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About Demand Planning LLC

Demand Planning LLC, based in Boston MA, is a consulting boutique comprised of seasoned experts with real-world supply chain experience and subject-matter expertise in demand forecasting, S&OP, Customer planning, and supply chain strategy.

We provide process and solutions consulting, as well as customized training across a variety of industries.

Through our knowledge portal DemandPlanning.Net, we offer a full menu of training programs through in-person and online courses, as well as a variety of informational articles, downloadable calculation templates, and a unique Demand Planning discussion forum.

  • 11Jan

    As a consultant, I get asked this question a variety of times.  Why should we improve forecast accuracy?  What is it worth to us?  What is the business case to spending money to improve the process and implement some expensive demand planning software?

    There is value in this for sure – the evidence comes from the fact that year-after-year companies continue to hire more demand planners and invest millions of dollars in putting together processes and software packages.  Now to dissect this, let us look at the Service-Cost Balance model that we preach in our workshops.

    Improving the demand forecast directly gets to two things that are important to companies:

    1.  Increasing the top-line – Improve customer fulfillment and delivery and increase the level of Sales.  Nothing works like reputation or service performance.  People flock to your company products and services if they are satisfied with what you offer.  The converse will be painful – bad news spread like wild fire.

    2.  Improve the bottom-line through process efficiency – Optimize inventories by trimming the level of inventories, cutting obsolescence and producing just enough to meet your demand.

    3.  Eliminate process costs – Expediting, over-time that may otherwise be required to fulfill volatile and unpredicted customer demand.

    Now if we want to quantify the benefits from forecast accuracy, it is difficult to quantify the first item.  What is our lost sales?  What is the effect of one point reduction in fill rates?  Did it cause lost sales?  Did we lose a customer?

    It is a little easier to look at the savings in inventory through improvements in forecast accuracy.

    At any time, your inventory level is comprised of Safety Stock to meet demand and supply uncertainties and the inventory needed

    But your average inventory = Safety Stock + Lead time demand or (order quantity if you are using the min-max method to deploy).

    We can find a relationship between the amount of safety stock you can decrease for each percent point reduction in Forecast Error, since forecast error figures directly in the Safety Stock calculation.

    Safety Stock = Forecast Error * Service Level Quotient * Square Root (Lead Time)

    From simple calculus, the effect of one unit reduction in Forecast Error is just the product of Service Level Constant * Sqrt (Lead-time).  So at 98% service level with a lead time of say two months, the effect of one unit reduction in Forecast Error is 2.90 Units.

    What is the impact of a % point reduction in MAPE?  The answer depends on the level of your current forecast quality.

    However, the relationship of inventory reduction to your current MAPE Level is not linear.   The calculation on the reduction in inventory is a function of your current level of forecasting.  This determines the quantity of inventory reduced for each percent point improvement in Forecast error.

    If you are at 50% MAPE on average currently, the reduction would be 2% of inventories for each point improvement in forecast error.  IF you are at 25% MAPE currently, the improvement will be 4% for each point reduction.

    This is actually a conservative estimate since it considers only the safety stock component of the total inventory.

    If your forecast is an over-estimate of the Lead time demand, then you carry additional inventory not accounted for in the above calculation.  This will also introduce obsolescence risk.

    So a lower bound is to just use the reduction in safety stock but being aware that a better forecast will also allow you to deploy better to the lead time demand.  Better forecast can also help you reduce production and logistics costs such as over-time and expediting costs.

    So if you have $200MM in inventory and let us assume that 25% of that total is safety stock then you have $50MM in safety stock.

    A reduction of 10 point MAPE will result in a reduction of $10MM in safety stock.  10 point MAPE reduciton =20% reduction in Safety Stock or $10MM assuming currently your average MAPE is 50%.

    Again this does not consider any reductions in the inventory carried to cover lead time demand (particularly due to forecast bias) or obsolescence that results from unsold inventory.  Obsolescence is a bigger risk since you lose all of the inventory investment.

    Next question is what does the reduction of $10MM in inventory really mean to you?  This completely depends on the inventory carrying cost for your company.

    Inventory carrying cost can be any where between 12% to 40% per year.  So in financial terms, a $10MM reduction in inventory could result in bottom line improvement of $1.2MM (at 12% carrying cost) to $4MM.

    Now we are talking real dollars……………..

    Let us try to save some of those costs by bettering the demand plans!

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  • 23Nov

    This has been a recurring challenge and a potential land mine when it comes to the raw number crunching in demand planning.  Zeroes and Nulls……….

    Is the Null the same as a zero?

    Although excel formatting can code a zero as a dash, can a zero be interpreted as a Null?  If so when and when not?

    Similarly, including some may also be bad for the health of your demand forecast.

    Leading zeroes – Will you include them in developing a statistically modeled forecast.

    How about nulls in the middle of the data? These either show up as nulls, .dots, or some times as zeroes.

