One of the interesting things about forecasting finished goods is how many functions participate in the development of the forecast and are subsequently impacted by the results. In a typical S&OP and consensus forecasting process, Sales, Operations and Planning collaborate to reach a best forecast to drive the operations and profit forecast for the company. We struggle to make this process work because each function has a different view toward the development and use of the forecast. Supply Chain needs the forecast at the SKU level by location, usually in cases. Sales is forecasting revenue and cases by customer. Finance is calculating net revenue and profit based on the product mix forecasted usually divided into price category groups. And Marketing forecasts at the brand level in gross revenue for a mid to long range time frame. You can put these differences into a chart that looks something like this.
|Function||Unit of Measure||Time Frame|
|Sales||Cases, Revenue||1 to 3 months||Customer|
|Operations||Cases||1 to 6 months||By SKU|
|Finance||Pounds, Revenue||Current and next fiscal year||Price Category|
|Marketing||Gross Revenue||4 to 24 months||Brand|
And the ways we each arrive at our forecasted volume is different which makes for a diverse set of numbers to start the process. The S&OP process is not about the differences between the functions but the need to reach a consensus to find the one number, the best number to drive the operations and forecast profit for the company. In order for an S&OP process to be successful, those are two of the goals that must be achieved: agreeing on “one number” which is of course a series of numbers, and that it is the best guess call, not biased toward under calling to beat the forecast or over-calling to ensure adequate inventory.
Most forecasting techniques used, especially in the Supply Chain function, use actual shipments from the past to project the future. The tools to do this have gotten very sophisticated over time and enable us to use huge extracts of data to generate fairly accurate detailed, low level forecasts going forward.
Forecasting in the Marketing function utilizes a very different approach which brings a perspective to the S&OP process that enables the diverse views to reach a consensus and find the best number when compared to statistically derived forecasts. In Marketing, we start with the actuals from the same month last year, itemize the factors that drive our business, and compare the revenue impact of each of those drivers compared to one year ago. These drivers include
- Consumer Promotion
- Base Velocity
- New Products
- Merchandising (Trade Promotions)
- Base Price
Some businesses also separate out large or unique customers because that volume and shipment history is stored and treated differently. For example Wal-Mart forecasts are often isolated because that volume is not part of the Nielsen data and because the volume can be such a large percentage of total shipments. Other channels like club stores, Dollar stores, Military sales, export, etc. may also be managed and forecasted by a separate part of the business based on the drivers unique to each channel.
To calculate each monthly forecast for the core business, start with the actuals from last year, add and subtract the volume impact of each driver compared to that driver a year ago and arrive at the forecast for each month this year. The technique to calculating each of these drivers can be simple or complex but clearly are geared toward developing the most accurate forecasts over time. For example, for advertising, you compare how much you spent last year during each month, to how much you plan to spend this year and multiply that by a calculated return on that advertising investment, or payback to arrive at an incremental volume as a result of that advertising campaign. And these calculations vary depending upon what product line or flavor is advertised and what media is used (TV, Print, Digital, etc.).
In Orlando at the IBF’s Supply Chain Planning & Forecasting: Best Practices Conference, I will be talking more about the techniques used by Marketing to generate a quality, mid to long range forecast.
Marketing Forecast Planner