Demand Planning Function: Where Does It Belong?

Posted on November 15, 2013 by Jeff Shaw

In a prior blog, “Using Forecasting Software to Drive Specific Business Improvements, Example One”, we emphasized the importance of ownership of the demand planning and S&OP process by a member of the C-suite. Who in the C-suite was not the end-game of that blog, as long as it was someone in the C-suite. But a recent energetic discussion in the Institute of Business Forecasting and Planning (IBF) LinkedIn group brought to light several issues that could drive that answer. I love discussion groups and forums: they are like roundtables that allow the kind of real time crossfire and discussion between thought leaders that was not possible before the advent of this and other online forums. Although not everyone agreed or even had a final opinion to the question of who should own demand planning, some of the issues that came up are considerations before organizational boundaries around planning should be set.

Roundtable Discussion

The following is a collection of some of the opinions gathered from the group as to demand planning organization ownership, together with a summary of the Pros and Cons of each approach.

Ownership Choice 1: Sales & Marketing
In his book on S&OP, “Sales & Operations Planning, Beyond the Basics” Thomas Wallace puts demand planning function in the hands of Sales, with longer-term demand planning with Marketing.

Pros: Sales & Marketing are the closest of anyone to the customer, thus having the best knowledge of demand. Advancements in processes and technologies allow them to have adequate statistical predictors of demand. They can work with customer service more directly to manage the market risks.

Cons: Sales people are good at sales, but not necessarily at predicting sales, so this placement can backfire. Marketing can be more focused on marketing and product analyses than on demand plan generation. Making the demand plan part of the Sales KPI could lead to low forecasts to ensure goals are met, potentially followed by failed customer service when Operations follows the plan and produces insufficient inventory.

Ownership Choice 2: Supply Chain Organization
Recent IBF event polls show that 61% of organizations have the demand plan generated here, with the trend rising. It can often end up here not by deliberate means, but out of Operations frustration of leading an S&OP initiative, or when Sales & Marketing rejects ownership. Business financial analysts could offer support.

Pros: This can be beneficial as an independent, more unbiased group. Higher-qualified statistical specialists are typically on staff.

Cons: There is no influence on pricing, marketing programs, etc., that is available if it were on Sales & Marketing side. Ownership too far from Sales can create disconnects. Smaller companies can often not have the budget to allow for a Supply Chain organization, meaning that another home could be Operations.

Ownership Choice 3: Hybrid
A handful of contributors offered up a hybrid approach, backed up by the IBF forum itself. The idea of the hybrid goes something like this: For the majority of companies, Operations or Supply Chain management would own and manage the planning function, while Sales can own the forecast in terms of the month-to-month unit volume commitment. In effect, the plans produced by Operations/Supply Chain are given to Sales & Marketing, who then identifies impactful factors like marketing campaigns, competitors, new markets, or economic indicators, and over-writes the baseline forecast where appropriate. Analysis would follow on both the original and overwritten plans, with metrics feeding back into the process to identify improvement efforts for Sales & Marketing.

Pros: This seems like a more collaborative approach, taking advantage of the skills of Operations, Supply Chain, Sales & Marketing, or any other organizations adding value.

Cons: Without a strong leader with responsibility and accountability, this could be a chaotic process that accomplishes little, and creates divisiveness between different camps.

My Takeaway on Best Demand Planning Placement

There are opposable forces at work here. There is no right answer, but in any case, I see 4 basic rules of thumb:

1. Do your homework. To pick a method, you will have to do some research and ask some questions. What has worked for others in the past, or companies like yours? Where are your skill sets? Where are the internal challenges that need to be addressed? Are there built-in biases, such as compensation tied to KPIs, or reviews tied to performance, that could affect demand plan judgment? Bias is inevitable, but it can and should be minimized.

2. Pick a champion. I see this as the cornerstone that makes it all possible, no matter what the plan. It all goes back to our blog about responsibility for the results. You need to find one individual that is willing and able to see the demand plan through, and with a passion for uniting different company departments to meet the company’s goals.

3. Enable collaboration. Buy-in from the groups from users through C-level executives is crucial to meeting the real goal of accomplishing the company goals. The stakeholders should feel that their voice and results are considered. Led by a facilitator, the collaborative platform should be in place to maximize communication between different business units, with the same goal of maximizing business effectiveness.

4. Make it repeatable. Make sure that the processes, people, and technologies in place are such that the demand plan generation is repeatable, and results are measureable and provide feedback to the process. The review meetings should be structured with a consensus of the stakeholders all present. The process should be automated and streamlined as much as possible.

While generous focus and energy invested on creating the demand planning structure will yield good results within an organization, continuous improvement efforts should be made to revamp the structure if necessary with lessons learned both internally and externally. A good demand planning organization can defend against market volatility and overcome competitive challenges, and follow a path to a demand-driven, and ultimately a customer-driven, success story.

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.

Compete To Be Unique

Posted on February 22, 2012 by Gene Tanski

Focus on Innovating to Create Superior Value For Chosen Customers

- Joan Magretta, Stop Competing to Be the Best, Harvard Business Review, 30 Nov 2011

You know the phrase “marching to the beat of a different drummer” is a way of saying someone isn’t following the status quo and is standing out from the crowd. It’s generally not a positive statement. We disagree wholeheartedly. Continue reading →

Process Redesign – Do it right or go home.

Posted on October 20, 2011 by Gene Tanski

When approached without a clear understanding of the technological possibilities and a relevant examination of the organizational structure and policies (i.e pay) supporting it, Business Process Redesign is a complete waste of time.

