1. 1 © The Delos Partnership 2003 Sales Forecasting and Demand Management Introduction

2. 2 © The Delos Partnership 2003 A Manufacturing Company “‘We want to deliver a good return to our shareholders. To do this we want to deliver Quality products to our customers, competitively priced, delivered on time, ensuring that they always have a positive experience with us. Suppliers will enjoy working in partnership with us. We will ensure that our employees will consider this a fun place to be, and we will take care of the environment.” said the mission statement at the entrance. Marketing is in the middle of a special promotion, which has suddenly been arranged, to meet the quarterly financial target. The artwork for the packaging is having to be arranged at short notice. Sales have just tendered for a big contract which will mean significant extra business above the business plan. It is not long till year end, and if they get the order in time then the Sales and Marketing Director will get a bonus for exceeding her annual target. Confidence is high. Customer Services will be working late tonight to catch up with the backlog of orders. There have been real problems with deliveries from the factory. Supply Chain has heard a rumour about a ‘really big order.‘ But they've heard about these before. So they are proceeding with their plans to cancel overtime at the factory to meet cost targets. The Supply Chain Director meets weekly, individually, with the Marketing manager to get a feel for the market. Then he meets with his Production Planner, compares his ideas with past history and they finalise the Forecast and Production Plan, based on their own knowledge of demand. They know about marketing forecasts.

3. 3 © The Delos Partnership 2003 A Manufacturing company – cont’d Corporate are short on Cash Flow, and hence have told the division to implement a cost reduction programme, and to reduce inventory by 20%. The Finance Director is working on ways to do this, in principle by delaying payments to suppliers The Manufacturing Director has just come back from a course with ideas on Operating Equipment Effectiveness. He wants a smaller product range and bigger batches. His basic manufacturing philosophy is that lower costs are achieved through maximising utilisation of machines, and keeping direct labour at maximum levels of output. The Distribution director has heard that demand is increasing, so is putting together plans to open a Central Distribution centre just outside Paris. Development are in the middle of developing a revolutionary new product range, that will dramatically increase market share. However, a minor modification to the product will reduce costs, and improve the quality. Customer response through market research so far is excellent. Unfortunately this development will delay the launch to Quarter 3 of the next year. The Chairman and the Chief Financial Officer just met with a key group of Stock- market analysts, and have said that cash-flow will improve this year through a radical cost reduction and inventory management programme. Sales and Profit will rise by 20 % next year, which should mean an increase of 25 % in Earnings per share, due to an exciting new product to be launched in Quarter 4 of this year. The result has been a “buy” recommendation for the shares.

4. 4 © The Delos Partnership 2003 Balancing the objectives Inventory Customer Service Manufacturing Costs Manufacturing Flexibility

5. 5 © The Delos Partnership 2003 Why is a Forecast needed ?

6. 6 © The Delos Partnership 2003 Why is a Forecast needed ? Design Purchase Intermediate Manufacture Sub-assemble Finish Distribute Cumulative Lead Time Customer Places Order here Forecast needed to cover this

7. 7 © The Delos Partnership 2003 What is a Forecast used for?

8. 8 © The Delos Partnership 2003 Impact of Forecast on the Supply Chain Part Number: 12345 Lead Time: 2 periods Safety Stock: 0 Min Ord Qty: 75 On Hand: 100 Part Number: 12468 Lead Time: 2 periods Safety Stock: 0 Min Ord Qty: 75 On Hand: 40 FACTORY Supplier Schedule Periods123456789101112 Forecast1525 Actual Demand10 Projected Available Bal755025050250502505025 Available to Promise9075 Master Schedule75 Periods123456789101112 Gross Requirements75 Scheduled Receipts Projected Available Bal40 Planned order Receipt75 Planned Order Release75

9. 9 © The Delos Partnership 2003 Forecasts are Needed to Support New Product Development On time and in budget…. 0 1000 2000 3000 4000 5000 6000 Units 1357911 Months New Product Forecast Forecast Non-optimistic Forecast From Ideas to plans Supported by Forecasts

10. 10 © The Delos Partnership 2003 Forecasts Provide Business Plan Forecasts Vision and strategy Finance Shareholders Resources

11. 11 © The Delos Partnership 2003 The Delos Model For Business Integration Innovation Innovation Vision Strategy Prioritisation Prioritisation Demand Support Supply

12. 12 © The Delos Partnership 2003 Common Reasons for Not Forecasting I can never make it 100% accurate My business has too many unforeseen peaks My business is different - you can’t forecast it I don’t know who’s responsible for it anyway It’s not in my objectives I’m measured on getting high sales - so who cares about the forecast The factory never make what I forecast anyway Nobody thanks me for it – so why bother ?

