BLT Chapter 6

Forecasting

- A forecast is what is projected to be sold and when - Forecasting is a critical capability as many logistics and other supply chain activities must be completed in anticipation of a sale. - Major forecasting approaches to achieve enhanced service or reduced inventory: 1. Improve forecast accuracy 2. Forecast at a higher level of aggregation (This works well with postponement strategy).

Sales and Operations Typical Results

- Aligns different teams around a common plan (ex: 50 - 70% reduction in planning cycle time) - Balances supply and demand (Ex: 15 - 30% improvement in forecast accuracy) - Identifies discrepancies between planning numbers (Ex: 10 - 20% reduction in excess inventory) - Improves sales forecasts (Ex: 25% reduction in stock-outs) - Reduces the long-term impact of unexpected events (Ex: 5% lift in revenue and margin)

Sales and Operations Planning

- Brings together all the plans for the business into one integrated set of plans. - It is typically performed once a month and is reviewed by management at an aggregate (product family) level. - Reconciles all supply, demand, and new product plans. - It is the definitive statement of the company's plans for the near to intermediate terms - Covers a horizon sufficient to plan for resources and to support the annual business planning process - Links the strategic plans for the business with its execution - Reviews performance measurements for continuous improvement

Benefits of Integrated Operations Planning

- Facilitates more effective planning with shorter cycle times - Offers capability to consider the extended supply chain and make appropriate trade-offs to achieve optimal performance - More effective and responsive planning allows a more level assignment of resources for existing sourcing, production, storage, and transportation capacity. - Greater integration with financial plans. - Increased inclusion of strategic initiatives and activities. - Improved simulation and modeling of alternatives. - Easier translation between aggregate and detailed planning levels

Simultaneous Resource Considerations

-Enables identification of trade-offs that can increase functional costs, but lower total system costs. -Is the ability to include demand, capacity, material requirements, and constraints in defining alternatives -Sequential decision making = sub-optimal planning and capacity utilization

Supply Chain Visibility

-Into the location and status of supply chain inventory and resources -Includes the ability to track inventory and resources throughout the supply chain -Information about available resources is effectively evaluated and managed -Requires exception management of potential problems as they are identified to minimize/prevent potential problems

Resource Utilization

-Supply chain decisions influence many enterprise resources which consume a substantial proportion of a firm's assets. -Is a coordinated approach to making functional resource trade-offs -Considers customer service requirements while minimizing combined supply chain resources -Critical capability when firms emphasize overall asset utilization -Functional management must focus on resource utilization within the scope of their own responsibility (i.e., don't try to manage outside your responsibility)

Forecast Process

Administration: Includes the organizational, procedural, motivational, and personnel aspects of forecasting and its integration into the other functions of the firm Techniques: The computation used to combine base, seasonal, and cyclical components with elements of promotion history into a forecast quantity. Support System: Includes supply chain intelligence to gather and analyze data, develop the forecast, and communicate the forecast to relevant personnel and planning systems

Description of Forecasting Model Components

Base Demand is long-term average demand after other components are removed Trend Component is long-range shift in periodic sales - Positive, negative or neutral Seasonal Component is annual recurring upward or downward movement in demand - e.g. Toy demand before Christmas Cyclic Component is periodic shifts in demand lasting more than a year ─e.g. Housing demand follows business economic cycle Promotional Component is demand swings initiated by a firm's marketing activities ─Advertising, deals, or promotions Irregular Component includes random or unpredictable quantities that do not fit other components

Basic Planning Formula

Beginning inventory + production - demand = ending inventory

Brief History of CPFR

CPFR extends ECR's business processes to include: - Information systems for capturing and transferring POS, inventory, and other demand and supply information between trading partners - Formalized sales forecasting and order forecasting processes - Formalized exception handling processes - Feedback systems to monitor and improve supply chain performance

How can the Bullwhip Effect be Alleviated?

