control. Forecasting software will allow determination of A, B,
etc. status, forecast-ability, forecast model, for any measurable
unit. Therefore, the desired SKUs must be carefully designed and
corresponding data must be extracted from the historic data files.
Consequently, a stock keeping unit for forecast purposes is vastly
different than an SKU for production and inventory purposes:
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 30
An SKU defined for forecasting purposes, can be any measurable
unit that can be extracted and/or composed from historic data.
Note that forecasts for SKUs that are too narrowly defined, can
become meaningless because the number of items becomes to
small, for meaningful statistical analysis.
To enable tracking of actual performance against forecast for these
constructed SKUs, the same cycle of assumptions,
measurements, corrections (the demand management) must be
applied as for real SKUs.
5.4 Discipline and Responsibility
The forecast process as described, will result in improved business
forecasts, IF and only if the organization implements the process in
a disciplined fashion. Assumptions must be noted in detail; their
correctness must be analyzed; corresponding changes must be
defined.
This necessitates two implementation tools: (1) a description of
the forecast process (from timing through data extraction, analysis,
note taking, to applying changes), and (2) assignment of
responsibility for each step in the process.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 31
Typically, companies develop roles and responsibilities for the
process, and incorporate them into the position descriptions of the
responsible functions.
5.5 Metrics Measures of Performance
Determining responsibility is not, by itself, sufficient to ensure the
discipline of the process. To do so, a set of performance
measurements are required. They fall into several basic categories:
5.5.1 Forecast Metrics
The quality of the forecast process itself can be measured by
constantly monitoring how close the observed actual data track
to the forecast data. The better the process, the smaller the
difference between them. Note that the forecast merely reflects the
organizations past history and its best judgment on how to
influence future demand. In and by itself, the forecast cannot be
right or wrong (unless underlying statistical formulae are
incorrectly applied).
If external influence factors are used to modify the statistical
forecast, additional statistical evaluations will be required to ensure
that these factors are correctly applied. For example, to determine
the effect of an interest rate rise on an interest-sensitive
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 32
organization, a multiple regression analysis might be necessary to
determine the degree and the time of the influence.
5.5.2 Performance Metrics
In many instances, forecasting can be accurate as measured by
forecast metrics, yet not reflect severe problems. For example,
actual total shipment volume can be exactly as forecast, while
many of the shipments could have been very late. In this instance,
customer dissatisfaction eventually would result in sales reductions
event though other sales and marketing assumptions might be
adequate.
Consequently, regular business metrics must be employed as part
of the forecasting process. Such metrics can be operationally
relevant (late shipments, partial shipments, excess damage, out-of-
stock situations etc.), reflective of market changes (new
competition, un-anticipated seasonal influences, etc.)
5.6 Other Implications
It is both probably and likely, that the forecast process as a
methodology, a discipline, and a set of usable results might
influence corporate decision-making more than any other
application of business knowledge. Customer Satisfaction the
ultimate measurement of success will be as good as the
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 33
organizations capability to anticipate the customers requirements
and expectations.
Forecasting is the process used to define and quantify these
expectations.
6 Forecastings Role in Corporate Functions
A top-down view of the corporation reveals a progressively
more detailed focus from the perception of the market, to the
metrics to be tracked for measuring performance in that market.
These views can be represented as follows:
6.1 Market & Product View
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 34
The first view indicates how the companys products/services must
compete in the market. Typically, production and distribution
characteristics as well as forecast time fences are a direct result
of the market environment.
Note that the forecast horizon the time available to forecast
likely demand, and to supply that demand, becomes ever more
Cus
tom
ers
Make to Stock
Make-to-StockAssemble-to-Order
EtO
FCH
Forecast Horizon
Production and Distribution Characteristics
Long Lead TimePoor Process CapabilityHigh Set-up / Tooling CostsIrregular Demand"Forever" UseCustomer-specificOne Customer - One Contractor
Short Delivery TimeHigh Reliability
Immediate ConsumptionHigh Throughput
1000's Suppliers, Millions CustomersLow Inventory Levels
"State" Risk Reduction
Market DriversDesign Drivers
Forecast Horizon
Supp
liers
Industry DriversManufacturing & Materials Lead Time
Reliable Fabrication / Assembly ProcessesContinuous Asset / Tools Utilization
Regular Demand"Replacement Lifetime " Use
Market-specificThousands Customers - Dozens Suppliers
continuousreplenishment
one-of-a-kind
OrderDelivery &Replace't
Forecast & Demand Management- Market & Product View
Models(2).vsd - 18Feb98 - RR
Life Cycle Product "Make" Product "Value"
Hours / Days MtS / POS Repl. cents / dollars
Days/Months MtS / AtO '00s / '000s
9 - 60+ months EtO / DBO '00,000s,millions/billions
Markets Competition RegulationCompliance
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 35
short as the corporation moves from an engineered-to-order
environment, to a make-to-stock operation.
