Customer Demand Forecasting
SOFP Series Blog #3
In my previous blog on the Sales, Operations, and Financial Planning process (SOFP), I discussed why SOFP is important. In this blog, we will look at the first monthly step.
There are 5 major steps in the SOFP process and many companies complete all 5 steps during the first week of the month.
Demand planning is primarily the forecasts of expected demand for the products in the value stream.
Who should provide these forecasts? The sale and marketing people. They are the closest to the customer and have the best understanding of the markets. The forecasting is always done for each value stream. This can be a problem when the sales & marketing people are organized differently. You need to find a way to easily obtain valid value stream forecasts.
How should the forecasts be presented? The forecast should be at the highest possible level. In some value streams this will be a single forecast for the entire value stream. In most value streams it will be a forecast for each product family within the value stream. Forecasts are never calculated for individual products. These high level forecasts will be much more accurate than the detailed level forecasts. Plus, if you can make a good job of controlling the volume of production, the mix of production is a lot less complicated.
What units of measure should be used? The forecast should be stated in the number of units of sales each month. Sometimes the units may be in pounds or gallons rather than units. But sales forecasts are never given on dollars.
How far into the future should we forecast? Most industrial companies look out for about 18 months.
What should accompany the forecasts? The forecasts should always have the assumptions upon which the forecast is based. This way the team can understand which assumptions caused errors or inaccuracy in the forecasts, and use this to improve the forecasting process.
Don’t argue about the fact that the forecasts are inaccurate. All forecasts are inaccurate. But measure the accuracy and the bias each month, and create formal methods for continuous improvement of the forecasting process so that the forecasts will improve over time.
How are they calculated? Calculating forecasts automatically from demand history is seldom useful for SOFP. What is needed is for the sales and marketing people to gain information and insight from the customers, and to keep in touch with market trends and the economic factors that drive them. The best forecasts come from the judgment of the sales & marketing people using real data from the customers and the market, and about competitor actions. The company can also affect the forecasts by introducing new products and retiring other products, and by various promotions and marketing pushes.
Where do the forecasts go? The demand forecasts for the value streams are entered into the SOFP Planning Sheet together with the assumptions behind those forecasts. We will take a look at the SOFP Planning Sheet in a future blog.
When the demand forecasts are in place we are ready to move onto the next step – Operational Planning.