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7/14/2008
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Six Steps to Better Sales Forecasting and Demand Planning

Most companies are immature and uncoordinated when it comes to sales forecasting and demand planning. Follow these six steps to increase forecast accuracy, speed planning cycles, reduce inventory costs, end stockouts and increase customer satisfaction.

What To Do Next

Many companies are trying to improve sales forecasting and demand planning so they can enhance profitability, improve customer satisfaction and gain competitive advantage. Unfortunately, most firms do not approach their forecasting and planning activities strategically. Typically that's because there are pieces missing from the necessary array of people, processes, information and technology components that support better execution.

People. Ventana's maturity assessment found that 47 percent of firms are at the lowest Tactical level. These companies have only basic capabilities when it comes to delegating responsibility, setting and communicating strategy and objectives, aligning actions across the organization and enabling interaction between business units and throughout hierarchies during the planning and forecasting processes. Participation in the processes is limited and the wrong people (or not enough of the right people) have responsibility for managing them. There are no incentives in place to encourage more accurate sales forecasting or demand planning (and, not surprisingly, a low level of accuracy in both).

Addressing the People elements needed to improve sales forecasting and demand planning may not be technically challenging, but it nonetheless may prove to be the most difficult dimension to address effectively. The move to a more integrated set of forecasting and planning processes will require more information-sharing and collaboration than a majority of companies have today. This means having high-level executive sponsors who clearly communicate strategy and connect it to specific objectives that the company measures. If they do it right, organizations will have more of the right people managing these processes and in the information loop. And forecast or plan accuracy (among other desired results) will be measured and rewarded.

Process. Process is another immature aspect of SF/DP. About two-thirds (65 percent) of organizations are at one of the two lowest maturity levels. In general, forecasting and planning frequencies are low, and it takes a relatively long time to prepare them. The two are probably related, but not in a positive way — companies that replan and reforecast infrequently think they have a long time (or that it should take a long time) to do so. Moreover, these companies lack a formal sales and operations planning (S&OP) process — a set of coordinated planning and decision-making actions that not only balance product supply and demand but also link day-to-day operations with business goals, operational planning and financial planning. The purpose of S&OP is to enable decision-makers to reach consensus on a single operating plan that allocates critical resources purposefully to reach corporate performance targets. Companies at low levels of Process maturity take longer to react to events such as outages, and their planning process is confined within their own four walls. For those that work with retail customers, there is no formal attempt to incorporate their views and the requirements of specific stores.

The key steps in advancing Process maturity are to increase the frequency of planning and forecasting and to reduce the cycle time required to complete the processes. Doing this will require executive sponsorship, since it is a core change management action. Implementing an S&OP process is also both ambitious and necessary. Your company may decide to implement S&OP after the sales forecasting and demand planning initiative or before it; the two are complementary, and having done one, the other will be much easier to put in place. For companies that sell into retail channels, the increased interaction and coordination with channel partners on forecasting and planning will have a positive impact on performance.

Information. The information infrastructure that companies work with is somewhat less of a problem than the People and Process dimensions of SF/DP according to Ventana's study. Only 36 percent or organizations are at the most basic Tactical level. However, another 34 percent are only at the Advanced stage, and just 10 percent are Innovative. Most companies over the past 10 years made major investments that improved the richness and accessibility of their enterprise data. Unfortunately, from a competitive performance standpoint, these improvements are now table stakes, and companies must expand the scope of information available. For example, the study shows that few sales forecasts incorporate product-level data, yet this is the degree of detail required to produce a demand plan. Forecasts also do not track promotions and their effectiveness or other events that affect sales. The accuracy of plans and forecasts in these companies are suspect because gaming is rife. Also, sales pipeline data is not widely shared. Companies that sell into retail do not track sales performance at the store level and do not account for lost sales at that level — information necessary for more effective performance measurement and for demand planning accuracy.

For many companies, expanding the scope of information will not be especially difficult, since many companies have the ability to collect more data. However, changing a culture that encourages gaming of forecasts will probably take time and require incentives to change behaviors. Requiring more detailed sales forecasts is not technically difficult, but it will require sponsorship by senior sales executives and incentives to encourage change. These are changes that any organization seeking to use SF/DP as a way to improve performance must consider.

Technology Maturity
Sales Forecasting & Demand Planning Technology Maturity
(click image for larger view)
Technology. Companies in this research scored highest overall in the Technology dimension of maturity, with a combined 37 percent at the Strategic and Innovative levels, and 35 percent at the lowest Tactical level (see chart at right).

Those at the lowest level of maturity rely heavily on their ERP system and spreadsheets to support the forecasting and planning processes. Spreadsheets are an indispensable tool for individual ad hoc analysis and planning, but they act as a barrier to effective forecasting and planning when used in collaborative, repetitive processes such as enterprise-wide SF/DP. In addition, these companies fail to take advantage of advanced, statistically based forecasting techniques and either wing it or rely on simple extrapolation of past trends. Because they lack the technology, these firms are limited to standard-plan-vs.-actuals reporting, some automated plan publishing and data collection from their ERP or other transaction systems.

Technology is probably the easiest of all dimensions to address in some ways, but that doesn't necessarily make it easy. The decisions (there very likely will be more than one) must be made as part of a master plan, not in isolation; if the decisions aren't made in unison, the value of individual enhancements may be negated by an increase in computing complexity that obstructs progress on the Process and Information fronts. While standardization of computing environments is a worthwhile goal, acquiring subpar tools in the name of commonality is self-defeating. Moreover, since SF/DP initiatives will involve people from many parts of the business, it is important to include each type of user in any software selection process. Failure to consider the requirements of all participants can result in the failure of the project, regardless of a high level of care and effort paid to the other aspects of an SF/DP initiative.

Performance Management. The best-performing companies include performance management in their SF/DP initiatives, according to Ventana. Perhaps the most important element of this is creating performance alignment – that is, linking strategy with corporate goals and objectives in a way that makes best use of the company's resources by coordinating the efforts of every member of the organization.

When SF/DP is part of an overall performance management process, it aligns people, processes and technology and ties operations to objectives. To align people and processes, you must be able to coordinate decisions, at both individual and departmental levels, based on accurate information and clearly understood performance targets. That coordination should enable you to use historical benchmarks, both internal and external, as references for driving organizational change.

While most companies can measure performance, few can apply their systems and processes to manage performance. This is because they have not integrated performance management across manufacturing, operations, sales, marketing and finance departments. One of the first steps in achieving this integration is to include SF/DP as part of your corporate assessments and performance reviews. Supporting performance management requires having an ongoing program to define activities and to link them to objectives. Ventana also recommends that you track the progress of the performance improvement process itself with a report card.

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