It was a Monday morning sometime in mid-July. It was a hot and muggy day and, with the traffic, seemed like an extra-long commute to work. I still was able to get to work just a little early and grab my cup of coffee when the HR manager, the Director of Marketing, and the VP of Supply Chain popped into my office and asked if had a second to talk…
Obviously, my stomach was now in my throat as I sat uneasily in my office chair. The HR manager spoke up and said with a smile “Dan, we have done a reorganization and, as of today (I braced myself for what was coming next) you will be reporting to Supply Chain and we have elevated your role to a senior manager position. John, the VP of Supply Chain, is your new boss.”
Up until this day I had worked playing with analytics to support Sales and Marketing at a company that does contract manufacturing for a range of consumer goods, based on the East Coast. Given I was good with numbers and the company always needed a forecast, I was promoted into the role of business forecaster. I had always worked on the commercial side of the business, so I was a little taken aback when faced with this new Supply Chain new position, and I admit I was more than a little apprehensive. Even though Supply Chain used my forecasts, I did not know much about their side of the business, and I feared my new boss didn’t know much about what I did either.
Not discouraged though, I saw this as a new challenge and opportunity to grow so I packed up my box and moved from the second-floor carpeted offices to the shop floor with concrete floors and noisy machinery. This alien environment did not inspire confidence. Even though it was the same building and same company, these two parts of the organization seemed worlds apart. Over the next few months, I was going to find out just how true this was.
That afternoon I met with my new boss. I sat across from his desk and his first words were, “I needed you on my team. Those Marketers are killing my Supply Chain costs with their aspirational forecasts. I need you to help get me a better forecast.” In my mind, being one of those Marketers, I explained it was a good forecast and that we had best-in-class MAPE of under 20%, to which he replied, “So where are my savings, why is my inventory still growing, what does that mean to me?”.
I sat there and did not have an answer. It was a reasonable question that I don’t think anyone in the organization could have answered. The only idea they could come up with was to move me to a new department and hope that fixed something. Good news is it did, but not for the reasons they thought.
A year later I was in my new boss’s office discussing how things were going. By this time, MAPE had increased to 24% but that was not a worry or even a concern because inventory levels had decreased by 20% and supply chain cost reduced by 3%. All the while, Marketing and Sales were happy and we saw service levels as high as they had ever been. It turns out that what we needed was not to take me from one side of the business to the other but bring these two sides of the business together.
What We Did Differently
I went into my new role not fully understanding Supply Chain and their needs. My fear was that my new boss and Operations did not fully understand forecasting and what I did. I discovered both were partially true. What we had was less of a forecasting problem and more of a communication problem and the two teams talking over each other instead of with each other. Over the course of a year, I help build a consensus forecast as part of a newly developed S&OP process that tore down some of these silos and helped bridge the divide. I turned the challenge of a new role into an opportunity for the entire organization.
We Stopped & Listened
By listening, you begin to hear common themes and legitimate concerns. Both Sales and Marketing and Supply Chain assumed the other side didn’t understand their point of view and what they needed from the other to add value to the company. Of course, both sides wanted what was best for the company, but were approaching from it a siloed perspective.
When listening to Supply Chain, Sales and Marketing learned they had long replenishment lead times and struggled because the product mix kept changing and promotions would be dropped in after they ordered product. They had goals relating to lower costs that their bonuses were tied to and had a list of projects they were working on to make sure they got them. One example was to close a West Coast distribution center (DC), consolidate inventory, and ship from a Mid-West DC. They didn’t feel other functions were helping them be successful.
When Supply Chain listened to Sales and Marketing, they learned they needed to increase revenue year over year. There was a West Coast customer they were trying to develop and it was feared that redeployment of inventory would cause stock issues and extra lead time that may lose this important account. They also struggled with having to run promotions to support sales targets, but never having the right stock in place to support the subsequent increase in demand. From the point of view of Sales and Marketing, it seemed we always had the wrong things in stock and, just like Supply Chain, they didn’t feel other functions were helping them be successful.
We Changed What We Forecasted
It was quickly apparent, after hearing both sides, that they both needed a forecast but for a different purpose. Sales were concerned with the customer comping their sales and if marketing campaigns were delivering incremental revenue. For this, forecasting at higher levels and what was occurring next month or quarter end was sufficient. In Operations and Supply Chain, they needed to understand product mix and where it was shipping from. To do their job better they needed item and location and foresight into demand 90 days or more in advance.
I started doing segmentation as a joint exercise to better understand key items and drive improvements to forecasts on those items. We developed forecasts at the lowest level of granularity (item/location/customer) through a middle-out approach, providing better insights to both Sales and Operations. We also extended our planning horizon out beyond 3 months and to include a rolling 12-month outlook. This picture of demand allowed for actions in Operations and Supply Chain to be taken ahead of time with the uplift of promotions baked into the forecast.
We Drove Communication Through An S&OP Process
The most critical evolution that we made was the implementation of a monthly S&OP process. This helped build communication and a consensus plan. Having a monthly forum allowed people to work towards the same numbers and similar objectives and understand each other’s needs. A consensus plan helped build adherence to the forecast and got everyone on the same page.
In these meetings we would discuss exceptions in the forecast and communicate impacts of changes within defined planning time fences. If I may say so myself, I played a key role in these meetings that went far beyond providing a new set of projections (as I had done previously). S&OP participants made a commitment to communicate with context, providing additional insights to allow the cross-functional team to fully analyze and optimize decisions. We used a supply review to discuss their list of cost drivers and, as a team, cross-functionally discuss what could be done. In demand reviews, we brought up marketing campaigns months in advance and decided if they could be supported or not.
We Measured The Right Things
In our S&OP, our focus now was margin, revenue, and inventory turns. This helped the different functions to focus on what they both agreed upon the most, the health of the organization. It also made what each function did real in the minds of the participants and connected their objectives—not only to a higher goal but to each other. To support these KPIs we would also get into discussions on service levels, cost savings projects, inventory availability, and even forecast error.
An example of one result that I felt was particularly meaningful: Working together on cost savings projects, we were able to improve our margins. While cost savings was a goal, the company was more concerned with top line growth. My colleagues in Sales were able to use these cost savings to offer rebates and discounts to select customers on items to increase revenue. The net results were that Supply Chain hit their cost reduction targets, Sales hit their revenue targets, and with an improved top line and strategic sales, inventory turns improved also. A win-win-win!
In regard to forecast error, as mentioned above, despite going from 20% MAPE to 24%, we were happy. The reason being that our WMAPE at lag 3 went from 62% to 41%. Although our more aggregated forecast 1 month out had gotten slightly worse, the item and location level forecast that was driving supply improved by 33%.
In retrospect I don’t really think moving me from a Sales and Marketing function to a Supply Chain role helped a whole lot. Changing who I reported to most likely didn’t have an impact in the long run either. What changed things was understanding that the organization had a problem and I was in a position to help solve it. In my opinion, it doesn’t matter where business forecasting reports to and who your boss is as long as you can stay independent and help facilitate communication. It is important for any company to break down silos and find a balance between metrics and communication. Business forecasting—no matter where they put you—is fertile ground to help enable this communication and build consensus-driven plans.
For more insight into forecasting and planning best practices, join us at IBF’s Business Forecasting, Planning & S&OP Conference in Orlando, held from October 19-22 at the Wyndham Orlando Resort. The biggest and best event of it’s kind, it’s your opportunity to learn best practices in S&OP, demand planning and forecasting, and network and socialize in a fantastic setting. See here for details.