demand forecast

Forecast Demand

Learning Objectives

To understand the fundamental of Demand Forecasting.

To help plan own Sales Budgets

Contents

Forecasting

Why forecast?

Forecast Types

- Benefits of doing forecasts - Consequences of not

- Statistical Methods- Creating Judgmental forecasts

Why forecast?

Forecast Types

OUTPUT:Volume: Evaluate TOTAL forecast Value: link to volume forecasts

Evaluating the Forecast

What is a forecast?What is a forecast?

- Total forecast components- Statistical forecasts- Judgmental forecasts

- Forecast Definition- Forecast uses

- Benefits of doing forecasts - Consequences of not

- Statistical Methods- Creating Judgmental forecasts

OUTPUT:Volume: Evaluate TOTAL forecast Value: link to volume forecasts

Evaluating the Forecast

- Total forecast components- Statistical forecasts- Judgmental forecasts

- Forecast Definition- Forecast uses

How to Forecast

Putting it TogetherPutting it Together

How to Forecast

e.g.

• How much Ventolin Inhaler 200 dose will we sell in February?

• How much will a case of Augmentin 100 mg cost in November?

• What % of Panadol sales will we spend on Television Advertising in 2002?

What is a Forecast ? Definition:

A forecast is an estimate of volume or value– for a given SKU (or group of SKUs)– for a given period of time.

A Forecast is an ESTIMATE of future salesA Forecast is an ESTIMATE of future sales

It willIt will always be wrongalways be wrong to some extent, to some extent, but willbut will always be BETTERalways be BETTER than than NONO informationinformation

What is a Forecast used for? Budgeting / Business Planning

Input to the PMI process – Inventory Planning – Distribution Requirements Planning– Inventory Management

Why forecast….? Develop forward view of business Allow more informed decision taking Highlight gaps vs. budgets

– volume & financial Communicate through the supply chain Aim for lower costs

– inventory– write-offs

PLAN don’t REACT

Consequences of not Forecasting

Always reacting to surprises– fire-fighting vs. value adding– no communication through supply chain

Stock unlikely to absorb abnormal demand– high stock (wrong stock)– poor customer service– unstable NR’s and poor supply

Forrester Effect– demand spikes are amplified

caused by over-reaction to surprises

Developing a forecast - Roles

Marketing– Long Term Forecast

Sales– Short Term Forecast

Finance– Prices & Cost forecasting

Senior Management– Sign Off

Demand– Process champions– customer of the forecast

A forecast should be reached by CONSENSUSA forecast should be reached by CONSENSUS

Monthly Planning CycleMo

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WeTh Fr Mo Tu

WeThFr

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FrWk. 2

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MonthlyPlanning

Cycle

Sales & MarketingMeeting

Download and Review Actuals

FinancialMonth Close

Forecast Review Meeting

FinaliseForecast

TransmitNet Req’s

SupplyReviewMeeting

TransmitAgreedSupply Plan

NegotiateExceptions

Rough CutCapacityPlanning

KPI REPORTINGDEADLINE

Global DemandMeeting

Global SupplyMeeting

Demand Meeting

Developing a Forecast - Forecast types Forecasts consist of two types of information

– Statistical forecasts based on historical data & patterns

– Judgmental forecasts based on judgement, research, consensus,

assumptions

Developing a Forecast - Forecast types

Base volume– seasonality– repetitive orders

yearly tenders samples

– promotions (with historical data)

Any situation where historical information is available and reliable.

Adjustments – changing market conditions– seasonal pattern changes– sales promotions

(with no historical data)– random tenders

New Products

Any situation where no historic data exists or is NOT VALID

Statistical Judgmental

Developing a ForecastForecast Types - SA Investigator In SA various volume facts exist to develop the TOTAL VOLUME FORECAST

– Base Volume– Adjustment Volume– Samples Volume– Free Goods Volume– Tenders Volume – TOTAL VOLUMETOTAL VOLUME

• StatisticalStatistical

• JudgmentalJudgmental

• CALCULATEDCALCULATED

• JudgmentalJudgmental

• Judgmental/StatisticalJudgmental/Statistical

• Judgmental/StatisticalJudgmental/Statistical

Developing a Forecast - Process What are the processes that create the different types of forecasting?

– Statistical Base volume forecast

– Judgmental adjustments etc.

Statistical Forecasting- Process Capture actuals

– from Sales Order Processing (SOP) system

Filter history – to remove abnormal demand– to remove stock outs– to adjust for step changes

one off task - when conditions change

Run forecasting “algorithm” tournament, regression etc.

