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Do You Know Your Execution Level for Your Demand Forecasting?

Posted on April 15, 2013 by Gene Tanski

I think this blog falls under the category – someone is always thinking, it just might not always be you.

You have hopefully read on this blog or perhaps in other venues the idea that demand forecasting has its greatest supply chain impact (and therefore financial impact) when improved at the execution level –the level that helps maximize the operational and financial performance.

And typically the implication and in some cases the outright declaration is that the lower the level of detail the better – supply chains do not produce product families or product categories. They make actual products, SKUs, and items. Forecasting at the family or category level only results in more error at the product level. So it makes sense to ensure that the SKU level forecasting is where you measurably improve forecasting accuracy.

But … if SKU is good, SKU by location is better. And if SKU by location is better, SKU by Ship-to customer location by location is even better. This could go on for awhile but the point is, the overall push has been for more information and accuracy at lower and lower levels of detail.

However, we recently ran into a company where that was not the case. It is a consumer products company that operates at a very high level of RPMs. And for their product and for their supply chain, forecasting at the SKU or lower level really does not make sense. What makes the most sense for them is forecasting by product category or what they would refer to as chassis. If they can get demand for the chassis accurately forecasted (said chassis representing 90% to 95% of the total material cost), then turning a chassis into a finished SKU is a quick and efficient process. The actual plates and other finishing components are inexpensive, easy and cost effective to order in bulk, quick to assemble, and are interchangeable with most of the chassis.

What’s the point? It comes down to the fact that when you start the process of improving your forecast (for all the reasons that have been outlined many times), a real fundamental key to success is stepping back and thinking through what is your company’s execution level of operation? Thinking through the execution level appropriate for you includes not just your supply chain but your entire value chain, especially as data proliferates through increased collaboration among enterprises. Getting the answer right is critical to driving improved customer service, cash flow, and profitability.

Why Don’t We Ever Learn? Partnership Matters

Posted on February 22, 2013 by Gene Tanski

Measurable performance, partnership, fiduciary responsibility – these are fairly consistent themes within the Demand Foresight blog. These themes and values were highlighted again through a couple of stories in the news over the past 10 days or so. One was an Oracle Implementation for the Air Force; the other SAP’s announcement that they are raising rates for their maintenance services.

For the Oracle story – and the 80 to 100 million dollar budget that ballooned into 1 Billion dollars spent, a cancelled project and no measurable performance of any type. Some of you reading will say that is the military or big government for you – that always happens with scope changes etc. Realizing that this is a professional website, let me adjust my normal wording and say that that type of reasoning is a bunch of malarkey (yes – a real word – I looked it up). The consulting company involved, the Air Force and Oracle were all willing participants in this very sad story, and it reinforces the very strange fact that software projects are very often not held to the same operating principles that drive normal business operations. Would the Air Force allow a critical supply mission of weapons and provisions to fail – would they just cancel the flights because of some tough conditions on the ground? Of course they would not – they are the U.S. Air Force – operational failure is not an option. But software – completely different story – why?

And to our way of thinking, Oracle is part of this – they got their license fees, so what if it doesn’t work. Where was their skin in the game? Where was their commitment that this critical project was successful? Until the buyers of software start holding suppliers accountable – and this can and should be done in contracting and even in choosing who the potential bidders can be (if you don’t offer a performance guarantee, you cannot bid) – these type of results will continue to happen and they absolutely should not.

Similarly, SAP is raising prices for maintenance support. Mind you, they are not simultaneously offering any improvements or new services within the support programs. They are not tying the maintenance to improved utilization of the functionality. It is just an across the board increase. And as it turns out, a lot of their customers really have no leverage to contest the increase. Because many of their clients have committed to an integrated IT platform under a single brand name, they are completely at the mercy of their supplier – in this case SAP. So from one perspective – you can’t really blame SAP. They are taking advantage of a situation that they worked very hard to create. More power (and $ to them). However, what does that say about the fundamentals of their ‘partnering’ with their customers?

And to the companies that bought into and continue to support sole source, single vendor integrated IT strategies – when do you start to think about IT just like any other strategic vendor. If you are manufacturing or assembling cars, or vacuum cleaners – you would never have just one option for sourcing motors or engines – why is it okay to trust just one supplier of mission critical IT functionality?