    Ok.  Now that I have asked too many questions, I will also propose some answers for you.

    Generally Nulls can never be treated as zeroes.  They are different things.  Nulls mean nothing, the absence of anything.  Nulls mean no data or no observation.  If you average a series with nulls, the nulls count in either the numerator or the denominator.  Zeroes are different.  If you average them, they will have no contribution to the numerator but will count as an observation in the denominator so you will have your average reduced with the presence of zeroes.

    At least in demand forecasting, we can coin the following rules:

    1.  Leading Zeroes can be interpreted as Nulls. 

    At times a product may be slated to launch in a specific month and hence the system may start recording zeroes as data if the launch is delayed.  Leaving them in may result in a poor statistical forecast.

    2.  Nulls in the middle can be interpreted as zeroes.

    Some systems may record nulls if there is no demand activity.  However if the nulls occur in the middle of a time series history, I would recommend they be treated as zeroes.   Most intermittent demand data is characterized by zero sales volume frequently.  If you leave them as nulls, this will inflate your average and generally result in a upwardly biased demand forecast.

    Imagine this scenario:

    90 Null Null 90 Null 90 Null Null 90 Null Null Null 90.

    If you ignore the null, then your demand forecast will be 90 per month if you use the average as the model to forecast. If you interpret the null to be zero, then your average will be 30 units a month.  If the customer has a three month requirement of 90 units and orders only once in every three months, then 30 per unit seems more likely as a forecast.

    3.  Trailing zeroes and Nulls

    Exclude or include?  What do you do with these?

    They look harmless to me if you have a decent exponential smoothing engine. Do you agree?

    We will discuss our approach in detail in our Demand Planning and Sales Forecasting Tutorial workshops scheduled for Feb 2013 in Dallas, TX.  We go into the nuts and bolts of many practical challenges that demand planners face.  This is why our workshop is considered to be the most practical and hands-on when it comes to Training for Demand Forecasters.

    Ignoring these nulls and zeroes can be perilous and lead you down the wrong path.  This may affect both your forecasting and inventory setting.  More dangerous to ignore these if you are calculating safety stock parameters.

    You can see more info on our workshop at http://demandplanning.net/demandplanning_tutorialCA.htm. I am told that we have just a handful of seats left for the early bird quota.

    Have a great holiday!

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  • 04Jun

    We discussed the S&OP Process in our two-day tutorial.  There was a question about if there is a list of steps in implementing such a a process.  Here is my outline and our implementation approach as a company:

    1. Assess the key objectives of the Planning Process- Identify and Involve stakeholders in Sales, Supply Planning, Operations, Marketing, and Finance during the process definition phase. Interview key General Managers and understand their informational needs from the Sales and Operations Planning process
    2. Identify the key pain points- Since Sales and Operations Planning is a collaborative process, the key is in establishing and improving internal communication and collaboration. The best approach is to start with the question, where do we have communication roadblocks? We need to identify areas where communication is missed, or ineffective. We also need to identify where communication is too late to be acted upon. An example of such a pain point will be to learn of a service failure for the first time in a score-card meeting after the end of the month
    3. Identify the Key Component Meetings- The key step in the process design is to plan and establish effective communication and decision sessions among the various functions. Our meeting design will derive from several white boarding sessions that revealed the various pain points in the process (step 2) and the key touch points in the organization. Where the touch points are heavy and involves frequent information sharing, that will indicate the need for a formalized information sharing session. Typically, the key meetings include the Demand consensus meeting, Supply Collaboration Meeting, the General Manager Review meeting, and the Operations Review meeting. In most organizations, there will be an executive Sales and Operations Planning meeting. But the type and content of the meeting depend on the needs of each organization
    4. Design Content and Timing of Meetings- Working with functional players from the key touch points, we will establish the type, sequence and timing of each meeting during the planning period. Through white boarding sessions, we will help you establish the key contents and the objective of each meeting
    5. Meeting Templates- we will help you design appropriate templates and summary reports to facilitate the meetings to be focused on key issues and arrive at a consensus recommendation. Demandplanning.net, with a vast collection of process reports in its knowledgebase, will help you design a template that is customized to the process needs
    6. Supply Collaboration Process- Once a consensus demand forecast is finalized, Supply planners will refresh their planning systems to arrive at their new schedule with constraints. The new demand may point to imbalances in their supply process including issues in raw materials, finished goods inventory, manufacturing schedule, and capacity constraints. The collaboration process should consider these issues to problem solve and decide a set of supply constraints to be acted on in the Operations Review meeting
    7. Budget Shortfall Review- Depending on the pain points of the current organizational process, we design this meeting to reconcile top-down financial and marketing forecasts with the operational demand plan. The GAP identification and resolution is a major part of the Sales and Operations Planning Process
    8. Exception Management- A well-defined process will thrive on exception management. All Component meetings will start with a follow-up of issues from the previous meeting and deal with exception issues highlighted by the meeting templates. A concise design of meeting templates will help you achieve brief, sharply focused, effective meetings
    9. Sales, Operations and Inventory Planning- This is a key part of the Operations Planning and review. The organizational consensus team will examine the Sales, Production and Inventory Plans and discuss major issues and bottlenecks
    10. Supply constraints and Scenario Management- The budget shortfalls may trigger management decisions on additional promotions and even key new product introductions. The process should be designed to be flexible enough to accommodate key top management requests to verify supply availability for key sales generating events. Promotions on key items can only be offered if adequate inventory is available or can be turned around in time to meet the promotional demand
    11. Value Chain Metrics- The Sales and Operations Planning process will be guided by the various value chain metrics that highlight performance and pin point areas of improvement. The Metrics should be a good indicator of the state of the business and should call for quantifiable corrective action. The design of the metrics should help you align incentives holistically to help achieve the organizational objectives. The key metrics include customer service (FTFR), inventory targets, forecast accuracy, on-time delivery, order cycle times. Demandplanning.net will help you design metrics customized to how various functional players are aligned in your organization. With our research and analytics in this area, we have a unique advantage in designing proper Supply Chain Metrics and implementation

