Salesandoperationsplanning Bfsboston2007 100629205141 Phpapp01

Approaches to Forecasting Management

Sales & Operations PlanningCharles NovakJohnson & Johnson GCC

Forecasting Summitt, September 2007

1Sales & Operations PlanningApproach to the Single Enterprise View

Departmental specialization supports/resulted in many independent spreadsheet based plans based on different set of assumptions, perspectives and needs. These plans/spreadsheets are difficult to consolidate.The answer to this problem is S&OP process that enables operational performance planning at both enterprise and departmental levels.Source: Ventana Research 20062Sales & Operations PlanningMost of the organizations have no integrated planning framework. This leads to:Difficulties reconciling functional views of the business.Limited understanding of the impact that one functional decision has on others.Delayed decision-making due to slow access to information.Unreliable forecasts to the financial and customer communities.Assumptions and insights that go unquestioned and are not updated and reviewed during budget creation.No single financial view that shows top management all information and assumptions about revenue, margins and inventory.

Source: Ventana Research 20063Sales & Operations PlanningS&OP Keep it Simple!New product introduction planningConsensus demand planningSupply and manufacturing planningFormal demand, supply and capacity reviewsFinancial plan reconciliationFormal executive S&OP meetingsSource: Ventana Research 2006High performing companies all practice S&OP with the same simplicity. They create summaries and aggregate plans, and executives review them in meetings that occur each month. This executive S&OP not only reviews demand and supply trade-off scenarios but also tracks the progress of strategic initiatives, assigns action items and reiews S&OP process performance.4Sales & Operations PlanningObjectives:

Provide aggregate management control over the operational demand/supply planning process.Understand the financial consequences and hence tie back to business plan.Balance Supply and Demand, Volume and Mix.

Source: Oliver Wight5Sales & Operations PlanningEffective Sales & Operations Planning is Business Imperative

S&OP is a corporate imperative. It must become a core business discipline, yet most companies continue to struggle to make this a corporate core competence.The need to improve S&OP effectiveness will force 70% of corporations to upgrade S&OP processes and technologies by 2008.Source: Gartner Report January 20066Sales & Operations Planning70% of the respondents to Aberdeens survey are actively engaged in enhancing their S&OP processesand Enterprises that deploy S&OP programs strategically consistently outperform, by an average of 20% in % gross margin, those companies whose approach to S&OP is more tactical and less integrated.

Source: The Sales and Operations Planning Benchmark Report: Leveraging S&OP for Competitive Advantage The Aberdeen Group 20067Sales & Operations PlanningBest in Class Enterprises operate an S&OP program with a focus on profitability and the integrated value chain, closed-loop analysis, and continuous improvement, integrated decision-making, and technology platform and systematic risk management.Source: The Sales and Operations Planning Benchmark Report: Leveraging S&OP for Competitive Advantage The Aberdeen Group 20068Sales and Operations Planning The S&OP emphasizes the alignment of demand, supply, budget and strategic goals to improve efficiency, and optimize profit and growth. The process starts with a review of product portfolio. The next step is to generate unconstrained demand forecast to see if both supply and demand are in sync. After the team decides on the course of action (GAP management), the plan is presented to the management for approval. The S&OP team not only reconciles demand and supply, but also sees to it that they are consistent with the financial plan and strategic goals. The right People, right Tools, and a full support of top management are important aspects of a successful process.Source: C. Jain, St. Johns University9Benefits of a Solid S&OP ProcessAn effective Sales & Operations Planning process supports the needs of the business on both the strategic and tactical levelsGreater VisibilityProcess ClarityIncreased AccountabilityOrganizational AlignmentLonger Term Focus10Greater VisibilityTransparent process, reports & requirements to create a more accurate forecastMeasure forecast error to identify opportunities for improvement MAPE, BiasProcess ClarityClearly defined objectives, inputs & outputs, roles & responsibilitiesDistinction between the objectives of the Consensus & Divisional Forecast Review (Gap) MeetingsIncreased AccountabilityAll functional areas measured on the quality of inputs and outputs to the processScore Cards & Accountability MetricsOrganizational AlignmentOne Number Consensus forecast supported by a formal, consensus driven process Gap closure programs and timing determined based on input from all functional areasImproved integration between functional areas reduces uncertainty & minimizes supply chain volatilityLonger Term FocusBeyond current month / quarter enables preparation of demand driven options to close GAPs in advance of implementationAccurate production plans to produce appropriate quantities in advance, respecting standard lead times critical for VMR plants

