Step 1: Bottom Up Planning
Like it or not, Demand Planning is a data-driven pursuit and the more granular the data, the more accurate the forecasts will be item by item and location by location. Why is that a revelation? Well, recent experiences with demand planners, planning software, and business executives suggest that keeping things simple is more attractive than being able to accurately forecast the weekly needs for widgets at each of your fifteen sales outlets.
Unsurprisingly, the simpler the ‘data’ being used in the planning process the less successful the overall S&OP and IBP regimes are.
- If your Demand Planning system can’t cope easily with as much data as your inventory locations can provide, it’s time to find another system
- If your management reporting system is not simple and exception-based, it’s time to find another reporting system.
The difference between the two is that the planning system should contain data on every inventory movement and should use that data to analyze, forecast, and make recommendations on appropriate actions to achieve target service levels at each inventory location. The bit which should be kept simple is the management reporting which should be presenting only ‘exceptions’ where a variance from the existing demand plan has exceeded pre-determined criteria. A tenet of good management reporting is that reports should only contain information on which a management decision can be made – in an ideal situation the management decision can be to not interfere with the detailed system recommendations.
Step 2: Demand Planning Capabilities required to enable S&OP and IBP
Demand Planning is an integrated process requiring people, processes, systems, and data. The weakest link in these is an indication of the strength of the overall planning capability. Each of the four components has an equal part to play in delivering the following demand planning capabilities. All too often Demand Planning is seen as a review of historic usage patterns with market intelligence and ‘gut instinct’; these are the capabilities which make a difference.
- Market Intelligence ‘Blow Down’ – changes must be able to be ‘blown down’ from the top levels and to be applied to every item
- Demand Sensing and Shaping – Demand sensing is a process which monitors and analyses changes in demand to determine the effect on the current demand plan. With high-performance analytics, you can derive correlations between demand and supply network data, which can provide insight into customer demand and potential supply constraints. Demand shaping uses all available information, including demand sensing data for developing an optimized, balanced demand and supply plan that meets profitability targets and achieves customer satisfaction metrics.
- Leading Indicator Analysis – Leading indicators are measures from which an indication of the value or direction of another variable (for example, a sales forecast) might be obtained. They are called "leading" because their direction historically "leads" the focal variable. For example, we may find that money supply indicates (leads) the future level of consumer spending.
- Rapid Response and Trend Detection – Advanced analytics are used to interpret the significance of small movements in inventory and to be able to form a view of the significance to other items and to inventory segments. The key aspect of this capability is to be able to detect a trend in sufficient time to allow appropriate action rather than waiting until an opportunity has been lost or a problem has occurred.
- Exception, Outlier Identification and Gap Analysis – Demand planning capability must include the ability to identify movements away from the Demand Plan and to identify whether they are changes to the expected patterns, one-off, but normal events or gaps in the Demand Plan which have been highlighted by the occurrence of a particular pattern or the complete absence of an expected usage pattern.
Step 3: Recognise that Demand Planning is Complex & Difficult
The final (for today) often forgotten step to successful Demand Planning is recognizing that it is complex and difficult. Accepting and responding to this complexity appropriately is a characteristic of successful companies. Because planning and forecasting is not well understood there is a tendency to take simplistic approaches.
Typical replenishment methodologies do not provide forward visibility which is required to give management a chance to understand what is likely to happen rather than accept what has happened in the past. The locked down approach only permits alterations based on market intelligence and the expected effect of marketing initiatives
Simplifying through averaging and the use of extended time-periods provides only a top-down view of inventory and limits flexibility and responsiveness. Likely outcomes include: Poor service delivery, Inventory waste, Cost redundancies, Inconsistent Service Levels and costs, Lack of forward visibility and hence management levers, and Inefficiency.
In conclusion: What does ‘awesome’ look like?
- Demand Planning which is based on ‘Bottom Up’ forecasting powered by analytical support
- Supply Planning which is proactive and which provides Time Phased Replenishment Planning based on the Demand Plan
- Service Level and Inventory Optimisation which includes integrated customer service, capital, cost and constraint optimization
- Optimized decision support
- Forward Visibility
- Informed Trade-offs and Exception Management
All these are integrated and inter-connected and interdependent but provide competitive advantages derived from the link between the organization and its planning capacity.
You’ve made the investments in supply chain infrastructure, planning processes, materials handling, collaborative planning and technology, and now the steps outlined above will help to escalate the benefits of your investments. The opportunity to become awesome exists within your business; you just need to take the right steps.