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  • 20Mar

    I saw this interesting discussion posted on a linked-in forum.

    Balancing Inventory and Service

    With a “hot” new product, or even your cold old products, how do you balance inventory and service? Forecasting isn’t the way. Who even listens to the weather man anymore?

    This makes me think about the utility of demand forecasts in corporate Supply chains.

    1. Do Supply chains really use demand forecasts?  I have seen many inventory strategies actually using the standard deviation of historical demand in their calculations.  What happened to the forecast error?
    2. If forecast is not used, what is the alternative?  What happened to medium to long-term planning?

    So I decided to summarize my response to this question:

    As long as you don’t leave your demand forecasting to the weather man, you should be alright.  Most supply chain problems originate by ignoring the forecasting that is happening through out the organization.  In a survey I remember reading a couple of years ago, on average 50% of the people in an organization were forecasting something or other.

    If the forecasting process is bad, fix it! You ignore and move on at your own peril!

    Even folks in supply chain who badmouthed forecasting actually were using an average run rate of some sort to determine their inventory calculations.  There is an article from the Harvard Business Review in that talks about most organizations operating inside the inventory curve rather than on it.  The inventory curve is a set of feasible points that trade off between service levels and required inventory.

    Perhaps the reasons many companies operate inside the inventory curve, as suggested by the article, is because the supply chain function ignores the demand forecast and uses the historical average as their forecast for their inventory strategy.

    If there is a reasonably good demand planning process installed in any organization, we can establish this will easily beat out the “run-rate” or any other average hands down.

    Even in the case of iPad, a hot new product, the decision to create the product was a result of a market forecast that estimated potential users and share. The decision to build capacity and manufacturing was based on a long-range forecast.

    Why different functions create forecasts?

    Inventory is a problem but is only one of many problems. Organizations need to solve a variety of challenges and constraints to solve so they can thrive and grow. Organizations need to plan for the medium to long-term and manage the business accordingly. 50% of the functions forecast but NOT necessarily for inventory purposes.

    • Senior management needs to forecast an EPS for investors and need to hit it within a reasonable threshold.
    • Companies need a long-term forecast to assess what they need in capital investment and where and how to build the facilities for expansion.
    • Even HR needs a forecast.

    Thinking every function will be forecasting for the supply chain is like the Dilbert Cartoon “Sure – I will drop everything else and will focus on your problem.

    So forecasting and planning is embedded in various functions and various forms through out the organization and is unavoidable.  The key is how to leverage the forecasting responsibility and accountability already installed into a holistic process that can let you piggy back and obtain a supply chain forecast for your short-term and long-term planning.

    Ignoring the corporate forecasting machine and creating an isolated forecast or an inventory deployment algorithm is a sure way to significant troubles – what we preach as the fragmented planning process or the lack of the often glorified “S&OP” process.

    In reality, 50% of the organization involved in forecasting is not the problem. The real problem is when supply chain decides to ignore the forecast or the forecasting process and decide to move on in isolation.

    Demand Planning LLC does use and recommend advanced algorithms for demand forecasting and leveraging customer input. But that is only half our story.  We work with Sales, Marketing, Supply chain and Senior management to drive a holistic process to leverage demand information and build forecasting processes that are used across most of the organization.  We call this consensus demand process or integrated business and operations planning.

    APICS and supply chain professionals need to re-think their philosophy when they decide to abandon/ignore/side-step the demand forecast.  Anyone who does so actually does a dis-service to the organization and to the profession!  Ignoring the forecast can be a great marketing technique to sell expensive software that preaches using volumes of transactions data.

    You can read more about the Demand Planning process at

    http://demandplanning.net/demandplanningconsults.htm

    and the S&OP process at

    http://demandplanning.net/sales-and-operations-process-redesign.htm

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