1. What is World Class Forecasting? A Perspective on 25 Years of Research Presented at the Florida West Coast Chapter Meeting APICS International January 10, 2006 Mark A. Moon, Ph.D. Associate Professor and Director, Sales Forecasting Management Forum University of Tennessee Knoxville, TN mmoon@utk.edu http://bus.utk.edu/ivc/forecasting

2. Florida West Coast APICS presentation© 2006, Mark A. Moon World Class Companies … Make Demand Forecasting a critical part of a FORMAL, DISCIPLINED PROCESS to match demand with supply

3. Florida West Coast APICS presentation© 2006, Mark A. Moon Financial Management Demand Management Supply Management Demand/Supply Integration (S&OP) SUPPLY Production, Logistics, etc., and Upstream Suppliers DEMAND Sales and Marketing, Downstream Channel Partners Finance Capacity Forecast Demand Forecast Financial Goal Operational Plan Demand Plan Financial Plan Input to S&OP Output from S&OP Our focus will be here! Integration of Supply and Demand in Enterprises: The Role of Demand Forecasting

4. Florida West Coast APICS presentation© 2006, Mark A. Moon What is World Class Demand Forecasting? A Program of Research to Arrive at a Vision Phase 1: 1982--Survey of Techniques Used by 157 Companies (Journal of Forecasting, 1984) Phase 2: 1992--Survey of Techniques, Systems, and Management Approaches Used by 208 Companies (Sponsored by AT&T Network Systems) (Journal of Forecasting, 1994) Phase 3: 1994-6--In Depth Analysis of 20 Companies (Sponsored by AT&T Network Systems, Andersen Consulting, Anheuser-Busch, and Pillsbury) (Business Horizons, 1999) Phase 4: 1996-Present--Sales Forecasting Audits (International Journal of Forecasting, 2003)

5. Florida West Coast APICS presentation© 2006, Mark A. Moon Phases 1 and 2: The Surveys (Journal of Forecasting) Technique Familiarity and Satisfaction - moving average, exponential smoothing, regression Jury of Executive Opinion Used Across Horizons and Levels Accuracy - Key to Performance Evaluations Accuracy - MAPE Most Often Used Little Change in Performance from 1982 to 1992

6. Florida West Coast APICS presentation© 2006, Mark A. Moon Phase 3: The Benchmark Companies (Business Horizons) 20 Top Performing companies included: Anheuser-Busch, Becton-Dickinson, Coca-Cola, Colgate Palmolive, Federal Express, Kimberly Clark, Lykes Pasco, Nabisco, J.C. Penney, Pillsbury, ProSource, Reckitt Colman, Red Lobster, RJR Tobacco, Sandoz, Schering Plough, Sysco, Tropicana, Warner Lambert, Westwood Squibb Multiple interviews conducted at each site Anyone affiliated with sales forecasting considered a candidate to be interviewed

7. Florida West Coast APICS presentation© 2006, Mark A. Moon Forecasting Dimensions FUNCTIONAL INTEGRATION PERFORMANCE MEASUREMENT APPROACHSYSTEMS

8. Florida West Coast APICS presentation© 2006, Mark A. Moon Functional Integration Forecasting C 3 Communication Coordination Collaboration Both Internally and across the supply chain

9. Florida West Coast APICS presentation© 2006, Mark A. Moon To Improve Forecasting Effectiveness On The Dimension Of Functional Integration: Recognize Forecasting As A Function, With Adequate Organizational Clout, That Has Responsibility To Provide Forecasts At Levels And Time Horizons Useful For Downstream Users Move Towards A Consensus Approach To Forecasting Management Encourage: Common Goal Setting Communication Free Access To Relevant Information Across Functional Areas Collaboration With Trading Partners Provide Performance Rewards To All Personnel Involved In Forecasting Process Put Forecasting in its proper place in a corporate-wide S&OP process

10. Florida West Coast APICS presentation© 2006, Mark A. Moon Forecasting Dimensions FUNCTIONAL INTEGRATION PERFORMANCE MEASUREMENT APPROACHSYSTEMS

11. Florida West Coast APICS presentation© 2006, Mark A. Moon Approach Plan versus forecast Techniques What to forecast? Training

12. Florida West Coast APICS presentation© 2006, Mark A. Moon To Improve Forecasting Effectiveness on the Dimension of Approach, companies should: Reconcile top down and bottom up forecasts Separate forecasts from business plans (remember S&OP?) Segment key customers (CPFR, VMI, or CMI customers) Segment products (ABC Analysis) Understand game playing (sales force and channel partners) Top management support Training

13. Florida West Coast APICS presentation© 2006, Mark A. Moon Forecasting Dimensions FUNCTIONAL INTEGRATION PERFORMANCE MEASUREMENT APPROACHSYSTEMS

14. Florida West Coast APICS presentation© 2006, Mark A. Moon Systems SYSTEMS ARE CRITICAL TO FORECASTING EXCELLENCE, BUT THEYRE NOT SILVER BULLETS! CONCENTRATE FIRST ON YOUR PROCESSES Hardware and software Computers Communications Develop, analyze, and distribute forecasts Information Storage Retrieval Transfer