6.2 Strategic / Corporate View
At the next level, the corporation identifies the business planning,
and sales and operations planning required to successfully operate
in the market.
The Tactical / Business View then defines how customers and
business partners become the focus of tactical planning, while the
Operational / Task View defines the production and operational
requirements.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 36
Forecasting and demand management apply the time fences
around these views.
6.3 Time / Sequence View
ERP
Operational / Task View
Tactical / Business View
Strategic / Corporate View
Business Planning
Sales and Operations Planning (S&OP)
Customer Relationship Management (CRM)
Supply Chain Management (SCM)
Master Scheduling
Materials Requirements Planning (MRP / II)
Manufacturing Execution (MES)
Logistics and Service
FC &
DM
Forecast & Demand Management- Strategic / Corporate View
Models(3).vsd - 18Feb98 - RR
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 37
The forecast horizon is long-to-medium-term attempting to
predict the likely independent demand for the companys products
(services) based on business, and on sales and operations planning
(i.e. based on the Corporate View!). Note that this horizon shrinks
the closer the company comes to make-to-stock operations.
The accuracy of the forecast especially in a short-term delivery
environment cannot be proved using actual orders. Ideally,
ERP
Operational / Task View
Tactical / Business View
Strategic / Corporate View
Business Planning
Sales and Operations Planning (S&OP)
Customer Relationship Management (CRM)
Supply Chain Management (SCM)
Master Scheduling
Materials Requirements Planning (MRP / II)
Manufacturing Execution (MES)
Logistics and Service
FC &
DM
long term
near term
detailed
toda
y
Fore
cast
"H
oriz
on"
Proj
ectio
n
Ord
ers
Ship
ped
WIP
tom
orro
w
hist
ory
TIM
E H
OR
IZO
N
Forecasting & Demand Management- Time/Sequence View
Models(4).vsd - 18Feb98 - RR
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 38
orders booked should be equal to the independent demand that
has been forecast.
In reality, the periodic forecast is a snapshot that predicts what
will happen, based on past history, IF the company does not
change its underlying policies and procedures which are reflected
in that history.
Using the forecast result as an indicator, the company needs to
determine which factors or drivers it needs to change, in order to
improve its likely result, compared to the initial forecast.
These influence factors are identified and applied, as part of the
tactical / business operations.
6.4 Tactical / Business View
The forecasting process together with customer relationship
management commences the periodic (usually monthly) tactical
review process. It aims at quantifying the desired results in
dollars and high-level product units, and determines which
contributions are necessary to achieve these results.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 39
This view makes it obvious that forecasting alone cannot deliver
results. Forecasting is customer and market oriented. Production,
back-office and logistics are parts oriented.
The gap between the two spheres must be bridged by a functioning
engineering and data management system. It allows rapid
sForecasting Process
Oriented towards Improving the Bottom Linei.e. Product Dollars and Quantities
Customers
Products
Markets
Competitors
Governments
Seasons
ProductionManagement
Marketing &Sales
Senior /Finance Mgmt
Planning / Scheduling ProcessOriented towards Operational Efficiencies
i.e. Production Costs and Units
Capacity
Equipment
Labor
Raw Materials
Governments
Seasons
Overlapping Drivers possible and likely
ManufacturingManagement
Purchasing /Logistics
Maintenance& Service
Bills ofMaterials
RoutingsContracts
MRP II /RCCP etc.
MIS / NetsDBMS etc.