Collaboration: Sharing information through the use of electronic data interchange (EDI), point of sale (POS) data, and web-based systems can facilitate collaboration. Synchronizing the supply chain: Supply chain participants coordinate planning and inventory management to minimize the need for reactionary corrections. [Example = JIT] Reducing Inventory: Through the use of just in time (JIT), vendor managed inventory (VMI), and quick response (QR), all of which will be discussed later in this course

CPFR Process Steps

Collaborative Planning (CP): - Front-End Agreement - Joint Business Plan Collaborative Forecasting (CF) - Create Sales Forecast - Identify Exceptions - Resolve Exceptions Collaborative Replenishment (CR): - Create Order Forecast - Identify Exceptions - Resolve Exceptions - Generate Order

Supply Chain Planning Applications

Demand Planning - Begins with a forecast - Is the information technology component of the process Supply Planning (aka Production Planning) - It matches the requirements plan with the production constraints - The statement of requirements defines what items are needed and when Logistics Planning - It coordinates transportation, warehousing, and inventory within the firm and between supply chain partners - It's essential for effective resource utilization Inventory Deployment - It represents one of the major integrators of sales, marketing, and financial goals

Sales and Operations Brings Together

Demand plans Financial goals Supply plans Inventory quantities New product plans

Forecasting Challenges

Demand variability - Distribution (retail stores) gains and losses - Competitive activity - Economy (private labels) Scale of information from Marketing and Sales Promotions - increased complexity Impact of supply issues on forecasting

Supply Chain Planning

Determining how best to satisfy the requirements created by the Demand Plan. Its objective is to balance supply and demand in a way that realizes the financial and service objectives of the company -Integrating all of the operational planning aspects of supply chain management facilitates this objective It is a combination of all the planning processes that are used across the supply chain: - Sales and Operations Planning - Advance Planning and Scheduling - Collaborative Planning, Forecasting and Replenishment 1. Plan (Demand planning responsiveness) 2. Source (Inventory receipt; Supplier relationship collaboration) 3. Make (Manufacturing customization; Inventory management) 4. Deliver (Order fulfillment; Customer relationship collaboration) 5. Return (Reverse logistics)

Formula Using Forecasting Model Components

Forecast = (Bt x St x T x Ct x Pt) + I where t = time period A meaningful forecast process requires the integrated and consistent combination of components - Consider the strengths and weaknesses of each component - Use the same components from time-period-to-time-period - Don't try to perfect a single component at the expense of the other components

Potential Issues/Watch Outs

Forecasting in many companies is typically a "best fit line" using history -The problem is "that you could be driving down the road by looking in the rear view mirror". The future might be significantly different than the past. Marketing: -May low ball the forecast numbers because if actual sales exceed their forecast, they can look like hero's in the organization. -May inflate the forecast numbers to essentially create "2 sets of books", the real forecast and the inflated forecast to ensure that Logistics plans for plenty of inventory. [Funnel analogy] So, what do you do as Logistics Supply Chain Planner?? - *Try to build a "consensus" demand plan*

Forecasting Requirements

Forecasts match the product requirements of customers with capacity of the supply chain Forecasts must be timely and accurate to align customer demands for higher service levels and more product variations with a management focus to reduce supply chain assets

Benefits Gained from APS

Improved Throughput Times Improved Delivery Times Optimum Inventory Levels Better Resource Utilization Improved Customer Service Levels Reduction in Costs Mitigating the Bullwhip-effect Enabling CPFR

Forecasting Accuracy

Improving accuracy of forecasts requires error measurement followed by analysis Choice of method for error measurement: - Simple average error can hide problems as positive errors are offset by negative ones [DO NOT USE THIS METHOD] - Mean Absolute Deviation (MAD) evaluates absolute error by ignoring the sign of the error (Ex: MAD = Sum of the Absolute Error / Number of Time Periods 200 / 12 = 16.7) - Mean Absolute Percentage Error (MAPE) is mean MAD divided by mean demand

The Bullwhip Effect

In the absence of any other information or visibility, individual supply chain participants are second-guessing what is happening with ordering patterns, and potentially over-reacting, creating the bullwhip effect •In periods of rising demand, down-stream participants increase orders. - In periods of falling demand, orders decrease or stop, and inventory accumulates

Logistics Planning and Inventory Development

Logistics planning integrates overall movement demand, vehicle availability, and relevant movement cost into a decision support system that seeks to minimize overall freight expense - Analysis suggests ways freight can be shifted among carriers or consolidated to lower expenses Overcomes these problems resulting from individual perspectives -Limited economies of scale -Limited information sharing -Excessive transportation expense

S&OP - Senior Leadership Involvement

Making S&OP work in an organization requires senior leadership involvement Functional leadership from all key operating areas must be committed to the S&OP process and be responsible for achieving success - Supply Chain Planning, Sales & Marketing, Manufacturing, Finance - Tie manager's compensation to successful S&OP performance - Include regular involvement and accountability at the general management level •Tradeoff decisions may negatively impact a functional area

APS Evaluates Constraints

Material - Availability, Safety Stock Levels Machines - Set-up, Sequence, Capacity Manpower - Labor Capacity, Competence (i.e., skills) Money - Cost Methods - Distribution Requirements, Due Dates Best applicable for: -Make-to-Order manufacturing -Production with products competing for resources -Products with high complexity

How does APS work?