15. Florida West Coast APICS presentation© 2006, Mark A. Moon Principles of Sales Forecasting Systems (Supply Chain Management Review) Tool should fit the problem, not the other way around System serves as a communication vehicle between users and developers of the forecasts Complex forecasting systems should not look that way to the user Think in terms of a suite of time series techniques, not just one technique Think in terms of qualitative, time series, and (nor or) regression analysis Let the system tell you which technique to use You tell the system which forecasts are important

16. Florida West Coast APICS presentation© 2006, Mark A. Moon To Improve Forecasting Effectiveness on the Dimension of Systems, companies should: Invest in adequate forecasting system infrastructure Common ownership of data base and information systems Customized on screen and printed reports Establish linkages to key customer demand data

17. Florida West Coast APICS presentation© 2006, Mark A. Moon Forecasting Dimensions FUNCTIONAL INTEGRATION PERFORMANCE MEASUREMENT APPROACHSYSTEMS

18. Florida West Coast APICS presentation© 2006, Mark A. Moon A Mantra to Hang on your Wall WHAT GETS MEASURED GETS REWARDED, AND WHAT GETS REWARDED GETS DONE

19. Florida West Coast APICS presentation© 2006, Mark A. Moon Performance Measurement Metrics Forecasting effectiveness (not just accuracy) Explanatory information

20. Florida West Coast APICS presentation© 2006, Mark A. Moon To Improve Forecasting Effectiveness on the Dimension of Performance Measurement, companies should: Measure accuracy at levels relevant to functions Graphical and statistical measures Multidimensional metrics Accuracy Supply Chain Costs Customer Service Profitability

21. Florida West Coast APICS presentation© 2006, Mark A. Moon Phase 4 – Sales Forecasting Audits (International Journal of Forecasting) Three objectives: Understand current status of forecasting practice (a companys as is state) Visualize the goals of forecasting process improvement (the should-be state) Develop a roadmap for achieving the goals (the way forward)

22. Florida West Coast APICS presentation© 2006, Mark A. Moon Phase 4--Sales Forecasting Audits Companies who have participated to date: AET Films, AlliedSignal, Alticor, Avery Dennison, Bacardi, Conagra, Continental Tire, Corning, Deere and Company, DuPont, Eastman Chemical, Ethicon, Exxon, Hershey Foods, Lucent Technologies, Maxtor, Michelin, Motorola PCS, OfficeMax, Orbit Irrigation Products, Pharmavite, Sara Lee Intimate Apparel, Smith & Nephew, Union Pacific Railroad, Whirlpool, and Williamson-Dickie In-depth study of an individual companys forecasting practices Preliminary visit with sponsor, exchange of documentation 2 day site visit, team of 4 researchers

23. Florida West Coast APICS presentation© 2006, Mark A. Moon Sales Forecasting Audit Methodology Interview across functions: Those who develop and those who use sales forecasts Sales, marketing, forecasting, finance, logistics, production and materials planning, manufacturing Analyze interview results Compare to benchmark dimensions Identify strategic themes Formulate recommendations for management action Deliverables Written report summarizing findings Presentation of findings to interview participants Presentation of recommendations to senior management

24. Florida West Coast APICS presentation© 2006, Mark A. Moon Sales Forecasting Audit Findings Common Themes: Blurred distinction between forecasts, plans, and goals Lack of performance measurement, evaluation, and rewards Islands of analysis (What is the most widely used forecasting package??) Limited commitment to sales forecasting as a separate business function Product proliferation Inadequate statistical analysis of historical demand

25. Florida West Coast APICS presentation© 2006, Mark A. Moon Summary Learnings Characteristics of a Forecasting Champion (Journal of Business Forecasting) Appreciation of sales forecasting role for planning Recognition of cross-functional role More of a Leader than a manager Sales forecast developer and user Good understanding of techniques Full awareness of role of forecasting systems Mentor/Trainer

26. Florida West Coast APICS presentation© 2006, Mark A. Moon Summary Learnings The 7 Keys to Better Forecasting (Business Horizons) 1. Understand what forecasting is, and what it isnt 2.Forecast demand, plan supply 3.Communicate, coordinate, collaborate 4.Eliminate Islands of Analysis 5.Use Tools … Wisely 6.Make It Important! 7.Measure, Measure, Measure

27. Florida West Coast APICS presentation© 2006, Mark A. Moon Financial Management Demand Management Supply Management Demand/Supply Integration (S&OP) SUPPLY Production, Logistics, etc., and Upstream Suppliers DEMAND Sales and Marketing, Downstream Channel Partners Finance Capacity Forecast Demand Forecast Financial Goal Operational Plan Demand Plan Financial Plan Input to S&OP Output from S&OP In Summary: Excellence in Supply Chain Management Requires Excellence in Demand Forecasting, and Demand Management

28. Florida West Coast APICS presentation© 2006, Mark A. Moon From the Department of Shameless Promotion: If youd like more information about our Demand Forecasting research, visit the University of Tennessee Sales Forecasting Management Forum website at: http://bus.utk.edu/ivc/forecasting

29. Florida West Coast APICS presentation© 2006, Mark A. Moon More from the Department of Shameless Promotion: Order your copy now! Supplies are limited!

30. Florida West Coast APICS presentation© 2006, Mark A. Moon Questions or Comments?