Overlapping Interests / Functions possible and likely
Sales Force Commitment &Participation
CRM and Forecasting Systems
Engineering and Drawing Systems - Production Planning
Production and "Back-Office", Logistics Systems
MIS - Platform and Applications Support
DPAS
Forecasting & Demand Management- Tactical / Business View
Models(6).vsd - 18Feb98 - RR
Distribution /Logistics
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 40
translation of high-level unit forecast, into detailed parts
requirements.
6.5 Operational / Process View
The periodic nature of forecasting and the short time available to
satisfy the predicted independent demand necessitate that the
forecasting and demand management process can be performed
speedily, with as little effort as possible. The process needed to
meet these requirements is represented below.
Note that the process is bound between extraction and provision
of historic data (last periods), and the uploading of forecast data
for MRP and reporting purposes.
6.6 Forecasting Procedures View
At the most detailed level, the procedures view (relative to
forecasting and demand management) identifies the steps required
to implement the process, and the tasks that must be performed
regularly and repetitively.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 41
The start of the forecasting and demand management cycle
produced the statistical forecast the calculated amount of
independent demand that would result from historic sales data
provided the company would not change underlying policies and
procedures.
Various business functions must assess these quantities and their
timing, and determine which factors likely would change the
quantities. These factors and their specific values are called
drivers. They exist in business and finance management
Initial Definitions & Periodic Maintenance
Platform MIS BusinessLogistics Startup
Forecast & Demand Management - Cycle Start
Business &Finance
Marketing&
Economics
Sales &CustomerRelations
Operations& Logistics
Consolidation - Assumptions, Contributions
Demand Management & Forecast Evaluation
Forecast Acceptance & Targets Update
Forecasting & Demand Management: Cycle End
Forecasting & Demand Management- Task / Procedures View
Models(5).vsd - 18Feb98 - RR
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 42
(interest rate sensitivity), marketing and economics (housing starts,
restrictive regulations, whether), sales and customer relations
(promotions, sales events, floor space support), operations and
logistics (distribution locations and distances, expediting costs,
materials lead times), and in any other corporate function.
Successful and reliable forecasting can be achieved IF these
drivers are vigorously tracked, analyzed, and used to shape
corporate policy and practice (service levels, inventory, etc.).
The ability to measure success, depends on two corporate
objectives: (1) setting targets for each function that identify and
quantify what is required of the function in order to meet the
companys targets, and (2) establishing data collection, calculation
and reporting capabilities that allow evaluation of the functions
actual performance against their respective targets. Usually, the
two objectives are addressed through the development of roles
and responsibilities, and of metrics. This is the most detailed
and common view of corporate operations:
6.7 Roles, Responsibilities, and Metrics View
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 43
6.8 Summary
Forecasting is a tool. It calculates likely outcomes based on
performance history. Business functions must determine how to
sustain or change the predicted outcomes, through active
management of the drivers. Setting specific performance targets,
and measuring each functions actual performance against target,
enables success control and remedial action.
President Objectives CSF - CriticalSuccess factors
Suggest, Direct,Guide
NegotiateAgree
Event
Task 1.1.1
Task n.1. 2
Etc.
Customers
BusinessProcesses
Defines Derives
ObjectivesVicePresident Defines
CSF - CriticalSuccess factors
Suggest, Direct,Guide
CSF - CriticalSuccess factors
Derives
Link
ObjectivesTeamLeader Defines Defines
NegotiateAgree
Link
Suggest, Direct,Guide
ObjectivesTeamMember Defines Derives
CSF - CriticalSuccess factors
NegotiateAgree
Link
My Team
Objective 1 CSF 1.1Task 1.1.1Task 1.1.2Task 1.1.3
Objective n CSF n.1Task n.1.1Task n.1.2
Objective On CSF On.1Task On.1.1TaskOn.1.3Close
Expectations
Require
Corporate Performance
From Corporate Objectivesthrough Roles and ResponsibilitiesDevelopment, to Accountability andPerformance Measurementsin performing Business Processes
Fulfillment
Tasks
Tasks
Roles &Responsibilities
Development
PositionDescriptions and
PerformanceTargets
AccountabilityDevelopment and
PerformanceMeasurements
Consistent &Dependable
Linkage
Consistent &Dependable
Linkage
Derives
Suggest, Direct,Guide
Derives
Suggest, Direct,Guide
Tasks
Tasks
Derives
Derives
Suggest, Direct,Guide
RequireRequire
Other Teams'Objectives,
CSFs, Tasks
Other Teams'Objectives,
CSFs, Tasks
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 44
7 Roles & Responsibilities Development
Forecasting is a tool to calculate likely outcomes, based on past
performance, under the assumption that "nothing changes" that
all policies, procedures, market environments, customer relations,
etc. remain static. In reality, this is highly unlikely. Consequently,
each business function must be assigned specific targets. The
targets, when met, would enable the company to achieve its
objectives for results.