Approaches to Forecasting ManagementIndependentEach functional department develops its own forecasts independently, for its own internal use ,lacks coordination of financial and operational plans based on sales forecasts No organizational commitmentNo cross-functional accountability nor alignment of objectives.Ignores input from other perspectives Promotes each department altering the forecast to meet their needs.Does NOT require GAP closure processNo S&OPIntroduces the bias of the department creating forecast Only requires localized resources to implement11Replace with this oneApproaches to Forecasting ManagementConcentrated Forecast is developed by one department and referenced by all others.Very limited organizational commitmentNo cross-functional accountability. Possible integration of objectives tied into performance of the owner.Forces some coordination between departments Limited credibility promotes each department altering the forecast to meet their needs.Does NOT require GAP closure processNo S&OPIntroduces the bias of the department creating forecast Only requires localized resources to implement12Replace with this oneApproaches to Forecasting ManagementConsensus (Operational Forecast)Each functional area makes own independent forecast and then all come together to negotiate a final forecast and one department is in charge of forecast. Implies that other forecasts may be driven by Financial objectives.Requires organizational commitment and ownership to the process .Limited cross-functional accountability and integration of objectives tied into performance.Team develops consensus on 'Operational Forecast' with input from several areas , results in better coordination between functions Credible to Operations and is used only on a limited basis for other functional groups.Requires GAP closure processAllows for S&OPReduction in bias and politics is limited due to partial collaboration Requires major effort to implement. Usually requires external consulting expertise.13Replace with this oneApproaches to Forecasting ManagementEffective S&OP Process Based on One Number ForecastEach functional area makes own independent forecast and then all come together to negotiate a final forecast which will be utilized by all cross functional groups in different units of measure and aggregation.Requires Strong organizational commitment and ownership to the process to control competing needs from different departments.Broader cross-functional accountability and integration of objectives tied into performance.Team develops 'One Number Forecast' with input from all areas . Requires team based structure or inter functional integration to work properly.Credible forecast to all functional groups.Requires GAP closure processS&OP driven, focus on both Tactical and Strategic planning horizons.Improved collaboration results in reduced bias and politics.Greatest challenge to implement - requires senior management to fully buy-in. Usually requires external consulting expertise.14Add comment on tactical and strategic use / fit.Independent Forecast15

P&L/Gross/Net $$$, DPC, Net Sales/Trade Spend, .Eaches/Cases/Pallets/STR, Gross/Trade/Net Sales; Margins/Costs, .Eaches/Cases/Pallets/Costs,

15Concentrated Forecast

16P&L/Gross/Net $$$, DPC, Net Sales/Trade Spend, .Eaches/Cases/Pallets/STR, Gross/Trade/Net Sales; Margins/Costs, .Eaches/Cases/Pallets/Costs,

16Consensus Forecast Tactical S&OP

17P&L/Gross/Net Sales, DPC, Trade Sales, Eaches/Cases/Pallets/STR, Costs

Gross/Trade/Net Sales; Margins/Costs, .17Effective S&OP

18P&L/Gross/Net Sales, DPC, Trade Sales, Eaches/Cases/Pallets/STR, Margins, Pricing Policy, Costs Short/Long Term - Tactical/Strategic Planning, .

18Independent Forecast19

19Concentrated Forecast

2020Consensus Forecast

2121Effective S&OP

2222Forecast Approaches23IndependentConcentratedConsensusOne NumberOrg. CommitmentLM-HHAccountabilityLMM-HDegree of CollaborationLMHForecast CredibilityLLM-HHBiasHHMLImplementation EffortLLM-HHTools$100KGAP ProcessNNYYS&OPNNYYROINN/LMH23The Resource Planning ModelMore traditional viewMRP II / ERP model.

Strategic and Business Planning used as drivers of the process. Sales and Operations Planning acts as an essential linkage, tying the Strategic and Business Plans together with the Master Scheduling function.

