Consensus Demand Management for Better Planning You can t survive without it! Ken Titmuss, CFPIM, CSCP, CPF, SCOR P, PLS Ken Titmuss Ken Titmuss, CPIM, CFPIM, CSCP, has an Honours degree in Production Engineering from Loughborough University in the UK as well as his CFPIM and CSCP from APICS in the USA. For the last eighteen years Ken has run his own business, Kent Outsourcing Services (KOS), focusing on education and consulting in operations and supply chain management. KOS is a member of the PSQ consulting group who are the SAPICS national Associate in Cape Town. During this time Ken has worked with over 160 companies in Southern Africa in many sectors including, automotive, engineering, electronic, electrical, food, agriculture, fishing, clothing, medical and mining, to mention a few. 1
Agenda Why is Demand Management important? Where does it fit into the bigger ERP picture? The components of Demand Management Using Sales History vs. Demand History Demand Management vs. the Traditional Budget Agenda Forecasting Time Horizons The Demand Team and its Budget The Consensus Demand Management Process Forecast Accuracy Summary 2
Why is Demand Management so Important? If you don t have a reasonable idea of your forecasted demand, how can the planners and factory hope to satisfy the actual demand? Why is Demand Management so Important? Good businesses are full of good processes Budget, resources and people Product Development Customer Order Fulfilment Production Shipping and Distribution What about Demand Management in your business? 3
Why is Demand Management so Important? Mostly we rely on salesman sucking their thumbs raw at month end trying to come up with some figures. Forecasting horizons are usually short a month or two. There is generally no budget for the process and no tools to help with the process. What is the Objective? To provide input to three important supply planning processes in your business: Strategic Planning Executive Sales and Operations Planning Master Production Scheduling Developed from same data Plans support each other 4
Where does Demand Planning fit into the bigger ERP picture? Your business is split into two halves; demand planning and supply planning. Demand planning must come first. Demand Supply Strategic Planning ERP Planning Branch Sales Forecasting Branch Inventory Management ERP Planning ERP Execution Consensus Demand Management Distribution Requirements Planning Purchasing Sales & Operations Planning Master Production Scheduling Materials Requirements Planning Shop Floor Control Resource Requirements Planning Rough Cut Capacity Planning Capacity Requirements Planning Feedback ERP Planning and Control Hierarchy 5
Demand Planning Cycles Although Strategic Planning only takes place annually with maybe quarterly updates...... Executive Sales and Operations Planning and Master Production Scheduling are monthly processes...... therefore Demand Management also needs to be a monthly process. Demand Planning Cycles Because no supply planning can take place until the consensus demand dplans have been circulated...... demand planning has to be carried out as soon as possible in the new month...... preferably in the first week! 6
Components of Demand Management Demand Management consists of the Known, the Unknown and the Really Unknown. Components of Demand Management The Demand Management process can be divided id d into 3 parts: The Known The Unknown The Really Unknown 7
The Known This part is easy! These are your customer orders Must be included in Demand Management Must be on your system ASAP You know exactly what is required and when Normal orders consume the forecast Abnormal orders are added to the forecast 8
The Unknown This part gets more difficult Current Customers and Products Statistical Forecasting Customer Collaboration Use Pareto on customers and/or products Result is a consensus forecast The Unknown Generally in this area the salesman is presented with a sales history spreadsheet and at best probably uses a moving average to predict the future. Moving averages are only good for stable, non trended, non seasonal products...... how many of these do you have? 9
Using a 3 Month Moving Average Forecast Accuracy 41% Using Multiplicative Winters Method Forecast Accuracy 74% 10
Quantitative Statistical Forecasting It s a no brainer! Geta relatively inexpensive statistical forecasting tool and...... improve your forecast accuracy considerably...... At the press of a button, in literally seconds. Quantitative Statistical Forecasting Many of these tools allow you to adjust the forecasts in collaboration with you customer and/or sales and marketing. You have limited time so use Pareto, only collaborate on 20% products/customers that give 80% of you business. 11
The Really Unknown This is where the process gets quite difficult Here we use Qualitative techniques: Delphi Market Surveys Historical Analogies Life Cycle Analysis Informed Judgement The Really Unknown We take into account: Quotations New product/customer introductions Environmental factors: Forex / Interest Rate Oil / Commodity pricing Promotions yours and competitors Other events Business cycles Weather / Car Sales / Birth Rate/ Disposable Income/etc, etc. 12
Sales History vs. Demand History The future needs to be predicted based on demand, not sales. Sales History vs. Demand History The Sales History is a record of what you have sold on a monthly basis, not necessarily a record of what the customers demanded during those months. Let s have a look at a few examples why this Let s have a look at a few examples why this can be the case: 13
Sales History vs. Demand History No sales because you had no stock. No sales because you didn t have the materials to make the product. You don t want to forecast no sales in a similar period next year! What was the true demand? Sales History vs. Demand History You had huge sales in a period due to a once off, never to be repeated tdorder. What was the normal demand? You don t want to forecast high sales in the same period next year. 14
Sales History vs. Demand History In some months you have negative sales, do you really want to forecast negative sales next year? What was the real demand? Offset negative sales from previous period. Sales History vs. Demand History Sometimes products are upgraded slightly and have their SKU number changed. It is ostensibly the same product, so copy old SKU demand history to new SKU number. 15