The development of roles and responsibilities is a four-step
process.
(1) For each corporate level, establish quantifiable objectives
(2) For each objective, establish its critical success factors
(CSF)
(3) The CSF of the higher level, become the objectives of the
respective lower level
(4) Operational tasks (procedures) are developed to ensure that
CSFs can be achieved.
The development process is out of scope for the purposes of this
topic.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 45
8 Metrics Development Process
Performance Measurement is at the core of the organizations
determination whether or not its plans have met with success. The
assessment process involves four steps:
1. Setting Performance Targets for each business function
in the organization
2. Collecting data about actual performance, for all business
functions
3. Calculating actual performance based on collected data,
versus targets
4. Acknowledging success / non-success of target
achievement
The process of collection data for performance measurement
usually is referred to as metrics. Metrics measure the
difference between established targets and actual performance
against these targets. This necessitates that both target and
performance are quantifiable in the same unit of measure.
Initially, only the accuracy of the forecast is established as a
metric. It indicates that this specific metric (were actual sales
within x % of the forecast for the period?) is subject to company
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 46
action on the preceding periods forecast and, therefore, very
subjective and prone to change.
To develop meaningful metrics for the organization measures that
allow assessment of performance even in the short term requires
a development and implementation program to be put in place.
Development of the metrics and performance measurement process
is out of scope of this topic.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 47
9 Demand Management Drivers
Statistical forecasts are a calculation of expected independent
demand, based on historic performance (sales). Policies and
procedures that were in effect in the past, are reflected in the
historic data.
9.1 Terminology: Drivers, Assumptions, Demand Management
For example, an earlier decision to heavily promote a specific
product, could be reflected in increased monthly sales quantities of
the product, since the promotion. Alternatively, the initial increase
could have been followed by a decline to traditional sales levels.
In the first instance, the promotion would have led to a permanent
gain, while in the second instance, the data would indicate the
specific promotion had a time-limited effect.
The statistical forecast would project a higher trend in the first
case, and a seasonality spike in the second. Whether or not this
projection would be accurate (better: whether actual sales would
by equal or similar to projected sales), depends entirely on the
analysis of the data, and on the conclusions the company draws
from the analysis.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 48
The process of analysis and conclusion can be described as
demand management. Technically, the company attempts to
influence (manage) demand by creating favorable conditions.
These conditions are aimed at specific factors, the drivers.
Conclusions drawn from prior factor analysis and assessment were
assumptions at the time the conclusions were drawn. Since
then, actual sales history indicates whether or not these
assumptions were correct.
Any relevant new conclusions must be recorded, as well as specific
action decisions taken to better influence the factor(s). To achieve
measurable results, actions and expected results must be quantified
in terms of effort and time. For example: The most recent
product promotion has resulted in sustained sales increases, where
for each dollar spent, we have seen an increase of 150 dollars.
Analysis indicates that we need to increase, permanently, our
promotion budget for this product by $ x (the budget target) in
order to sustain improving sales every month by y % (the result
target), recognizing that the improvement effect will be noticeable
approximately 2 months after the initial promotion (the time
target).
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 49
The resulting actions would be reflected in these ways:
(1) the budget would show a promotion cost increase of $ x
every month,
(2) the sales forecast would be increased by y% every
month, but
(3) with a time delay of two months between the cost
increase and the sales increase
9.2 Types of Drivers
Specific business functions need to be responsible for identifying
and quantifying drivers on a regular basis. Which functions roles
and responsibilities will be so affected, depends on how the
drivers are classified, based on the companys past experience.
