What comes to mind when you think about the Demand Planning role? Sophisticated econometric models, highly analytical work, and number crunching? This was my first impression when I saw an advertisement for an internship in a Demand Planning department. The reality turned out to be a little different…
How Effective Is Your Company’s Forecasting Process?
What struck me when I started my first job in a Demand Planning team was that you learn a lot about reports and templates, and read a lot of PowerPoint decks, but you don’t learn much about how to actually build a good forecast for your portfolio of products. I started to dig a little deeper into how to improve my forecasts, and what occurred to me was that every one of my colleagues had a different approach to forecasting. The goal of this article is to initiate a discussion on the different ways of working in Demand Planning, and to discuss bottom up and top down forecasting, and why we need to think beyond these two methodologies.
The base forecast generated by statistical models is less biased as it is derived from the performance of each product.
Bottom Up Forecasting
The fundamental component of the bottom up forecasting process is statistics (usually through SAP APO software). The process is organized with a baseline forecast on the SKU level generated by a centralized team, and a final forecast that combines statistics with market intelligence from local Demand Planners working in particular markets. The monthly process consists of the following:
- Statistical models are recalculated with data from the recently finished month.
- Monthly calls between the local Demand Planner and the Central Demand Planner to discuss recent forecast changes, top sales outliers and major root causes of forecast errors.
- The base forecast Demand Planner meets with the Sales team to add market knowledge.
- Creation of a separate forecast for New Product Development and New Product implementation provided by Marketing.
- Presentation of final forecast figures to upper management to achieve official sign off on forecast figures (reflected in USD value, not volume).
- Develop Operational Sales Plan with monthly update to aid product availability forecast.
Sales teams members must share responsibility for forecast accuracy. That means putting narrow functional objectives to one side.
Top Down Forecasting
The top down forecasting process relies strongly on Sales engagement and is more simplified. This process consists of:
- Monthly forecast revision with Sales team representatives (which is an additional function within the wider Sales structure) who bring projected sales figures at the product family level.
- The Demand Planner challenges those figures and its major assumptions.
- The final forecast figures form the basis of the Operational Sales Plan for the company, which is signed off by management (working to the one number concept).
- The Demand Planner forecasts a mix of products, arriving at a total figure for the product family as agreed with Sales.
The base for forecasting the product mix is historical sales split within product family. The split is modified to include all latest information like new listing and delisting at customers’ stores, promotions, Marketing support, New Product Developments and cannibalization.
In both processes, Sales teams have very different objectives to us as Demand Planners.
Pros And Cons Of Each Process
In both methods, the role of the Demand Planner and its impact on final figures is different. The advantage of the bottom up approach is higher autonomy for the Demand Planner and greater control. The base forecast generated by statistical models is less biased as it is derived from the performance of each product. On the other hand, higher engagement with Sales in the top down forecast process gives the benefit of inputting valuable market intelligence.
In both processes, Sales teams have very different objectives to us as Demand Planners. In bottom up forecasting, they tend to increase volumes to secure the stock to avoid missing out on potential sales, which leaves the company at risk of holding excess inventory. Sales also declare numbers only in dollars and on a brand level. Once this Sales Plan is signed off by management, these numbers form the basis of the Operational Sales Plan, meaning the Sales team’s conservative bias affects the whole organization.
In top down forecasting, as the final figures become the official Sales Plan, Sales try to lower them as it is always better for them to set low targets and outperform them, rather than set a realistic range. For top down forecasting it is important, in my opinion, that Sales team members participating in the forecasting process are sharing responsibility for forecast accuracy. That means putting narrow functional objectives to one side.
These Two Forecasting Methodologies Place Limitations on Demand Planning
I cannot help but feel these two approaches place limitations on the Demand Planner function and overall forecast accuracy. There is a need of wider knowledge regarding different ways to work in the Demand Planning role and different methodologies, especially for young people entering this profession. Such knowledge should cover the topics Demand Planners face day to day like incorporating input from Sales regarding a promo event (i.e how to translate information into volumes), how to structure the forecast review meeting, the best tools for forecast analysis, and how to challenge the Commercial team using your statistical output.