Where is the sense of fiduciary responsibility by the company executives to shareholders and private owners to rethink the approach to IT vendors and approach it in the same way that operational initiatives are treated? And what are IT providers doing to help make that happen?

Until the culture and expectations around IT implementations are radically rethought, these types of stories highlight the risk associated with critical projects like improving S&OP capabilities and taking advantage of profit optimization opportunities – the types of initiatives that really drive bottom line improvements, and that is what is really unfortunate.

Causal Factors in the Recent News – Using Them for Your Forecast?

Posted on January 31, 2013 by Gene Tanski

Great information in the news this week – I am sure everyone reads the news with a specific focus on how to improve forecasting and S&OP, right? Anyway – to the point.

Yields on 10 year treasuries rose 11 basis points. Claims for jobless benefits fell to a 5 year low. US home sales for the month of Dec. fell 7.3%, with a 1.3% increase in average sales price, but for year over year sales actually increased 8.8%, with a 14% rise in average sales price.

From an S&OP and demand planning/forecasting point of view, this information raises some interesting questions about causal impact and associated lead times.

What does all of this information imply for demand for your products 3 months from now, 6 months from now? For future pricing of your raw materials? Do the implications change per geography? Per season? Per product line or per customer class?

Does the fact that banks are accelerating repayment of bailout funds mean anything regarding interest rates? And do interest rates impact your procurement policies or demand for your products?

And what is the lead time associated with all of these potentially causal and leading indicators?

Most importantly, does your current process and technology platform allow you to study the impacts, understand the causality, plan for the impact with correct lead time? Are you having these conversations?

Our clients are talking about the implications of increased housing values on consumer spending and in what time frame. They are creating scenarios around different inflation trajectories, different employment rate scenarios and doing this within the context of different weather projections by geographic region. Are you equipped to have similar conversations on a weekly, monthly quarterly basis?

CPG and B2B manufacturing companies use leading indicators / causal factors like weather (temp. and precip. indexes), unemployment, birth rates, housing starts, and Nymex commodity spot prices to improve their forecasting and do so for cascading time frames. They are included in as additional inputs into forecasting process and used concurrently with the traditional historical inputs.

We recently had a good conversation with Amber Sally from Gartner. Among the topics discussed were her views on competitive differentiators in demand planning and forecasting – one was the ability to employ causal factors into your process.

Are you going to figure out how to corral the power of this competitive differentiator, or are you going to passively let your competition outflank you just as you are passively allowing external forces to impact your business without understanding the details of the how, why, where, and how much?

Apple Feels Impact of Forecast Error | Demand Foresight Blog

Posted on January 17, 2013 by Gene Tanski

This blog is all about exploring the importance of reducing forecast error. It also explores the measurable impacts of achieving that reduction in error. We have explored certain details like impacts on working capital, customer service and production efficiency. We have pulled back and also discussed the more strategic bigger picture components of using forecast accuracy to drive important processes like sales and operations planning and financial reporting within the context of Sarbanes-Oxley.

However, I think we have been consistent that ultimately, improving forecasting is the first step in a long process of maximizing profitability and shareholder and stakeholder value. The more forecast error a company (either private or public) accommodates or allows to exist within its value chain, the less valuable the company will be.

Unfortunately, this lesson has been brutally reinforced through recent reporting about Apple. It was revealed that Apple had dramatically cut orders for iPhone components. It was reported that this was primarily because demand was softer than expected. In other words, the forecast was way off – it contained a lot of error. The result – an immediate 4% drop in the stock price worth billions of dollars.

Reducing forecasting error should be, consistently, one of the top 3 strategic initiatives of every leadership team of every for-profit company.

Forecasting Software to Increase Your ROI | Demand Foresight

Posted on January 11, 2013 by Gene Tanski

Happy New Year! 2013 looks to bring a whole host of new challenges and opportunities for businesses to differentiate themselves and to thrive in an increasingly more competitive marketplace – just like last year. Brings to mind the old quote from Jean-Baptiste Alphonse Karr (although probably more familiar to people who are fans of Kenny Chesney or Jon Bon Jovi) – the more things change, the more they stay the same.