Evaluate results against assumptions

Statistical Forecasting Process- Capture Actuals

Actuals from SOP system

– provides historical data to use for statistical method essential to drive forecast in future

– will be invoiced sales - therefore : all sales will be included

– including promotions volumes stock problems will be reflected in lower figures

– requires maintenance to be effective initial one off job when first building forecast ongoing task is to maintain last month only

Statistical Forecasting Process - Actuals being used as History

Projects historical sales patterns into future forecasts

– shape will be ‘smoothed’ to varying degree

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History

Forecast

Statistical Forecasting - Uses of History Trends

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History Forecast Linear (History)

TrendingTrending

Statistical Forecasting- Uses of History Seasonality

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SeasonalitySeasonality

Statistical Forecasting Process- Filtering (modify) History

Why Filter– large abnormal patterns will wrongly influence future

Things to look for in History to filter– stock outs (zeros) & promotions (spikes)

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Total Vol FC

Sales Vol FCSales Vol

Statistical Forecasting Process - Filtering (modify) History

Results of filtering– smoother pattern is projected into future

modify history in Sales Vol Md in SA (use Comments)– doesn’t change REAL history (sales Vol)

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Total Vol FCAdjstmt FCSales Vol Md / FcSales Vol FCSales Vol

Business Forecasting ProcessCapture

Historic Data

Review CommercialPlans

Consensus Forecast

Modify History

GenerateForecasts

Demand Review Meeting Sign off

Review ExceptionalDemand

Sales/MarketingResponsibility

Feed to Demand Planning

Process

Developing a Forecast- Judgmental Forecasting When Statistics won’t work….When Statistics won’t work….

– Where there is no reliable history New SKUs

– For future events that have no past information range changes changing market conditions promotions

Solution…….– Use Judgmental forecasts

to create forecasts where no statistical can exist to adjust statistical volume (as per last slide)

Judgmental Forecasting

Used to add future events to the forecast– can be positive or negative– adjustments made to the statistical base

if one exists (e.g. New SKUs)

Require assumptions to base judgement on– research– market information– brand plans– consensus forecasts (Demand Review

Meeting)

Judgmental Forecasting Adjustments should NOT overwrite base volume

– should be complementary to the statistical numbers statistical Base added to judgement

adjustments get the Correct TOTAL VOLUME

– in SA use different Fact for adjustments allows analysis & visibility comments database can be used to store

assumptions

Judgmental Forecasting

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Adjstmt Vol 0 0 0 0 33 104 5 0 0 10 20 80 50 40 40 40 40

Sales Vol FC 100 123 131 144 122 80 110 85 112 123 108 144 122 122 110 130 112

Total Forecast 100 123 131 144 155 184 115 85 112 133 128 224 172 162 150 170 152

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Putting the Forecast together… - Effort of Forecasting

Focus Forecasting Effort– Statistical forecast alone will often achieve sufficient level of

accuracy (especially Cat B/C)– not always the best solution alone

Build judgmental adjustments in where necessary– Complex Demand or High Value (Cat A) Products

Together powerful tool to deliver TOTAL forecastTOTAL forecast

Statistical - deliver base, trends & seasonality Judgmental - promotions, ranges changes,

abnormal scenarios

Putting the Forecast together… - Effort of Forecasting

ComplexityComplexity

ValueValue

StatisticalStatisticalForecastingForecasting

JudgmentalJudgmentalForecastsForecasts

AA

BB

CC

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Sales Vol FC Adjstmt Vol

Sales Vol Total Forecast

Sales Vol MD

Putting the Forecast together…- The bigger picture

Putting the Forecast together… - The Volume - Value link

Value Forecasts driven by volume– Volume x Average Price = Sales Value

both volume and price require forecasting

Volume - Value link will deliver the 24 month rolling business forecast

– new products will need to be forecast earlier to get full business picture

Financial forecasting was deployed in 2000– will allow forecasting for profit and contribution

ONE SET of NUMBERS drives the business

Putting the Forecast together…- Points to remember….

Always remember….– the forecast from the system may be correct – the initial assumptions may be wrong

changing market conditions unexpected seasonal conditions

Work out if adjustments are– required, realistic and reasonable to make– if they are - don’t overtype the base volumeif they are - don’t overtype the base volume

use judgmental facts (i.e. Adjustment vol.)