Informative guides on industry best practice
Effective Demand Planning
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Performance
T H E O L I V E R W I G H T – W H I T E PA P E R S E R I E S
Introduction
This White Paper captures a number of key lessons from Oliver Wight’s 40 years of
experience in demand planning with some of the world’s best known organisations,
including more than 100 across the Asia Pacific region.
Arguably, all successful business planning and Here we deal with five of those principles
supply chain optimisation begins with effective – those that form the critical elements of a
demand planning. It is a fascinating subject and successful demand planning environment.
By Peter Metcalfe,
while there are always significant implications to And we explore the fundamental behaviours,
Partner, Oliver Wight
consider in terms of geography, organisation, processes and tools that are required to
Asia/Pacific
markets and customers, there are ten keys to establish accountability for the demand
demand planning which apply consistently. planning process, to maximise benefit from
the supporting tools, and to formalise the
key inputs.
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T H E O L I V E R W I G H T – W H I T E PA P E R S E R I E S
1. Ownership and accountability
An essential key to establishing accountabilities The demand review (figure 1) is a key
is to understand the definition of a demand component of the IBP process and results
plan: in a 24-month rolling forecast which is
unconstrained by supply, meaning the
“The demand plan, or forecast, is a formal forecast covers both volume and finances.
request from sales and marketing to the It is important that the demand review can
supply chain to make the relevant materials generate a volume and financial output.
and capacity available at the time that they
anticipate the customer will require them.”
In short, the forecast is a formal request
from sales & marketing to make capacity
become available. Sales & marketing become
accountable for the forecast; supply chain
operations only have authority to make product
if there is a formal request to do so from sales
& marketing. This is a crucial concept and
important to grasp from the outset.
Establishing this accountability calls for an
Integrated Business Planning (IBP) process,
and this process must contain a formal monthly
review of demand.
These days Integrated Business Planning (IBP)
or advanced S&OP, is at the leading edge of
management thinking and practice. Originated
by Oliver Wight, S&OP has developed from
its production planning roots in the 1970s to
the fully integrated supply chain collaboration
process that Integrated Business Planning has
become today. Unlike S&OP, IBP brings with
it, a truly strategic perspective, and integration
is what distinguishes it from its predecessor.
Led by senior management, IBP is a common
sense process for aligning company plans
each month, to allow organisations to most
effectively allocate their critical resources –
people, equipment, inventory, materials, time
and money – in satisfying customers in the Figure 1: The Review Demand
most profitable way.
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T H E O L I V E R W I G H T – W H I T E PA P E R S E R I E S
There are important rules in terms of structure Thirdly, inputs from several sources are needed
for the demand review to ensure accountability. to produce the long range, 24-month forecast.
Firstly, the review should be chaired by the Marketing provides information such as brand
sales & marketing director (if your business plans, product and consumer promotions; and
has separate sales and marketing directors, a sales shares its customer plans and targets
choice would need to be made but experience for new and existing customers. The ability
shows responsibility falls more often than not, to relate the forecast to actual business and
to the sales director). The chair signs off the commercial plans is critical. It also ensures that
24-month volume and financial forecast – the sales and marketing are truly engaged in the
formal request to supply – so it is crucial to process.
have the right person in the chair.
Finally, input from the supply chain team is
Secondly, the demand review should be also vital, because they need to have a clear
facilitated by the demand manager, whose role picture of the overall supply chain. They need
it is to ensure all participants are fully prepared to understand the flow of material through
for the meeting. Attendees are drawn from the supply chain, enabling them to identify,
marketing, sales, customer service, finance for example, any points where inventory may
and key account (or channel) managers. build up with customers, which could cause
a decrease in demand for future periods.
Alternatively, they may have to pre-build
stock to meet a seasonal spike in demand.
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T H E O L I V E R W I G H T – W H I T E PA P E R S E R I E S
2. Statistical forecasting
By its very nature, statistical forecasting is A-class forecast accuracy. This will provide a
data rich and requires systems and tools as an better outcome in terms of working capital.
enabler to produce the required output. There
are, however, some overarching advantages An important key performance indicator
and disadvantages with statistical forecasting. for every demand manager should be the
improvement of statistical forecast accuracy,
Advantages include: which will result in cleaner data and sharper
• It is easy to generate a large amount focus on A-class products.
of numbers
• The process is consistent Forecasting tools should provide valuable
• For large numbers, it is impossible to outputs, which make it easier for sales &
do otherwise marketing to produce accurate demand plans.
• It gives a strong indication of what will
happen and is better than a guess
The disadvantages:
• Filtered history is essential
• It cannot produce predictions based on
anything other than history (knows nothing
of future plans)
• It can be a dangerous tool in unskilled hands
• People must understand strengths and
limitations of the model – who has access?
Statistical forecasting is very much about taking
the benefits of your system functionality and
using it as an input for demand planning.