Using that quote as an incredibly clever transition device, whatever the challenges and opportunities before us, there are a few key basic truths and one of the them is that as business people we have a fiduciary responsibility to maximize the value of our businesses over time and that is often measured through increasing cash flow and pre-tax profitability (net profitability has become a much more complex conversation).

Therefore, to start the year, I thought we would revisit and refine the value proposition of dramatically reducing your forecasting error. All of the research supports that in today’s operating environment, improved forecasting is the number one option available, from an operational S&OP point of view, to most effectively, measurably and quickly improve your value chain performance and therefore improve cash flow, return on capital and pre-tax profitability.

How specifically can improved forecasting improve value chain performance? Not necessarily in order of importance or impact, improved forecasting should allow you to

Increase revenues because:
- Sales focus on their most profitable customers and products
- Marketing more effectively supports sales and brand strategies
- Customer service increases because there are less out-of-stocks
Improve utilization of working capital because:
- Inventories are reduced closer to what is needed
- Raw materials, components and finished goods are purchased more in line with optimized production or deployment plans
- Order to cash cycle times are greatly reduced
Improve Return on Capital Employed because greater accuracy allows for more effective:
- Master Scheduling of plant and materials (and personnel but often this is not included in capital calculation)
- Constrained Planning
- New asset / capital investment

These represent what can be improved – no doubt you are asking to what degree can I improve my returns on investment and capital employed and cash flow and pre-tax profitability.

Results are obviously dependent on the exact situation within each company however as a general rule of thumb, our experience shows that a 25% reduction in forecast error translates into a minimum 5% improvement in pre-tax profitability.

However, perhaps more compelling, independent research shows equal or greater impacts.

Specifically,

Dr. Hau Lee is the Thoma Professor of Operations, Information, and Technology at Stanford University; Co-director of The Stanford Global Supply Chain Management Forum; Director of Managing Your Supply Chain for Global Competitiveness Executive Program.

Given Dr. Lee’s long term research and cooperation with client companies, the impact of improving forecasting and focusing on demand drivers is significant.

“Distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies: excessive inventory investment, poor customer service, lost revenues, misguided capacity plans, inactive transportation, and missed production schedules.”

“I have already seen some companies using new software tools to manage their businesses based on demand, with results ranging between 50% and 100% in net profit increases, which in turn can easily be translated into enormous increases in shareholder and market values.”

Dr. John T. (Tom) Mentzer was the Harry J. and Vivienne R. Bruce Chair of Excellence in Business in the Department of Marketing, Logistics and Transportation at the University of Tennessee. He was a prolific researcher and author with 5 books on value chain excellence and competitive differentiation not to mention hundreds of articles to his name.

Dr. Mentzer extended his research, through the help of many colleagues and collaborators, to the measurable on a company’s performance. The single most clarifying result of improved forecasting highlight by Dr. Mentzer:

An increase of shareholder value of 15% or more!

Lastly, we refer to the Gartner Group which includes the recently merged business/supply chain analysts from AMR Research. There are a host of strong practitioners such as Noha Tohamy, Tim Payne, Mike Griswold, Dennis Gaughin, and Steve Steuterman just to name a few. Since January 2011 they have published a large number of research papers and articles that highlight the impact of improved demand forecasting. Their cumulative research has pointed to some significant findings.

Gartner’s measurable impacts of improved forecasting and demand planning:

1% to 3% revenue increases
15% to 30% inventory reductions
20% to 30% order fill rate increases (Demand Foresight note – important to do 2 and 3 simultaneously)
10% to 15% decreases in obsolete inventory
3% to 5% increases in gross margin

Do you have an aggressive revenue, margin, cash flow and profitability plan for 2013 and/or for a number of years ahead? Are you mixing it up with aggressive and creative competition? Trying to differentiate your company and yourself?

I hope that as we kick off 2013 and all the possibilities and potentials still lie in front of us, you will take to heart that one of the most powerful investments you can make (and should make given fiduciary responsibility) that will have an immediate and long term positive impact on your performance (intentionally left blank – your company? Yours?) is the investment in dramatically improving forecasting accuracy.

Looking forward to the conversations that are coming up.