In companies without S&OP, there is frequently disconnect between the Business Plan and the Master Schedule. Strategic PlanningBusiness PlanningVOLUMESALES & OPERATIONS PLANNINGOperations PlanSales PlanMIXMASTER SCHEDULINGDetailed Planning and Execution SystemsFORECASTING AND DMD MANAGEMENTCAPACITY PLANNINGSource: T.F. Wallace24Monthly Sales & Operations Planning ProcessStep 1Run Forecast ReportsStep 2Demand Planning PhaseStep 3Supply Planning PhaseStep 4Pre-SOP MeetingStep 5Exec SOP MeetingEnd of MonthStatistical Forecasts;Field Sales WorksheetsManagement Forecasts1st pass SpreadsheetsCapacity Constraints2nd pass SpreadsheetsRecommendations and agendafor Executive SOPDecisionsAuthorized GamePlanSource: T.F. Wallace25The role of Demand PlanningBetter processes yield better results and forecasting is no exception; better forecasting processes will yield better forecasts.Forecasting: Inputs, Process, OutputsCurrent CustomersNew CustomersCompetitionEconomyNew ProductsPricingPromotionsManagement DirectiveHistoryOther

INPUTSFORECASTS THAT:

Are Reasoned

Are Realistic

Are Reviewed Frequently

Represent the Total DemandOUTPUTSPROCESSSource: T.F. Wallace26Class A Cross-Functional IntegrationThe Business EntityIntegrated Business ManagementMarketing

SalesDemandSource: Oliver WightMfg.

Materials

Logistics

Purchasing

DistributionSupplyProduct Development

Portfolio Management

Promotional Activity

Value EngineeringProduct ManagementFinancial Planning

AccountingFinanceQuality

HR

Administration

Customer ServiceSupportMultiple plans in the business need to be integrated.27SupplyDataCustomerDataMarketDataEffective S&OP MUST have all components linked.FinancialPlanningMSResourceCapacityPlanningOperationsMeetingBusinessStrategyDRPStatisticalForecastMarketDataConsensusProcessFieldSalesFcstMarketingForecastBusinessPlanningSupplyChainOneNumberForecastHistoryExecutiveS&OP28newSupplyDataCustomerDataMarketDataEffective S&OP MUST have all components linked.FinancialPlanningMSResourceCapacityPlanningOperationsMeetingBusinessStrategyDRPStatisticalForecastMarketDataConsensusProcessFieldSalesFcstMarketingForecastBusinessPlanningSupplyChainForecastHistory????!X29newRole of Demand Planning (Example)To find a completely unbiased process champion is often not an option. In our example, Demand Planning exists as a separate group under the Market Operations department. This allows for relatively low bias.Demand Planning owns the Operational (supply constrained), Consensus (S&OP) and GAP (vs. Financial commitment) meetings. The Finance and President jointly own the Executive S&OP meeting and its outcomes.

30Key points on One-Number ForecastHow was the forecast created?The One-Number Forecast needs to be a compilation of insight, data, trends, and confirming facts.The ideal demand plan synchronizes category trends, shipment trends, trends derived from POS or syndicated data.The goal of the One-Number consensus process should be the creation of a reality based One-Number Forecast not a consensus planned forecast.Does the One-Number Forecast have a well defined set of underlying assumptions?Does the One-Number Forecast have a feeling of reality built into it?Are aspirational volume activities well documented?Does the forecast have sales insight derived from talking with the customer or consumer?Is the One-Number Forecast well communicated so that supply believes in the plan, and does not hedge the plan on its own?Source: P. Bower, Plan4Demand31Key points on One-Number ForecastThe One-Number Forecast MUST be based on a reality. It also should be UNCONSTRAINED so the management understands what the business can sell given unlimited supply. This aids in capacity and resourcing decisions.A separate formal process is used to determine the executibility of the forecast. (operations meeting)The supply planners asses their ability to deliver the proposed demand. The forecast is eventually constrained, but not until the gapping process has been completed. The gapping process, for example, helps to protect future revenue by pointing todays lost opportunities.The striving for a One-Number Forecast has an important place in S&OP, buy it shouldnt be the only focus of the entire process. The One-Number Forecast should be assumption based, realistic, executable and forward reaching as well.Source: P. Bower, Plan4Demand32The role of process championIdeally, the leader of the process should NOT be responsible for the success of areas that participate in the process. In reality, it is seldomly possible to find a completely unbiased process champion.The process requires unbiased measurement, evaluation, and action, credibility and authority of the leader.The ideal leader should be a process facilitator and manager. That is why it is important to seek a leader who has a direct involvement in determining the strategic direction of the organization.Source: P. Bower, Plan4Demand3312 Most Common Threats to S&OPThere is a disconnect between S&OP and corporate strategySenior management indecisionThe One-Number forecast is not reality basedWe meet every month more or lessThe process focuses on the balance of the yearThe S&OP leader also owns supply or demand planningLeaders are obsessed with last months salesS&OP ignores product life cycle managementS&OP ignores or excludes extrinsic business trendsFailure to measure and monitor progressNo understanding about proper meeting proceduresOffice politics undermines progressSource: P. Bower, Plan4Demand34The Role of Demand Planning