Let’s consider, for example, how to improve the
forecasting of A-class products, versus B or
C. With some businesses, it is appropriate to
use statistical forecasting for C-class products,
even though the forecast may be less accurate,
because this frees up sales & marketing to
focus on A-class products thus improving
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T H E O L I V E R W I G H T – W H I T E PA P E R S E R I E S
3. Management of assumptions
Businesses need to focus on the 24-month Figure 2 includes a column headed ‘degree of
volume forecast resulting from the demand control’. These are the facts, the drivers and
plan. To make it easier to understand the the levers that support the forecast. Whatever
assumptions behind this, we ask ‘Under the business sector, there are always certain
what conditions will this forecast become facts about the market that may affect the
true?’ For example, if 3% growth is forecast assumptions.
over 24 months, there could be a number of
assumptions supporting that growth. Will it Drivers, for instance, could be material or
come from a general growth in that sector? component prices. Oliver Wight worked with
Is it driven by a new promotional activity? Will a steel company which supplied product to
it come from increased market share? copper mines. We calculated that if the price
of copper were to increase, the demand for
These assumptions are time-phased across our client’s steel product would increase by a
the 24-month period – if a peak is seen in the certain percentage. The copper price caused
forecast, it could be related to the increase in a spike or decline in steel volume three months
market share which is, in turn, related to the later – so the driver for this business was
demand plan, account plan or whatever plan actually the price of copper over 24 months.
is appropriate for that business.
Levers are the factors over which the business
It is vital to get this right since the integrity has full control – pricing, promotional activity
of assumptions is what drives the process. and new product introduction, for instance.
These are in the assumptions.
Degree Now 3 mths 6 mths 9 mths 12 mths 15 mths 18 21 mths
of mnths
control
Volumes resulting 1000 1200 1300 1500 1500 1600 1800 2000
Market Market assumption project
assumption
Growth of None .5% .5% .5% .25% 0% 0% 0% 0%
economy
in sector
Rate of new Control 4 year 2 1 1 0 0 2 2
product
introduction
Competitor activity None Price war Price war Price war New Promo- Promo- Promo- Promo-
products tions tions tions tions
Promotional Some High High High Med Med Med Med Low
activity
Market share Full 25% 25% 25% 26% 30% 30% 35% 35%
Sales assumption Sales assumption projection
Share of Full 40% 50% 50% 50% 50% 50% 50% 50%
customers
Avg # of products Full 5 5 5.5 6 6 6.5 7 7
per customer
Figure 2: Managing assumptions
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T H E O L I V E R W I G H T – W H I T E PA P E R S E R I E S
Inputs for you and your competitor
1 Planning promotions
2 Planned price changes
3 New listings planned
4 New product launches and placements
5 Bids and tenders and other one off demands
6 Competitive activity
7 Planned external influences
8 Customer plans
Figure 3: The demand plan requires multiple inputs
An important point to remember is that behind integrity, and match the baseline forecasting
any market group or product sector, there are system to the assumptions going forward.
usually 5-10 real assumptions that should be
documented and managed over time. If the list There is no such thing as a 100% accurate
extends to 20, the business has probably lost forecast, but the demand manager can ensure
sight of the real facts, drivers and levers. that all assumptions support the forecast and,
thus, that the forecast is realistic.
All assumptions relate back to a process of
consensus – the multiple inputs from marketing,
sales, business development, strategy groups
and, ultimately, the customer.
All inputs are fed to the demand plan and
therefore the demand manager. The role of the
demand manager is to pull together all these
inputs, making sure all the assumptions have
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T H E O L I V E R W I G H T – W H I T E PA P E R S E R I E S
4. Demand Control is an essential part of Demand Planning
Time factors are an important part of demand Outside the time fence, the monthly demand
planning or forecasting. Figure 4 shows a time review meeting can sign off the formal request
fence, which represents cumulative lead time. and change the forecast on a monthly
Cumulative lead time is the time it would take frequency. Inside the time fence, the frequency
to restore a product to stock if that product changes from monthly to weekly, because
was out of stock today. In our experience we demand and supply must match. In other
have found that across many businesses the words, outside the time fence, the business
time fence is typically situated at a point around is in unconstrained forecasting; inside the
three months in to the planning horizon. time fence, the business has to manage the
constraint of supply.
Inside three months, demand planning is about
balancing supply to match demand. Supply Inside the time fence – and therefore the lead
has enough time to react because it is within time – operations and supply chain have less
the cumulative lead time, so if the demand plan time to react, so demand control is called
alters, supply can react to that change. for and the demand manager is formally
responsible for the demand control process.
The key elements of demand control are
matching actual sales to the forecast. There
are inputs from the aggregate sales plan, which
is the formal request from sales & marketing;
the assumptions discussed earlier in this
document; the customer sales plans; the
actual orders; and, if the business operates
in a distributed environment, there may be
additional replenishment orders for other
warehouses.