Some classification options are:
9.2.1 External Drivers
These are drivers that are beyond the companys control; they are
encountered in the many areas such as (with examples):
customer (vacation shutdown, short order lead time)
market (development permits, housing starts)
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 50
competition (aggressive promotions / pricing for brand
builders
government action (mortgage rate deductibility)
fiscal / monetary policy (interest rate change)
licensing requirements (gas installation inspections)
engineering standards etc. (new UL requirements)
whether (seasonal influences, snow predictable,
unpredictable)
etc.
Some of these drivers occur infrequently (such as interest rate
reductions / increases, changes in engineering/UL specifications,
etc. ), while others occur quite often (such as snow falls could
delay construction starts, our customer shuts down for vacation
could drop some demand or simply postpone it, etc.)
9.2.2 Internal Drivers
These are those that influence our demand because of actions we
take, internally. They can be found in many areas such as (with
negative examples):
Accounting (credit approvals take too long)
Distribution (too little stock in our distribution
warehouses)
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 51
Customer Service / Administration (installer calls kept on
hold, slow inquiry response)
Engineering (design not friendly for install ability,
insufficient specs, etc.)
Facilities (shipping dock too small, inadequate handling
equipment
Finance / Treasury (pre-determined price curve / price
points not flexible enough)
Forecasting (do not consistently analyze last periods
assumptions)
Human Resources (slow data entry causes backup of
orders)
Information Systems and Technology (no quick order
status inquiry)
Inventories (commodities safety stock too small for
ensured acceptable cycle time)
Logistics (competition for LTL space in regions increases
shipping costs)
Maintenance (equipment/tools breakdowns lengthen
average cycle time)
Marketing (we dont promote to brand builders for
profitability)
Materials (steel too thin excessive freight damage)
Management (too many special pricing requests real
exceptions take too long)
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Copyright 2000 by ECRU Technologies, Inc. 52
Manufacturing (capacity constraints, scheduling, labor
availability etc.)
Overhead (too many salaried heads, expensive but
ineffective controls on quality etc.)
Systems / Processes / Procedures (retroactive price break
application too time consuming)
Production / Shop Floor (scrap and efficiency not
controlled)
Projects (effects of special projects subdivision
development promotion? not reflected in production
scheduling / materials purchases)
Purchasing (long lead times, pricing, quality assurance on
receiving)
Quality (high warranty costs)
Sales (incentives promote volume regardless of
profitability)
Some of these drivers require quick action from period to period
(such as responding to competitive promotions), others may
necessitate internal improvements in order to maintain or expand
demand (customer service / installation support, credit policies and
approvals etc.); still others may require investments to improve
profitability (inventory levels for immediate availability allow
profitable pricing).
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 53
9.2.3 Sector Drivers
Other classifications can be made by sector or function. Some
examples follow.
9.2.3.1 Business and Finance Drivers
Existing Markets
New Markets
New Customers
New Product Potential
Interest Rates
Capacity and Inventory Financing Constraints
Production and Distribution Facilities Planning
Service Levels
Product Replacements / Phase outs
9.2.3.2 Economic and Market Drivers
Political Action
Fiscal / Monetary Policies
Economic Conditions
Competitive Environments / Imports
Distribution Structures
Market Outlooks
Industry Trends
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Copyright 2000 by ECRU Technologies, Inc. 54
Construction Starts
Whether
9.2.3.3 Customer Relationship and Sales Drivers
Existing Customers / Sales Profiles
Existing Sales Channels, Markets
Demand Potential Existing Products
Demand Potential New Products
Customer Relationships and Data Exchange
Promotion Campaigns
Co-packaging and co-marketing
9.2.3.4 Operations Drivers
Capacity Constraints short / long-term
Materials Acquisition Trends and Logistics
Labor Markets
Distribution Logistics Time and Cost
Manufacturing Scheduling
Assembly Scheduling
Inventory Policies
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Copyright 2000 by ECRU Technologies, Inc. 55
9.3 Driver Identification
The company needs to identify the business functions that are
responsible for the specific drivers by type and sector. The roles
and responsibilities for the respective positions need to be updated
to reflect driver-related objectives, and compensation and
incentives programs need to be adjusted to reward early change
detection and assumption management
Initially, the top 10 drivers in each area should be identified, as a
starting point. This allows the company to concentrate on the most
important focus areas right away. Over time, additional drivers
should be identified and included in the demand management
process.