35S&OP Maturity ModelPEOPLE, PROCESS, TECHNOLOGY, PERFORMANCE MANAGEMENTTactical the company does only the basics of S&OP, such as demand and supply balancing.Advanced the company has progressed in knowledge and skill of S&OP beyond the basics, for example, to formal planning and review meetings.Strategic the company uses S&OP to align operational planning with corporate strategic objectives.Innovative the company runs S&OP using a variety of performance management techniques.Source: Ventana Research 200636

Recommendations for usersPeopleBroaden deployment to include executive management, finance, manufacturing, demand planning, supply planning, marketing, product engineering and design and IT functions.Use a cross-functional team for plan development and reporting.Have all departments use S&OP as the plan of record including FINANCE.Engage the CEO or CFO as a sponsor.Source: Ventana Research 200637Recommendations for usersProcessUse S&OP to align operations with corporate strategic objectives.Have regular formal demand and supply review meetings and look at actual-vs.-forecast targets.Plans should cover 18 months and include multiple lines of business or brands and multiple factories or regional operational facilities across product lines.Source: Ventana Research 2006

38Recommendations for usersThe S&OP process itself should include these steps:New product (or service) introduction planningConsensus demand planningSupply and manufacturing planningFormal demand, supply and capacity reviewsFinancial plan reconciliationFormal executive S&OP meetings thatReview demand and supply trade-offsTrack progress of strategic initiatives and projectsIncluded balanced scorecards or performance reviewsAssign action items and set follow-up assessmentsSource: Ventana Research 200639Recommendations for usersTechnologyActively evaluate vendor-provided dedicated solutionsLook for software that has what-if scenario planning, real-time dashboards, collaborative demand planning, automated financial planning reconciliation and profit-based solvingConsider supporting technologies like EAI and BI platformsPerformance managementMatch S&OP metrics with corporate goalsIntegrate S&OP with Balanced ScorecardSource: Ventana Research 2006

40Sales & Operations PlanningCharles NovakJohnson & Johnson GCC

Forecasting Summitt, September 2007

Thank you!41

Independent Forecast Approach

Manufacturing

Marketing

Sales

Supply Chain

Finance

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Week 3



Month End

Concentrated Forecast Approach

Marketing

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Supply Chain

Finance

Manufacturing

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Consensus Forecast Approach

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Demand Planning

Consensus Meeting

Finance

Manufacturing

Marketing

Sales Team Leads / Planners

StatisticalForecast

MarketingForecast

Sales Account Mgrs Forecasts

Consensus Validation Report (Mktg/D.P/Sales)

Financial LE

GAP Analysis & Fcst Adjust.

GAP Analysis / Presentation to LT

Consensus Meeting

Consensus Meeting

Exec S&OP Meeting

Exec S&OP Meeting

Exec S&OP Meeting

Exec S&OP Meeting

Forecast Transfer Costs / $ LE

Forecast Transfer Units / VMR

Forecast Update, Transfer and Locking

Supply Chain

Consensus Meeting


Exec S&OP Meeting

One Number Forecast Process

Demand Planning

Consensus Meeting

Week 2


Marketing

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Month End processing / Reports / LE Validation

Review Forecast & Brand Impacts (LE)


Update and review inputs into Consensus Meeting

Exec S&OP


Develop One Number National Sales Forecast

FinanceSr.Management

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Consensus Meeting

Consensus Meeting

Consensus Meeting

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Exec S&OP

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Exec S&OP

Independent Forecast Approach

Manufacturing

Marketing

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Supply Chain

Finance

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Month End

Concentrated Forecast Approach

Marketing

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Supply Chain

Finance

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Consensus Forecast Approach

Week 4

Week 1

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Demand Planning

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Finance

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StatisticalForecast

MarketingForecast



Financial LE

GAP Analysis & Fcst Adjust.


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Supply Chain

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S&OP Meeting

One Number Forecast Process

Demand Planning

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Week 2


Marketing

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1-0-1 (Operations) Meeting



Month End processing / Reports / LE Validation

Review Forecast & Brand Impacts (LE)


Update and review inputs into Consensus Meeting

Exec S&OP


Develop One Number National Sales Forecast

FinanceSr.Management

Week 1

Consensus Meeting






Consensus Meeting

Consensus Meeting

Consensus Meeting

Exec S&OP

Exec S&OP

Week 3




Exec S&OP

Exec S&OP

Salesandoperationsplanning Bfsboston2007 100629205141 Phpapp01

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