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T H E O L I V E R W I G H T – W H I T E PA P E R S E R I E S
Time fence
Manage demand Balance supply
to match supply to demand
Demand control
Demand planning
Refinement Supply chain alignment
Demand creation and influence
Time
Figure 4: Demand planning time fence
The role of the demand manager is to monitor manager and sales & marketing, and it is up
the orders and ensure they arrive in the time to sales & marketing to say whether the formal
and volume anticipated by the demand review’s request has changed or not. Supply chain and
formal approved forecast. operations should stick to the supply plan that
was agreed in the monthly S&OP process until
Within this there are various processes, such as they are informed of a change to the formal
forecast assumption and forecast processing. request. It is important too, to understand how
If 200 units remain unsold at the end of a to manage exceptions.
month in which 1,000 sales were forecast,
the process is to ascertain whether these 200 Managing forecast accuracy enables the
units should be rolled into the next month or demand manager to calculate the normal
dropped. If they are dropped, that is a change demand variation for a product. Figure 5
to the formal request. The demand manager is illustrates a simple month, where 100 units
responsible for communicating any changes in are forecast at 25 sales per week.
the formal request through to supply chain and
the supply planning manager. Again, demand
control places accountability with the demand
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T H E O L I V E R W I G H T – W H I T E PA P E R S E R I E S
Week 1 Week 2 Week 3 Week 4
Action Mark for attention Look to increase Make sure you Make sure that the
forecast understand why is understood
as it may effect the
following weeks and
+ 40 70 90 months
Forecast 25 50 75 100
- 15 30 50 Roll or not? Make
sure that the why is
Action Mark for attention Look to decrease Make sure you understood as it may
forecast understand effect the following
weeks and months
Figure 5: Managing forecast accuracy
In this example, in week one, sales can the forecast was achievable and if it could be
fluctuate between as much as 40 per week or managed within the supply chain.
as little as 15. That is normal demand variation
and inventory policy could cope with a variation The key to demand control is to understand
on that scale. In week two, sales could range normal demand and the range of tolerance that
from 30 units to 70. can be accommodated within the supply chain.
This should be used as an input to safety stock
The weekly planning process would highlight and inventory policies.
activity outside normal variation patterns. A
weekly demand review meeting would be held, A-class products should be the main focus
at which sales offered explanations for why and it is here that tolerances should be as
certain products were outside the tolerance tight as possible. If the tolerance for A-class
levels. Reasons could include customers products can be made tighter each week, the
ordering early – which would mean there result will be an improvement in working capital.
is no need to change the formal request. This, in turn, will improve forecast accuracy;
Alternatively, something significant may have forecast accuracy results in less safety stock;
happened to affect an assumption, so a new less safety stock results in lower working
forecast – and formal request – would be capital. That is the focus for the weekly demand
issued to supply. The demand manager and planning process.
supply planning manager would look at whether
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T H E O L I V E R W I G H T – W H I T E PA P E R S E R I E S
5. Measuring and managing forecast inaccuracy
At the point of cumulative lead time, we should accuracy should be measured at that time
save the forecast so we can understand and fence. If cumulative lead time is 13 weeks, save
measure forecast accuracy at this point. It is the forecast at that same stage. Therefore to
likely that every product has its own cumulative check the accuracy of the plan for July, you
lead time, but to keep things as simple as would need to go back to the forecast entered
possible, apply a common cumulative lead into the system in April and measure that to
time to a product group or family. Forecast determine forecast accuracy.
Cumulative
lead time
Emergency Trading Adding and
changes area changing
Stabilise Capacity firm Future
material ordered planning
Today Save forecast
Time
Figure 6: The demand manager has to understand the volatility placed on the supply chain.
Building the foundation for Integrated Business Planning
These five keys to managing demand should provide valuable insight to the weekly and monthly
demand planning process, and should provide a solid foundation on which to build a true capability
for Integrated Business Planning.
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T H E O L I V E R W I G H T – W H I T E PA P E R S E R I E S
About Oliver Wight
Oliver Wight has a 40 year track record of delivering business improvement to some
of the world’s best-known organisations. We believe that sustainable improvement can
only be made through your own people. So unlike other consultancy firms, we transfer
our knowledge to you, which means you can achieve performance levels and financial
results that last.
At the leading edge of management thinking years ago into the fully integrated management
and practice, our Integrated Business Planning and supply chain collaboration process it is
(IBP) model lies at the heart of our clients’ today. IBP allows the senior executive to plan
journey to outstanding business performance. and manage the entire organisation over a 24
Oliver Wight originated Sales and Operations month horizon, aligning tactical and strategic
Planning in the 1970s and IBP can most simply plans each month and allocating critical
be described as advanced S&OP; evolving resources to satisfy customers in the most
from its production planning roots over 40 profitable way.
Oliver Wight Asia/Pacific
131 Martin Street, Brighton
Victoria 3186, Australia
T: +61 (0)3 9596-5830
F: +61 (0)3 9596-5840
[email protected]
www.oliverwight-ap.com
Oliver Wight Europe, Africa & Middle East
The Willows, The Steadings Business Centre
Maisemore, Gloucester GL2 8EY, UK
Oliver Wight Americas
P.O. Box 368, 292 Main Street
New London, NH 03257, USA
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The information contained is proprietary to Oliver Wight International and may not be modified, Business
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reproduced, distributed or utilised in any manner in whole or in part, without the express prior
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