The essence of Sales and Operations Planning (S&OP) is the active participation of different departments. Participants come from varied backgrounds, each with different daily objectives and challenges, and they need to reach consensus to advance the process. Achieving this alignment in an environment of trust while balancing risks and opportunities is the main challenge.
The Demand Review is a foundational step in this process It is where a picture of future demand is created by taking a statistical forecast and adjusting it according to information about clients and the market from Sales & Marketing. It is where consensus on future demand is achieved.
The building blocks of the Demand Review include a statistical forecast, input from Sales and Marketing, and technology that supports the planning process to track the different clients, SKUs, and each person who collaborates in each stage of the S&OP process. In addition, transparency is key whereby all participants have the same information regarding past performance and future expectations.
Pre-Demand Review
Before the Demand Review, we must build a statistical forecast. I highly recommend having a quick meeting at the beginning of each month to show the results of the main KPIs, similar to the daily meetings proposed in the agile methodology. This helps us to understand the main difficulties of the last month and encourages conversation between the Sales team and Demand Planners. It is important not to focus too closely on each SKU and to keep it high level. I have been in Demand Reviews that lasted more than one hour per category, causing managers to leave the meeting. At this stage, keep discussions concise and focused.
In these pre-meetings, we can gain information about products or clients. For example, we might have a deviation from the forecast because our competitors increased their prices, or a client decided to increase shelf space, or conversely, the client decided that the product will be sold in fewer stores.
At the same time, it’s important to look at our service levels for different clients. Variations in sales could be due to internal problems. I recommend discussing Fill Rate, Market Share, and Days on Hand (DOH) for each client/category. If our colleagues have this information, we can react faster to changes in sales. For example, if we see that a retailer has increased its DOH, it is highly possible that our sales for next month will be lower. Information from the past helps us identify new sales trends and focus on products or clients that could pose risks or opportunities for our projections.
The desired level of aggregation depends on the planning time horizon. We take a more granular view the closer the horizon, and a higher level view for longer horizons. I suggest breaking it down as shown in Figure 1.
| One Month Ahead | 2 Months Ahead | 9 Months Ahead | 12 Months Ahead |
| Weekly | Monthly | Quarterly | Yearly |
| SKU | SKU Family | Category | Category |
| Customer | Customer grouping | Channel | Total Customers |
Figure 1 | Aggregation by planning horizon
Inputs We Need Before The Demand Review
We need a few different types of data for our Demand Review, which we collect from different sources.
Statistical forecast: We forecast based on historical data, assuming what happened in the past could happen again. The unconstrained demand forecast is our foundation for further discussion. This forecasting step can be improved with technology. For example, with APO or IBP, it is possible to keep a history of sales affected by out-of-stock situations or promotions, leading to a cleaner history and allowing Demand Planners to create better forecasts.
Input from Sales: Collaboration from the salesperson for each client is crucial, as they know the client’s perception best and will execute the sales plan. Therefore, they must be committed to the plan, considering it is usually their goal for the next month, with correlated financial incentives. The unconstrained forecast can be adjusted accordingly.
Input from Marketing: This area must incorporate knowledge of expected future share of the category, promotions, launches, or any product changes that could mean replacing a current SKU. At this point, the effectiveness of the Demand Review increases, as all the previous hard work will help have a decision-making meeting with managers. The unconstrained forecast can be adjusted accordingly.
During the Demand Review Meeting
During the Demand Review, I recommend starting with a one-page overview focusing on each category, showing the projections in terms of volume, price, and margin. This should be high level; only go into detail for SKUs that show significant deviations versus the last three months or have notable characteristics for the next months. In this meeting, we expect the participation of the sales manager, business manager, finance manager, or revenue manager.
The S&OP leader should encourage consensus to obtain a single plan that must be followed and executed. However, the S&OP leader also needs to create tension among the areas by asking questions such as:
- Are we considering pending orders in this demand?
- With the current projection, what could be our market share? Is it similar to what we expect?
- If we create a scenario in which competitors increase or decrease their prices, what is the expected volume difference?
- Which SKU poses the biggest risk? (If we anticipate higher sales than planned, we can project a bigger proportion of the demand at the beginning of the month, adapting the production schedule accordingly and react faster to potential out-of-stock situations.)
- Are we considering discontinued SKUs according in our revenue forecasts?
- Are we considering cannibalization between SKUs?
- Are we comfortable with this plan? What is the gap between this plan and the budget?
- What do we need to do to achieve our strategy? (We can adjust projections for a specific client, considering the sales manager’s participation in the meeting.)
One of the outputs of this meeting is a realistic yet challenging demand plan, with alerts for the next stage of the process. This will facilitate the next step in the S&OP cycle, the Supply Review. While uncertainty about the future always exists, we must take action with the best information available and prepare to react to new opportunities or risks. This is why it is essential to discuss the questions above.
Overcoming Bias & Achieving Alignment
I have been in Demand Reviews with biased behavior. We cannot forget that the demand agreed on at the end of the process will be part of the sales goal. Therefore, sales teams may try not to overcommit, thinking that selling more than planned is a good problem to have. At the same time, I have seen Marketing overpromise sales for new launches to ensure sufficient inventory, even at the risk of expiration. To promote cohesion, ensure that all participants share the same overarching goal (profitability for the business). Occasionally, let everyone adopt the CEO perspective. This approach helps identify what is best for the company and reduces siloed thinking.
Conclusion
In conclusion, the Demand Review is a critical step in the S&OP process and its success depend on the quality of the data and information used in preparation. This preparation allows for a decision-making meeting instead of an informational one. The S&OP leader must align the team through commitment, transparency, and trust, creating positive tension that addresses potential risks and opportunities.
This article first appeared in the fall 2024 issue of the Journal of Business Forecasting. To access the Journal, become an IBF member and get it delivered to your door every quarter, along with a host of memberships benefits including discounted conferences and training, exclusive workshops, and access to the entire IBF knowledge library.