13. 13 © The Delos Partnership 2003 What are the Results of an Inaccurate Forecast ?

14. 14 © The Delos Partnership 2003 What are the Causes of an Inaccurate Forecast ?

15. 15 © The Delos Partnership 2003 Vertical Functional Organisation MD Sales Marketing Technical Operations Finance HR R&DR&D R&DR&D MKTGMKTG MKTGMKTG SALESSALES SALESSALES OPSOPS OPSOPS ACCTSACCTS ACCTSACCTS HRHR HRHR Directors Managers Supervisors/Team Leaders

16. 16 © The Delos Partnership 2003 Impact of Biassed Forecast Increase resources to meet higher demand OVERFORECASTING IS AS BAD AS UNDERFORECASTING More Stocks More Labour More Materials More Plant No Sales Cost of Goods increases OVERFORECASTING GROSS MARGIN GROSS MARGIN Stocks Low Labour Unavailable Short of Capacity Short of Materials Lost Sales Cost of Goods increases GROSS MARGIN GROSS MARGIN UNDERFORECASTING Resources insufficient to meet demand

17. 17 © The Delos Partnership 2003 Who Forecasts ? A forecast is needed to cover the difference between the customer lead time and the Cumulative Lead Time Often the question is simply who does the forecast Sometimes many people do the forecast

18. 18 © The Delos Partnership 2003 The Delos Model For Business Integration Innovation Innovation Vision Strategy Prioritisation Prioritisation Demand Support Supply Responsibility

19. 19 © The Delos Partnership 2003 Forecasting - Is There a Definition?

20. 20 © The Delos Partnership 2003 Forecasting – Definition A forecast is a formal request to the Supply Management function… From Sales and Marketing to have the product, materials and Capacity available according to the quantity and At the time that they anticipate the demand will occur from the Customer to ship the product to their premises

21. 21 © The Delos Partnership 2003 The Delos Model For Business Integration Innovation Innovation Vision Strategy Prioritisation Prioritisation Demand Support Supply One set of numbers !

22. 22 © The Delos Partnership 2003 Demand Management Horizon PLAN MANAGE EXECUTE Cumulative Lead Time Add or subtract To capacity Strong Link to Integrated Enterprise Planning Process Capacity and Materials “firm” Release Orders

23. 23 © The Delos Partnership 2003 Demand Management Sometimes actual demand is different from forecast demand ! Abnormal demand should be identified A realistic promise should be given to customers Risk of losing customer needs to be balanced against upsetting others!

24. 24 © The Delos Partnership 2003 Forecast needs Safety Strategy Design Purchase Intermediate Manufacture Sub-assemble Finish Distribute Where Do you meet The Customer ?

25. 25 © The Delos Partnership 2003 A Forecast of Some Sort is Needed for all of These Strategies ! Safety Strategies Every business needs to decide whether products are: – Make to stock – Assemble to order – Purchase to order – Design to order Or some combination of the above

26. 26 © The Delos Partnership 2003 Forecast needs Safety Strategy Design Purchase Intermediate Manufacture Sub-assemble Finish Distribute Where Do you meet The Customer ? Safety Capacity Safety Stock

27. 27 © The Delos Partnership 2003 Business Strategy and Financial Effects Customer Service Inventory Manufacturing Costs

28. 28 © The Delos Partnership 2003 The Forecast is the Driver of the Business The Role of a Forecast Helps Plan resources (equipment, people, materials, services) Develop and support sales targets Capture marketing information Reach consensus on the support needed Strategic and Business planning Vital for communication

29. 29 © The Delos Partnership 2003 Integration CULTURE/ BEHAVIOUR TECHNOLOGY WAYS OF WORKING Consumer And Customer Focussed Simplicity Itself Delivering Shareholder Value

30. 30 © The Delos Partnership 2003 Improving the Forecasting and Demand Management Process will improve Customer Service Customer Service Inventory Inventory Business Control Business Control Financial Performance Financial Performance