S&OP processes always include a demand review step. There are plenty of articles, webinars, and blogs about how to set up and optimize a Demand Review, covering such topics as the best metrics to use, which departments to include, and whether to use a unconstrained or constrained demand forecast.
These details are important, but there is something often overlooked in our attempts to build a robust Demand Review. We often struggle to speak a “language” that is understood by those outside Demand Planning. By failing to speak a universal language we our peers can undervalue our efforts and fail to see how what we do relates to their work. As a result, we struggle to keep Sales and Marketing partners engaged and, subsequently, we don’t get the necessary insights.
Details are important, but the priority for our Demand Review meetings is cover four key areas. Let’s look at the cornerstones of a healthy Demand Reviews and identify what value should be captured from each of them, including the one even experienced Demand Planners miss that is key to tying our demand plans to revenue.
1 – Understand The Assumptions Behind Past Performance
To start, we need to understand the value of our past assumptions. These assumptions include understanding our demand history, quality of the data, the models we use to create statistical forecasts, and the adjustments we made to accommodate business changes. We can’t possibly build trust in the forecast we are using if we don’t take the time to measure and track past performance. It’s why we have so many discussions around which metric is best, which level to measure, and how to apply formulas.
“Too much time is spent reporting performance as if this is the purpose of the meeting”
Understanding past performance is necessary, but frequently too much time is spent reporting performance as if this is the purpose of the meeting. Capture it, measure it, discuss it but don’t spend all your time on it. It is equally important to take the time to choose the right metrics. While a single metric can certainly tell you something valuable about the forecast, a singular metric limits understanding and often generates misconceptions about the forecast. Using multiple (compatible) metrics improves daily decisions when using the forecast.
This article isn’t to debate which measure is best, which formula to use or how to apply them; it’s a reminder to consider metrics beyond just looking at accuracy and bias. There are plenty of great metrics that you should add like FVA, Forecastability, tracking signals and waterfalls, forecast hit/miss, and even simple absolute error in dollars. Whatever combination you choose, explain the metric in terms of what they measure and what they tell you about the data. Advanced planners will take the time to link results to actionable behaviors in other areas.
“Discuss past assumptions and which ones were most value-added”
For example, forecast performance can explain poor service levels, tendency to build excess inventory (bias), or even why operational efficiency is low (poor product mix measured by accuracy calculated at lower levels). Measurements like FVA can tell us which assumptions, forecast or whatever we want to measure provided a better predictor of actual demand. Discuss past assumptions and which ones were most value-added.
2 – Assess The Current Demand Factors
Secondly, we need to understand our current demand situation. The Demand Review should also highlight our current immediate forecast and help us to understand how we are trending in actual performance. While this isn’t the ultimate focus of our meeting, it is something we should discuss. Are we waiting on orders or are orders ahead of plan? Is there a risk of creating future shortages?
Reviewing and discussing the current short term demand picture can also help us identify unplanned and previously uncommunicated events. Finding these events while they are happening — while less than ideal — can help us mitigate risks and drive better customer service in the future than if we were to find them when reviewing our past assumption performance.
Of course, it would be better to be told of these events in advance so they can be properly planned, but let’s face it — for every event or planned promotion there is at least as many and usually more that happen on the fly without any advance notification.
3 – Understand Future Demand Factors
Our Demand Review should help us understand the future. Most of our time should be spent on understanding the assumptions, events, new products, or sunsetting items loaded into the demand plan in the mid to long range period, as well as any risks or opportunities in that plan. Rather than thinking about the forecast for next week, next month or maybe two months out, we should be looking out to the next quarter or the next year in our forecasts. At a minimum, we should be looking at our max lead-time plus one period.
“The Demand Review creates a road map that all other departments in the organization will use to make decisions”
I’ve been in many Demand Reviews and have been guilty of leading reviews where most of our time was spent on looking at past performance. Sure, it helps us to understand something about our process, we must give at least equal attention to the future. The whole reason we’re building the demand plan is to have some understanding of what we can expect in the future and to share that knowledge with the rest of the organization. It’s to set a road map that all other departments in the organization will use to make decisions.
Understanding the assumptions and any risks or opportunities that exist provides context, credibility and builds trust in the forecast, which is critical if other functions are to use it. Thus, when using the demand plan, we can plan contingency strategies for things not in the plan instead of letting fate happen.
4 – Understand The Gap Between The Demand Plan & Financial Plans
One last part often missing from demand reviews is a gap analysis between the demand plan and the operating budgets or financial plans. We work as a team towards a single plan, but those forecasts may look different depending on how they are translated such as the difference between the demand plan, financial plans, and the replenishment plan. As the demand plan rolls through the S&OP process into the supply review, disconnects between what we sell and what we can supply are identified and addressed. Unfortunately, we often overlook the need to compare the demand plan to the latest operating budget or financial plan.
It’s not just about comparing to the original plan from the beginning of the year — that will no doubt change — but instead understanding the gaps between the current financial plan and the demand plan. Are we planning for revenue above what’s in the demand plan? If so, what is being done to ensure the right product (or any product) will be available to sell to meet the revenue expectations? If revenue expectations are below the demand plan, do we understand why, and the potential excess inventory we are building? Communicating and understanding gaps improves opportunities to meet corporate initiatives.
Demand review are a critical step in any S&OP process. As Demand Planners, we often get buried in a lot of details with large charts and files, talking about metrics that many of our sales and marketing partners may not understand or find valuable. Taking the time to communicate the right metrics and refocus efforts on the parts that matter most will result in a more productive demand review meeting. It’s not about who is the most accurate, but rather identifying the data that provides the most value and capturing the insights needed to better run our business.