what is world class forecasting? a perspective on 25 years of research presented at the florida west...

What is World Class Forecasting? A Perspective on 25 Years of Research

Presented at the Florida West Coast Chapter MeetingAPICS InternationalJanuary 10, 2006

Mark A. Moon, Ph.D.Associate Professor and Director, Sales Forecasting

Management ForumUniversity of Tennessee

Knoxville, [email protected]

http://bus.utk.edu/ivc/forecasting

Florida West Coast APICS presentation © 2006, Mark A. Moon

World Class Companies …

Make Demand Forecasting a critical part of a FORMAL, DISCIPLINED PROCESS to match demand with supply


Financial Management

Demand Management Supply Management

Demand/SupplyIntegration(S&OP)

SUPPLYProduction,

Logistics, etc., andUpstreamSuppliers

DEMANDSales and

Marketing, Downstream

ChannelPartners

Finance

CapacityForecast

Demand Forecast

FinancialGoal

OperationalPlan

Demand Plan

FinancialPlan

Input to S&OP

Output from S&OP

Our focus will be

here!

Integration of Supply and Demand in Enterprises: The Role of Demand Forecasting


What is World Class Demand Forecasting? A Program of Research to Arrive at a “Vision”

Phase 1: 1982--Survey of Techniques Used by 157 Companies (Journal of Forecasting, 1984)

Phase 2: 1992--Survey of Techniques, Systems, and Management Approaches Used by 208 Companies (Sponsored by AT&T Network Systems) (Journal of Forecasting, 1994)

Phase 3: 1994-6--In Depth Analysis of 20 Companies (Sponsored by AT&T Network Systems, Andersen Consulting, Anheuser-Busch, and Pillsbury) (Business Horizons, 1999)

Phase 4: 1996-Present--Sales Forecasting Audits (International Journal of Forecasting, 2003)


Phases 1 and 2: The Surveys (Journal of Forecasting)

Technique Familiarity and Satisfaction - moving average, exponential smoothing, regression

Jury of Executive Opinion Used Across Horizons and Levels

Accuracy - Key to Performance Evaluations Accuracy - MAPE Most Often Used Little Change in Performance from 1982 to 1992


Phase 3: The Benchmark Companies (Business Horizons)

20 Top Performing companies included: Anheuser-Busch, Becton-Dickinson, Coca-Cola, Colgate

Palmolive, Federal Express, Kimberly Clark, Lykes Pasco, Nabisco, J.C. Penney, Pillsbury, ProSource, Reckitt Colman, Red Lobster, RJR Tobacco, Sandoz, Schering Plough, Sysco, Tropicana, Warner Lambert, Westwood Squibb

Multiple interviews conducted at each site Anyone affiliated with sales forecasting

considered a candidate to be interviewed


Forecasting Dimensions

FUNCTIONALINTEGRATION

PERFORMANCEMEASUREMENT

APPROACH SYSTEMS


Functional Integration

Forecasting C3

Communication

Coordination

Collaboration

Both Internally and across the supply chain


To Improve Forecasting Effectiveness On The Dimension Of Functional Integration:

Recognize Forecasting As A Function, With Adequate Organizational Clout, That Has Responsibility To Provide Forecasts At Levels And Time Horizons Useful For Downstream Users

Move Towards A Consensus Approach To Forecasting Management Encourage:

Common Goal Setting Communication Free Access To Relevant Information Across Functional Areas Collaboration With Trading Partners

Provide Performance Rewards To All Personnel Involved In Forecasting Process

Put Forecasting in its proper place in a corporate-wide S&OP process





APPROACH SYSTEMS


Approach

Plan versus forecast

Techniques

What to forecast?

