Joseph Ogrodowczyk, Ph.D.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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