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Sales and operations planning driven byeffective medium term demand forecasting |
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Medium term forecastingSales and operations planning |
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Sales and operations planningThere is a need for medium term demand planning in any business. Preparation of the annual sales budget is perhaps the traditional reason for it, typically looking forward around eighteen months at the time of preparation. The emphasis switches from the short term maximisation of existing resources to the longer term planning of essential new capacity and other resources. The concept of sales and operations planning has again become very popular, tackling the balancing of demand and supply over a medium horizon. The exact forecast horizon for S&OP varies with the type of business, ranging from a minimum of eighteen months to three years or longer in the pharmaceutical industry where there is a high need for longer term demand planning. The S&OP process should take account of planned product innovation and expected market and technology changes. And it normally assigns a high level of importance to the financial outcome arising from the demand and supply plans. Methods for medium term demand planning and forecastingDemand forecasting and planning over the medium to long term tends to require a somewhat different approach to the short term forecast. New product programmes can have significant implications for production or supply resources and considerations of product life cycle is more important. It becomes more appropriate to work on the forecast at a high level of product/customer aggregation and in time buckets of months or quarters rather than days or weeks. In terms of modelling demand patterns over the medium to long term, curve fitting methods assume greater importance than in short term demand planning. In certain markets, including pharmaceuticals, curves to reflect product life cycle are very useful. Also, due to the uncertainties around innovation and technology changes, creative input in the application of commercial judgement assumes greater importance. Consideration of cause and effect due to factors such as relative prices and economic indicators may be relevant, but it should be remembered that the projection of the causal factors that impact on the sales forecast becomes more and more digfficult over the long horizon. Avoiding pitfalls in forecasting for S&OPThere is usually an acknowledgement in established sales and operations planning processes that outcomes should be considered at product group level and in relatively big time buckets, usually months. However, companies often have existing forecasting systems that are set up primarily for short term forecasting. The temptation is to simply extend the forecast horizon in the short term forecasting system to an unrealistically long horizon, meaning that projections that are perfectly adequate over the short term are extrapolated to a point at which they become unrealistic for the medium term. The difficult part of demand planning for S&OP is the creative part that is to do with innovation and longer term marjket and technology change. This should be recognised, not lost in a forest of detail produced from a short term forecasting system. So there is a need for a different mind set in medium term forecasting, often different methods. Then if integration of short and medium term forecasts is necessary, consideration should be given to the adoption of a top-down rather than a bottom-up method at some point along the forecast horizon. Forecast Solutions can help by recommending processes and forecasting methods for S&OP and suitable ways to integrate short term and medium term forecasts. And we can facilitate the sales and operations planning process with an interim or permanent service to provide the sales forecast, making best use of available techniques.
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