Training


To Improve Forecasting Effectiveness on the Dimension of Approach, companies should:

Reconcile top down and bottom up forecasts Separate forecasts from business plans (remember

S&OP?) Segment key customers (CPFR, VMI, or CMI customers) Segment products (ABC Analysis) Understand game playing (sales force and channel

partners) Top management support Training





APPROACH SYSTEMS


Systems SYSTEMS ARE CRITICAL TO FORECASTING EXCELLENCE,

BUT THEY’RE NOT SILVER BULLETS! CONCENTRATE FIRST ON YOUR PROCESSES

Hardware and software Computers Communications

Develop, analyze, and distribute forecasts Information

Storage Retrieval Transfer


Principles of Sales Forecasting Systems (Supply Chain Management Review)

Tool should fit the problem, not the other way around System serves as a communication vehicle between users

and developers of the forecasts Complex forecasting systems should not look that way to

the user Think in terms of a “suite” of time series techniques, not

just one technique Think in terms of qualitative, time series, and (nor or)

regression analysis Let the system tell you which technique to use You tell the system which forecasts are important


To Improve Forecasting Effectiveness on the Dimension of Systems, companies should:

Invest in adequate forecasting system infrastructure

Common ownership of data base and information

systems

Customized on screen and printed reports

Establish linkages to key customer demand data





APPROACH SYSTEMS


A Mantra to Hang on your Wall

WHAT GETS MEASURED GETS REWARDED, AND WHAT GETS REWARDED

GETS DONE


Performance Measurement

Metrics

Forecasting effectiveness (not just accuracy)

Explanatory information


To Improve Forecasting Effectiveness on the Dimension of Performance Measurement, companies should:

Measure accuracy at levels relevant to functions Graphical and statistical measures Multidimensional metrics

Accuracy Supply Chain Costs Customer Service Profitability


Phase 4 – Sales Forecasting Audits (International Journal of Forecasting)

Three objectives:• Understand current status of forecasting

practice (a company’s “as is” state)• Visualize the goals of forecasting process

improvement (the “should-be” state)• Develop a roadmap for achieving the

goals (the “way forward”)


Phase 4--Sales Forecasting Audits

Companies who have participated to date: AET Films, AlliedSignal, Alticor, Avery Dennison, Bacardi,

Conagra, Continental Tire, Corning, Deere and Company, DuPont, Eastman Chemical, Ethicon, Exxon, Hershey Foods, Lucent Technologies, Maxtor, Michelin, Motorola PCS, OfficeMax, Orbit Irrigation Products, Pharmavite, Sara Lee Intimate Apparel, Smith & Nephew, Union Pacific Railroad, Whirlpool, and Williamson-Dickie

In-depth study of an individual company’s forecasting practices

Preliminary visit with sponsor, exchange of documentation

2 day site visit, team of 4 researchers


Sales Forecasting Audit Methodology

Interview across functions: Those who develop and those who use sales forecasts Sales, marketing, forecasting, finance, logistics,

production and materials planning, manufacturing Analyze interview results

Compare to benchmark dimensions Identify strategic themes Formulate recommendations for management action

Deliverables Written report summarizing findings Presentation of findings to interview participants Presentation of recommendations to senior

management


Sales Forecasting Audit Findings

Common Themes: Blurred distinction between forecasts, plans, and goals

Lack of performance measurement, evaluation, and rewards

Islands of analysis (What is the most widely used forecasting

package??)

Limited commitment to sales forecasting as a separate

business function

Product proliferation

Inadequate statistical analysis of historical demand


Summary Learnings

Characteristics of a Forecasting Champion (Journal of Business Forecasting)

Appreciation of sales forecasting role for planning Recognition of cross-functional role More of a Leader than a manager Sales forecast developer and user Good understanding of techniques Full awareness of role of forecasting systems Mentor/Trainer


Summary Learnings

The 7 Keys to Better Forecasting (Business Horizons)1. Understand what forecasting is, and what it isn’t 2. Forecast demand, plan supply3. Communicate, coordinate, collaborate4. Eliminate Islands of Analysis5. Use Tools … Wisely6. Make It Important!7. Measure, Measure, Measure


Financial Management

Demand Management Supply Management

Demand/SupplyIntegration(S&OP)

SUPPLYProduction,

Logistics, etc., andUpstreamSuppliers

DEMANDSales and

Marketing, Downstream

ChannelPartners

Finance

CapacityForecast

Demand Forecast

FinancialGoal

OperationalPlan

Demand Plan

FinancialPlan

Input to S&OP

Output from S&OP

In Summary: Excellence in Supply Chain Management Requires Excellence in Demand Forecasting, and Demand Management


From the Department of Shameless Promotion:

If you’d like more information about our Demand Forecasting research, visit the University of Tennessee Sales Forecasting Management Forum website at:

http://bus.utk.edu/ivc/forecasting


More from the Department of Shameless Promotion:

Order your copy now! Supplies are limited!


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