It is particularly important that all functions cooperate in driver
identification and subsequent assumption management.
Forecasting is not a sales function, and cannot be used successfully
without input from many sources.
The forecast manager (the person or function assigned to plan
and manage the periodic/ monthly forecasting and demand
management process) must ensure that each identified function
participates in the analysis and assessment process.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 56
The combined input from all functions will be consolidated in a
single forecast change for each affected product.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 57
9.4 Driver Management
To facilitate identification and management of specific drivers, a
standard format should be used that would allow tracking of each
driver, by applicable product, customer, market, etc., and support
generational maintenance so that each forecasting cycle would
have access to preceding assumptions and resulting action
conclusions.
To facilitate the process, a manual work sheet is provided as an
example. It can be used for all drivers until such time as
Information Services can support on-line documentation.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 58
Drivers and Assumption Work Sheet Ref.ID:
Subject: Briefly describe the "subject" to which this particular assumption / note applies:Internal:
ID. Identification / DescriptionCustomer:Model:Product:Part:Service:
External:ID. Identification / Description
Market:Industry:Competitor:Comp.Product:Government:
Date & Period: Identify the specific date and / or period to which this assumption / note applies:
Date: Week: Month: Year:
Period: from date: to date:
Background: Briefly describe the "environment" of the event or fact or development etc. dealt with:
Assumption / Note: Briefly describe the conclusions drawn / actions to be taken etc., as a result:
Anticipated Effect: How will the the the event or fact or development likely impact on us? (describe)
Positive:Neutral:Negative:Information Only:
Calculation Model How will "factors" be measured, and what calculations are used to arrive at :quantification"
Process: Determine Variables and their units of measureDetermine Result Values and their units of measureDetermine Calculation Formulae
using these variables as input,and producing Results as output
Identify Sources for each variable (time series, report field, responsible function, etc.)Identify Use of each Result (in forecast, other functional actions, etc.)
Quantification: Quantify the effect that we need to ancticipate, for the stated "Subject":
Month & Year In/Decrease Quantity In/Decrease Dollars other Comments:+/- units or % +/- value or %
expand as needed transfer these changes to the Change Form for the respective SKU
Follow-up: "Accuracy, Dependability, etc." of Assumption as observed from ACTUAL development:
Date:
Completed by Name: Position: Date:
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 59
The following example illustrates the possible use of such an
assumption work sheet for many different but related or
associated drivers.
For each applicable (important) driver, the company needs to
identify which events can occur, and what would be the time and
quantity and price impacts of each event on the demand. Initially,
the aim should be to concentrate on the top 10 drivers that will
have the greatest impact on performance.
The intended result is the eventual ability to answer the question:
IF event X happens, what will be the effect on my
demand (sales) ?
Which action can we take to enforce positive / mitigate
negative effects ?
How much will it cost us to take that action ?
How much more (sales volume, profitability, cost
reduction etc.) do we expect as a result?
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 60
An example of a forecast cycle involving market share would
be:
a) take expected housing starts (per state) as an objective
basis
b) develop an explosion for each type of start (i.e. for single,
multi family, commercial housing, how many units of our
models do we expect to result from each start
c) multiply the starts with the expected units of models
d) (Differentiate on the basis of quality and price based on
state, etc.)
e) this is the possible market size by month and state,
expressed in units of our models (with added average net
prices if required)
f) define the share of this market that the company wants to
attain, in the respective next forecast period (month, quarter,
etc.)
The result is a forecast market size
g) now derive a statistical forecast from historic data and
scrub it to remove known errors
h) note assumptions (drivers and their values) that would
increase, decrease the demand volume, change the
profitability in a market or for a model; estimate the effect of
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 61
these assumptions (by market, customer, brand, month etc.
as appropriate) and update the assumptions accordingly
i) apply the assumptions (with estimates as noted) to the
scrubbed statistical forecast
j) re-generate the forecast (in units, and apply average net
prices)
k) measure our forecast quantity and value against the size of
the potential market and note the resulting share (%)
The result is a forecast market share
l) For the period, track the actual sales (units with average net
prices) with required / desired degree of detail (by product
and customer per state and region etc.) and calculate actual
units and dollars
The result is an actual sales report for the respective period;
assuming that the forecast market size has not changed in or
prior to the period (refer to assumptions!), the company can
calculate its actual market share (sales versus forecast market
size)
m) measure the actual market share against the forecast market
share and note the difference if any
n) for differences, analyze assumptions and determine likeliest
cause(s) of difference(s)
o) refine assumptions to arrive at better forecast estimates.