Overcomes the weaknesses of ERP systems such as: - Can't consider capacities of external partners and suppliers - Limited opportunities to create, optimize, analyze different scenarios - Low support in decision-making of the future demand

Forecasting Techniques

Qualitative: relies on expert opinion, intuition and special information - Developed using surveys, panels and consensus meetings - Costly and time-consuming - Ideal for situations with little historical data or when much managerial judgment are required Quantitative: uses mathematical models and historical data •Time series focuses entirely on historical patterns and pattern changes to generate forecasts - "The past is a good predictor of the future" •Causal [Cause and Effect] uses specific information to develop relationships between lead events and forecasted activity

APS System Components

Resource Management Resource Optimization Resource Allocation Demand Management

What S&OP Is and Is NOT

S&OP Is: - A strategic approach that links the Business Plan with current Demand/Supply Plans - A cross-functional, collaborative process focusing on improving business performance - A structured, formal, holistic set of monthly consensus business disciplines S&OP Is Not: - Informal, analysis-paralysis meetings - A "silver bullet" solution to resolve all business problems - A short-term business issue resolution process

S&OP Must Resolve Traditional Conflict

Sales & Operations Planning is an integrated combination of - Organizational processes - Personal responsibility and accountability - Information systems (financial, marketing and supply chain planning) Using this S&OP combination, the operations and sales groups must overcome conflicts to develop consensus and then execute their collaborative plans - Finance also plays a key role in dollarizing the impact of decisions

S&OP Horizon - Near to Intermediate Term

Sales and Operations Planning: 2-18 months - Covers a horizon sufficient to plan for resources and to support the annual business planning process

CPRF Components

Strategy and Planning: Relationship between buyers and sellers is planned, establishing the ground rules for the collaborative relationship. Leads to front-end agreement and a joint business plan Demand and Supply Management: Forecast is created, exceptions or discrepancies are identified and are resolved. Improves forecast accuracy by having customers and suppliers participate in the forecast, tying the buyer and seller together so that their goals are compatible Execution: Orders are generated, shipments are prepared and delivered, products are received and stocked, sales transactions are recorded, and payments are made Analysis: Monitor planning and execution activities for exceptional situations. If a discrepancy occurs, the trading partners can get together and share insights and adjust plans to resolve such discrepancies

Production Planning (a.k.a. Supply Planning)

Supply planning uses requirements from demand management to develop a realistic supply plan -Must integrate with manufacturing (and 3rd party) resources and constraints Requirements plan defines what items are needed and when Supply planning systems match the requirements plan with the production constraints, i.e. Advanced Planning & Scheduling (APS) -Limitations can include material, facility, equipment and labor availability Effective planning creates a time-sequenced plan to manufacture the correct items in a timely manner while operating within constraints

Forecasts are Necessary To...

Support collaborative planning - Collaborative forecasts help avoid inventory excesses and out-of-stock situations Drive requirements planning to determine: - Production requirements - Replenishment requirements - Inventory projections - Distribution requirements Improve resource management through cost trade-offs of strategies such as: - Extra production capacity - Extra storage capacity - Speculative production or product movement - Outsourcing

Business Planning

The Business Plan, with its long-term focus, provides the company's direction and objectives for the next 2-10 years - Management gathers input from the various organizational functions such as finance, marketing, operations, and engineering, to develop the Business Plan - The Business Plan states the company's objectives for profitability, growth rate, and return on investment - It is then typically only updated and reevaluated annually - It is also typically used as the starting point for developing the organization's Aggregate Production Plan

Integrated Operations Planning

The benefits from operational integration are directly related to capturing efficiencies between functions within an enterprise as well as across enterprises in a supply chain

Demand Management

The demand management system is the information technology component of the sales and operations planning (S&OP) process - The demand management process develops the forecasts used by other supply chain processes to anticipate sales levels Demand management processes must integrate •Historical forecasts •Promotional plans •Pricing changes •New product introductions - Forecasts are then used to determine production and inventory requirements - Must maintain forecast data consistency across multiple products and warehouse facilities

