what you are describing is reality in most places. However I strongly believe that you must agree on THE number.

One number does not mean, that this number is always correct, however it ensures that everybody is working against that ONE agreed number. Otherwise there is a risk, that i.e. Supply Chain always second guesses the demand plan (because they know it better) and so does everybody in other business processes ending up with a huge pocket of contingencies, which in fact are wast (e.g. overcapacity, high stocks, obsoletes, to many resources, etc.)

I fully agree with you, that conversation is key here. Everybody must get an understanding, what a bias (and this is not only demand bias think about the CEO always asking for more than he actually needs to please the banks) causes in terms of waste. A lot of it has to do with trust and openess and the reward culture in the organisation. And you are right in saying, that it is also important to understand the assumptions behind the number. It is much better to discuss and challenge those assumptions than the number.

Helmut Runschke

Using this information, you can make adjustments in the supply chain. If the official forecast is biased high, cut you safety stock levels. If the forecast is biased low, increase the safety stock levels. If there is a large range around demand, work to postpone product and keep it in sub-assemblies that can be used in other products.

I am not arguing for doing this in the back room by yourself. Make it part of the management team discussion. Involve sales, finance and the general manager. I have found this to make for a much richer and more useful discussion than arguing about how to change the demand forecast. It requires the management team to be willing to trust each other with the truth. It also requires the operations team to have control of the important levers within the supply chain.

I expect many will argue that if you know the forecast is biased, change it. Sounds like a good plan, but I have found that the information you gather in a discussion of the weaknesses and risks of the current demand forecast yield much more useful information than a discussion about whether the forecast should be 3 or 7.

Of course, if you can agree on making a forecast change, you should make it, but don’t stop there. You are ignoring a lot of important information if all you do is focus on the one number in the demand plan. You need to understand what is behind the number.

I am interested in what others think about this approach. I know it worked successfully for us.

Ed Hancock

Hope this helps
Steve Schaffer

I used to be in charge of conducting the S&OP meetings and I have learned that sales contribution is key for the success of planning.

It is common to see that sales people is not aware about statistics, trends and details upon products that are imperative for a good planning of materials and resources. The most of data comes from historical of sales and open proposals where you try to extract information in advance to start operations with less risk possible.

There is a “war” agaist working capital, mainly attributed to avoid building inventory of low turns goods. At same time, the market is calling through sales to reduce the lead times and improve the on time delivery.

Should not we have a crear “pact” with sales in order to force them to dedicate a time for planning the sales, conduct the market study and so define the “rules” for delivery guide lines? I usually feel operations commited to delivery the best products, at lowest costs and highest quality but frequently penalised by sales due to lack of information.

According to group members experience, how to “bring” the sales force for a truth contribution on S&OP?

Regards to all,

Rogerio Amarello

This is NOT to suggest that no planning must occur at the point of manufacture. But under such a “pull-based” system, the planning should be accurate (because it is at the highest level of aggregation) and it should be based on filling “buffers” in the pull-based replenishment system, nothing more.

Under such a system, forecasting profits should relatively easy and, after all, it is the financial forecast that is most flexible. Missing the financial forecast does not leave the company with too much or too little inventory, or make one guess incorrectly on the amount of warehouse space or manufacturing capacity one needs.

Great points!!! You completely nailed one of the most frustrating exercises in Planning. What has baffled me time and again is all of the work and preparation that goes into a well thought-out “bottom-up Demand Plan” that may not be viewed as accurate because it does not match the “top-down Financial forecast/budget”. I am in your camp … forcing these numbers to align may actually be detrimental to delivering solid results.

A “Two-Number” system actually seems to work best, but there is a catch. The angle here is to get the Consensus Demand Plan (realistic) to become the baseline for the Financial Forecast. Therefore, Finance starts to build their Forecast/Budget with the aligned realistic Demand Plan, but they have some license to modify projections for risk/opp messaging in the Financial Forecast. As you point out, as long as all parties are aware of the gaps and the rationale, the organization can plan successfully.

I agree that the S&OP process has to execute against the demand plan/forecast. We only have to look at the recent economic downturn to understand the falicy of driving the S&OP from the budget.

But I think that this is only true in the “near term”, where near term term will depend on the industry. I know of some companies that run a 3 month S&OP in weekly buckets and others that run a 10 year S&OP in monthly buckets. Typically the longer the term the more companies use “range” forecasting (optimistic, pessimistic, realistic) rather than “single number” forecasting.

In the longer term though, the S&OP plan should focus not only on risk, but also on demand shaping activities which can range from new product introductions, to promotions, and should also include risk factors such as legislative changes. There is a lot of uncertainty this far into the future, which is why companies use range forecasting. The S&OP process in the longer term should be focussed on determining how to execute at an operational level to meet the corporate financial objectives. Many in the analyst community refer to this activity as Interated Business Planning (IBP).

But I agree that the demand/supply balancing aspect of S&OP should be driven by a realistic forecast, not the budget.

There is also a great need to reconcile the forward looking plans of all planning activiities, but particularly the S&OP process with the corporate financial goals, typically contained in the budget. Too much of Corporate Performance Management is focussed on analysing what has happened using BI tools. IBP can provide the projected financial performance of the company, which is of course a lot more valuable than analysing what has happened. One of the key outputs of IBP is the variance between the budget and the plans using financial metrics. To do this effectively requires the seamless integration of financial and operational information. It also requires projections of average selling price, component costs, and operating costs. In the not too distant future it may even require carbon footprint calculations.

In summary, while I agree that the near term S&OP should be driven by a realistic demand plan, I think the budget is a better number to use in the long term as it encapsulates corporate financial goals. In the longer term the purpose of the S&OP should be, as you point out, to identify the gaps and the risks involved in reaching the corporate financial goals.

Regards
Trevor Miles
Kinaxis