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 62
9.5 Applying Demand Management Results
Once all inputs have been obtained, and their respective
quantitative impact on the statistical forecast has been determined,
the cumulative effect of the anticipated changes, on each affected
product, needs to be calculated.
Again, on-line facilities should be made available to track
assumption-based changes on a generational basis.
In the absence of an automated tool, the following work sheet may
be used to consolidate the various inputs for a product:
Forecasting - Demand Management Data Changes
Effective for Forecasting beginning with "Month 1" as month/year: _________________
This form is intended to capture all desired changes in the forecast of an SKU, as indicated in one or more Assumptions for the SKUThe form assumes "no integration" with front-/back-end processes, and allows you to apply changes in a controlled fashion.
1) Note that the definition of "SKU" may change depending on the forecast data you use (e.g. parts, customers, models, combinations, etc.)2) Prepare one of these forms, for each SKU for which you plan to apply demand management (e.g. make changes resulting from assumptions)3) For each assumption affecting this SKU, enter one "line of data changes", with cross-reference to the assumption form or file (for later tracking)4) The desired changes must be shown as 'modifying quantities' for the applicable month(s) - note that "month 1" is the next applicable month5) Change (or 'modifying" quantitites can be shown as absolute changes (e.g. +100 or -50), or as percent of the original forecast quantity (e.g. +/- 7%)
Note that your specific "front-end" and "back-end" processes may determine how to enter changes for subsequent automatic calculations.6) In the absence of front and back-end integration, add up all individual changes, per month (lines 1 through n) in line B, then add/subtract this change total from line A.7) Add/subtract the total changes (line B) to/from the original forecast quantity (line A) to arrive at the new, desired forecast quantity (line C)
Seq. SKU # SKU Description Assumpt. Xref. Mo.1 Mo.2 Mo.3 Mo.4 Mo.5 Mo.6 Mo.7 Mo.8 Mo.9 Mo.10 Mo.11 Mo.12
A DPAS Forecast Quantity before Changes:Changes resulting from Assumptions (1 line per A.), below
123
etc.
n
B Total Changes for this SKU (total for 1 through n):C Resulting new Forecast(s) for this SKU (C=A+B)
Forecasting and Demand Management
Copyright 2000 by ECRU Technologies, Inc. 63
Line C the Resulting new Forecast(s) for this SKU will be
entered into the forecast system.
These values will replace the calculated statistical forecast
values and be used for subsequent processing.
Forecasting Strategy and Development
Copyright 2000 by ECRU Technologies, Inc. 64
10 The Forecasting & Demand Management Cycle
On a periodic usually monthly basis, the forecasting and
demand management process is performed with least loss of time.
A forecast that takes too long to produce, becomes useless as a
predictive and tracking tool.
There are three phases in the periodic cycle. They should be
integrated in terms of required activities and their timing into
the companys normal month-end closing schedule (or such
other periodic calendar event as may be decided). The three
phases are:
Forecasting Strategy and Development
Copyright 2000 by ECRU Technologies, Inc. 65
10.1 Download and Cycle Start
These activities must be performed as soon as the financial month
is closed. All referenced information must be produced as quickly
as possibly and supplied to all parties involved in the forecasting
and demand management process.
Develop WEB ?distribution ?
Develop HRProcess
Develop Calendar
Develop Scripts
DevelopProcedures
Performance Targets - all R&R
Ensure Perform. Datacollection and Metrics
Calculations
Metrics from "FC systems"
Periodic Forecasting & DemandManagement Cycle
Forecast(s) forPeriod P-1
PARTINFO.TXT P-1
USETRAN.TXT P-1
FC/DM MANAGER:Ensure complete backup copy ofall FC/DM data as at the end-of-
the-la st-cycle da te (FC files,assumtion, change document etc.)
FC/DM MANAGER:Ensure complete backup copy ofall FC/DM data as at the end-of-
the-la st-cycle da te (FC files,assumtion, change document etc.)PARTINFO.