In fact, I will go so far as to argue it is a destruction of shareholder value to invest time, human resources and actual cash in pursuit of improvements that will be minimized and/or never realized.

So what are the risks of the so-called “People, Process, Technology” approach?

You can only contribute your process requirements based on what you know, but you can’t know the possibilities inherent in technology platforms until you’ve explored them
You might design a process that only stays relevant for a year rather than 5 years and/or necessitates expensive upgrades, training and consulting fees with every step
You might end up paying people to perform the old process, not the new process
Your technology may require costly customizations or “work-arounds” to manipulate data outside of system support in order to support the new process

Say your current process involved 4 or 5 steps – it begins with a query to get historical data, extracting that data to a forecasting engine – something like excel or Demantra (no real difference), then running the model, then organizing the output into a useable format, running a series of reality meetings with Sales, Marketing & Operations and then finalizing the execution forecast.

Now, given that background and experience, in a typical process redesign, you would enter a room with big whiteboards or brown paper sheeting taped up and most likely a consultant (internal or external) standing at the front of the room saying – please – give me your requirements so we can design a process. What are you going to pull from in order to provide requirements? Your experience – what you know. Which means in effect you will be paving over cow paths – which might be charming in Verona but not the basis for delivering competitive differentiation for your company.

Perhaps even more frustrating is say that you are able to think out of the box and come up with a truly radical process that cuts out 4 of the 6 steps and if properly executed would increase accuracy by 10% and reduce cycle time by 75% and help improve order fill rates from 90 to 99%? And then you go out and look for a technical platform only to find there is no technology to support your process? Can you say frustrating loud enough?

So what is the right way?

Technology – Process – People

A comprehensive, holistic approach based on the principle that Technology should support Business Process, and Business Process should exploit the capabilities Technology can provide – Davenport & Short dubbed this recursive view of Technology & Process Redesign “the New Industrial Engineering” — Rather than lay out a step by step detailed process (proscriptive process design) you outline specific outcomes for the project (outcome based process design).

This would include:

Identifying what is wrong with the current process,
Creating a general vision as to where you think the current process could improve,
Setting specific measurable goals for improvement – including areas to focus investment and amount or degree of improvement desired.
Considering your pathway toward maturity – how much will it cost to improve down the line?

Within this framework, you can then invite technology providers in for conversations and focus on finding a partner with a technology that can provide measurable performance improvements as well as a platform that is flexible so that it can stay relevant for this process as well as future required changes as your business continues to grow and evolve.

Once you have a partner chosen based on technological prowess, flexibility, industry knowledge and compatibility, you can then engage in detailed process design in tight partnership with the technical platform you have chosen. You can then also do a review of compensation structures and organizational design to ensure these will be flexible in supporting new process and performance expectations.

[Quick word of warning: This does fly in the face of the normal RFP process where a company says, “Hey, we want to do something but we are not going to share the specific details or outcomes we are going to measure nor any of our criteria for success.” What ensues within the responders is a process of guesswork, misdirection, outrageous claims and leverage which, in many cases isn’t entirely dissimilar from a season of “Survivor.” And yet, after it all, many executives end up choosing based on faulty assumptions about long-term cost savings and NOT business outcomes.]

There has been specific research done on this by a few groups and the statistics are frightening:

70% of process redesign projects fail to deliver on the business case and the budget. Only 30% actually hit the minimum marks!!

The holistic approach, however, produced strikingly different results.

50% reduction in total project time,
35% reduction in total project cost,
70% improvement in technology uptake
60% improvement in attaining business case

This really seems like a no-brainer but yet, as noted at the start, people are still approaching corporate performance improvement like it’s 1985.

How can we evolve this conversation beyond old paradigms? What can be done to help drive efforts to improve corporate performance such that our companies not only survive but thrive?

More about our forecasting and planning software.

75% of ERP implementations deliver more pain, less gain

Posted on October 19, 2009 by Gene Tanski

Over the years that I helped clients install brand name Enterprise Resource Planning (ERP) software, a common complaint was that vendors “over promised and under delivered.”

Have you ever been part of an implementation? It’s like suffering through a root canal for 12 months: once it’s over, you’re still in pain. Typically, this is how it works: a business case is made that promises improvements in some component of ongoing operations. Requirements are gathered, configuration happens, piloting will usually occur and then the big rollout (or, in some cases, the “Big Bang”).

How often does the reality live up to the promise? According to Gartner and McKinsey, less than 26 percent of the time. Can you imagine if three out of four root canal procedures were unsuccessful? Do you think the FDA would allow dentists to continue performing the procedure? The reasons the implementations often don’t live up to their promises are many, but, what do you do when you’re halfway through an ERP implementation and it’s proving more disruptive than productive?

This is typically where the “partnership” that both sides professed early on starts to fall apart. Rather than focusing on addressing the problems or the misunderstanding, usually there is an investigation, fingers are pointed and then the negotiations begin as to the solution. Not surprisingly, the new solution requires yet more money, and somehow, despite the best corporate negotiators, the customer ends up footing the bill.

Since the facts show that this happens more often than not, is there a benefit to a guarantee from the software partner? If a vendor’s entire compensation were tied to the same performance requirements as the customer’s, would that help raise the average for successful technology-based projects?

I want Foresight to be the painless dentist of ERP — delivering a demand forecasting solution that lives up to the promises. I want to challenge all the software vendors — whether they provide value chain management or not — out there to match Foresight and guarantee they will refund their customers’ money if the ERP implementation doesn’t go as promised.