Monthly S&OP Cycle

The objective of S&OP is to arrive at an agreed-upon plan which manages and allocates key resources; people, capacity, material, time, and money to provide products on time and in accordance with the needs of the customer - If capacity is less than demand the company should try to increase capacity (e.g., through overtime, extra shifts, subcontracting to a 3rd party, etc.). - If capacity is greater than demand the company should try to increase demand (e.g., through promotion, advertising, extended payment terms, etc.). - If capacity and demand are nearly equal emphasis should be placed on meeting demand as efficiently as possible

S&OP Horizon - Flexibility of Decision Making

The scalability of the supply chain will determine the decisions to be made during the S&OP process - Flexibility is limited in the short-term Operational and Tactical horizon, and more limitless in the mid to long-term S&OP and Strategic horizon

Making the Case for S&OP

Traditionally, companies have sequentially and often independently developed Financial, Sales, and Operations plans (i.e., not integrated). - S&OP can determine the most profitable combination of marketing and supply chain activities - It collaboratively establishes a coordinated plan for responding to customer requirements within the resource constraints of the enterprise

Time Series Forecast

Uses historical data to predict future demand patterns Simple Moving Average - An un-weighted average of the previous periods of sales Weighted Moving Average - A weighted average of the previous periods of sales Exponential Smoothing - Bases the estimate of future sales on the weighted average of the previous demand and forecast levels. Uses a smoothing constant to place greater weight on actual demand or forecast

Cause and Effect Forecast

Uses one or more factors (independent variables) to predict future demand (e.g., seasonality in retail markets) Regression - Uses independent variables, such as price, promotion plans, or related product volumes, to predict sales Multivariate - Uses more complex statistical techniques to identify more complex demand history relationships; techniques include spectral analysis, Fourier analysis, transfer functions, and neural networks

7 Critical S&OP Implementation Challenges

1. Demand & Supply Visibility 2. Collaborative Forecasting and Planning 3. New Product Introduction 4. Supply Planning 5. Monthly Review Process 6. Performance Management 7. Executive S&OP

Major Benefit Categories of CPFR

1. Improved Customer Service Through Better Forecasting 2. Lower Inventories for Higher Profits 3. Improved ROI on Technology Investment 4. Improved Relationships Between Trading Partners 5. Cost Reduction

3 Drivers of Effective Supply Chain Planning

1. Supply Chain Visibility 2. Simultaneous Resource Considerations 3. Resource Utilization

8 Keys to Successful S&OP Implementation

1.Executing the process every month 2.Process ownership and clarity of roles and responsibilities 3.Organizational commitment to achieving high forecast accuracy (senior management commitment & performance objectives) 4.Focus should be on the next 3 to 18 months (not short-term) 5.One plan that integrates the actions of the entire organization 6.Senior management decision making (bottom-up / top-down) 7.Measuring end-to-end supply chain performance 8.S&OP forecast versus operating plan or budget

Collaborative Planning, Forecasting, and Replenishment (CPFR)

A business practice that combines the intelligence of multiple trading partners who share their plans, forecasts, and delivery schedules with one another in the planning and fulfillment of customer demand, in an effort to ensure a smooth flow of goods and services across a supply chain Objective is to increase availability to the customer while reducing inventory, transportation and logistics costs Developed to reduce unplanned and uncoordinated events that distort the smooth flow of product throughout the supply chain (reduces bullwhip effect) CPFR can significantly reduce the Bullwhip Effect, however, it requires a fundamental change in the way that buyers and sellers work together - The real value of CPFR comes from the sharing of forecasts among firms, rather than firms relying on sophisticated algorithms and forecasting models to estimate demand

Advanced Planning and Scheduling (APS)

A manufacturing management process by which resources and capacity are optimally allocated to meet demand. Uses advanced mathematical algorithms to perform optimization or simulation on finite capacity scheduling, sourcing, capital planning, resource planning, forecasting, demand management, and others. These techniques simultaneously consider a range of constraints and business rules to provide real-time planning and scheduling, decision support, available-to-promise, and capable-to-promise capabilities. APS often generates and evaluates multiple scenarios. Management then selects one scenario to use as the "official plan." The five main components of APS systems are (1) demand planning, (2) production planning, (3) production scheduling, (4) distribution planning, and (5) transportation planning Instead of focusing on each individual link in the chain, an APS system acts like an umbrella, extracting real-time information from the supply chain to calculate a feasible schedule, resulting in fast, reliable response to the customer