TXTPARTINFO.
TXTAll electronic
Files P -1
All non-electronicdocumentsfAll non-electronic
documents - P-1Generational
Maintenance ofForecast and
DemandManagement Data
Use to regenerate in theevent of system failures, and
for simulation purposesrequiring old / re-start
information
FC/DM MANAGER:receive / load P -1 data
FC/DM MANAGER:receive / load P -1 data
FROM: _______Sched. DATE/TIME _______Act. DATE/TIME: _______File Names received:1: ______________2: ______________3: ______________
etc.
FC/DM MANAGER:Prepare Cycle P Forecasting &
Demand Management Material forDistribution , in agreed format
FC/DM MANAGER:Prepare Cycle P Forecasting &
Demand Management Material forDistribution , in agreed format
PARTINFO.TXT
PARTINFO.TXT
DPAS Masterand Ref. Files
All non-electronicdocumentsfNon - / Electronic
Support Informat. Actual Sales forPeriod P-1
Mktg / SalesDrivers/Assumpt's
used in P-1 FCOper's Drivers /
Assumptions usedin P-1 FC
Forecast Reports:1: __________n: __________Sales Reports:1: __________n: __________Assumtion/Change Copies1: __________n: __________etc.
FC/DM MANAGER:From updated Organization Chart /List, prepa re Distribution List forprepa red ma teria ls, a nd distribute
in agreed format -set expectations,and return requirements dates
FC/DM MANAGER:From updated Organization Chart /List, prepa re Distribution List forprepa red ma teria ls, a nd distribute
in agreed format -set expectations,and return requirements dates
Organiz.Charts
Roles &Responsibilities
FC/DM MANAGER:produce "statistical forecast" for
periof P;produce Performa nce Metrics for
Period P-1
FC/DM MANAGER:produce "statistical forecast" for
periof P;produce Performa nce Metrics for
Period P-1
Calculated based on updatedhistory ASSUMING all priorAssumption remainunchangedPerformance Targets &Metrics - may be at differentperiods
DISTRIBUTION LISTAttachment List
Expected ActionsExpected Return Dates
Ensure Cut-offManagement
IS: CLOSE MonthExtract Reference Data Updates
Extract Shipment DataFormat as required
Transmit to Forecast Manager
Metrics from "other systems"
Perform.TargetsP-1
Perform.MetricsP-1
Stats. Forecast P
To "ResponsiblePositions" for
Analysis, Updates,Response
12Forecasting - Download & Cycle Start
(DPASFCTG.vsd (12) - 01Mar00 - RR)
Develop PMProcess
IF simulation desired:re-load backup files, adjust
using DPAS MenuSelections, re-start process
Forecasting Strategy and Development
Copyright 2000 by ECRU Technologies, Inc. 66
When these parties receive their documents, the second phase of
the periodic cycle takes place.
10.2 Forecast Review & Demand Management Analysis
Lastly, when all assumption updates and resulting forecasting
value changes have been completed, the third and last phase
consolidating all suggested changes takes place.
DevelopAnalyticalMethods
Assumpt. Updatesfor FC P
DevelopProcedures
May require re-issueof correctd FC
RESONSIBLE ROLES:collect "driver intelligence" a sa ppropria te for specific RoleAna lyze "Drivers" for Impa ct
RESONSIBLE ROLES:collect "driver intelligence" a sa ppropria te for specific RoleAna lyze "Drivers" for Impa ct
DevelopGuidelines
Periodic Forecasting & DemandManagement Cycle
Forecast(s) forPeriod P-1
RESPONSIBE ROLES:Receive "Foreca sting a nd Dema nd
Management Package" andensure completeness
RESPONSIBE ROLES:Receive "Foreca sting a nd Dema nd
Management Package" andensure completeness
RESPONSIBLE ROLES:review sta tistica l foreca st
ma ke correction cha nges a sneeded
provide Change Form to FC Mgr
RESPONSIBLE ROLES:review sta tistica l foreca st
ma ke correction cha nges a sneeded
provide Change Form to FC Mgr
Actual Sales forPeriod P-1
Mktg / SalesDrivers/Assumpt's
used in P-1 FCOper's Drivers /
Assumptions usedin P-1 FC
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