Sales History vs. Demand History Demand could be as a result of an event, which needs to be flagged otherwise it will try to be treated as seasonality. Christmas is seasonal, Easter is an event! Your promotions, your competitor promotions. Sales History vs. Demand History So develop a demand history file from your sales history and update it monthly with the latest sales history and massage accordingly. Take out all dead products. Don t drive your statistical forecasting system directly from sales history. 16
Demand Management vs. The Budget You can t drive a business s operations with The Budget unless you want to go out of business. Demand Management vs. The Budget The term budget is banned from demand management. Business has to be driven using a continuously updated demand plan, generally on a monthly basis. Don t adjust your consensus demand plans to The Budget. If way out, improve budgeting process, which h should be driven by the demand management process anyway. 17
Forecasting Time Horizons At different planning levels in the business you need to be looking forward out to different horizons. Forecasting Horizons What we find in many businesses it that forecasts/plans only extend to a few weeks or months. This is not sufficient if you want to plan and control your business properly. Good long term planning makes you pro active not reactive 18
Forecasting Horizons Strategic Planning Forecast required in total, Dollars, Tonnes, Hectolitres, etc, etc. Forecasting horizon should be about 3 5 years, for a normal business. If you are a chemical company, power generator, oil refinery probably your horizon is closer to 10 20 years. Forecasting Horizons Executive Sales and Operations Planning Forecast required in production product families. Forecast horizon should be about 2 years. The time it takes to significantly change your capacity. At this level we plan the volumes. 19
Forecasting Horizons Master Production Scheduling Forecast required in finished product detail Forecast horizon should be about 6 months. The cumulative lead time to manufacture your product, plus a look ahead period. At this level we are planning the product mix. Forecasting Horizon Summary Strategic planning 3 to 5 years In totals Exec Sales & Operations Planning 2 years Inproduction product families Master Production Scheduling 6 months In finished product detail 20
The Demand Team Getting the Consensus into Consensus Demand Planning The Demand Team Good demand planning can t be carried out by a single person or function. We need to assemble a group of people that have insight into what drives demand in your business. 21
Demand Team In the past when the salesman got the forecast wrong again, we went and beat thim, hoping for a better job next time. The first rule of forecasting is that it will be wrong. Sothe salesman was on a hiding to nothing. And, they weren t keen to participate in the process. Demand Team Who to include: Demand Manager Sales and marketing New Product Development Master Production Scheduler Financial Manager Consultant or others with demand insight 22
The Demand Management Budget We need to apply, resources and people to this important tprocess, therefore it should have a budget. Demand Management Budget The first thing you don t do is rush out and buy the most expensive demand management software you can find, chances are it will never be implemented. Develop a process and walk before you run. Don t buy the Ferrari until you have learned to drive properly in the VW Golf! 23
Demand Management Budget Firstly, buy a simple inexpensive statistical forecast package, it will save you masses of time and provide a more accurate forecast than a moving average on a spreadsheet. When you have budget hire a demand manager with the right credentials IBF Demand Management Budget Don t try and combine the demand management position with the supply manager (MPS) position. The poor incumbent will not know what hat he/she is wearing and do a half hearted job on both sides of the fence. Both functions require a totally different expertise. 24
The Consensus Demand Management Process Putting it all together to provide you g g p y with an excellent, continuously improving process. 25
Forecast Accuracy You can t improve that which is not measured. d Forecast Accuracy If you have a forecast it has to be measured It doesn t matter what your current forecast accuracy is... aslong asit is improving month... as long as it is improving month by month. 26
Forecast Accuracy What should be your accuracy objectives? In a recent survey it was found that at product family level: Top 20% best performing companies 91% Middle 50% performing companies 73% Bottom 30% performing companies 54% Forecast Accuracy Our rule of thumb: Strategic Planning Total >95% S&OP Product Families 80 to 90% MPS Product Detail 60 to70% 27
Summary What are your next steps? Summary Forecasting, or what should be known as consensus demand dmanagement, is far too important to leave in the hands of your salesman. You need to have a reasonable idea of the You need to have a reasonable idea of the demand on your business from a team that has insight into what drives your demand. 28
Summary Demand Managements 3 Components: The Known The Unknown The Really Unknown Summary Drive your demand management process with a demand dhistory, not the sales history. Put a budget together for the process. Statistical i lforecasting tool Demand Manager 29
Summary In the time allotted we haven t had much time to go into dtil detail. Do further research. Study forecasting and demand management. Object of today was to impress upon you the incredible importance of the process to your business. Summary In words of Jason Jennings Think Big, Act AtSmall. ll Have that big vision of your ultimate Consensus Demand Management process...... but get down to the detail and work on the small stuff. 30
Summary Time for procrastination is over. Start developing a process...... that will assist you with company s future growthby focusing on your product demand, today. 31