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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
Tu
WeTh Fr Mo Tu
WeThFr
TuMo
MoTu
We
We
Th
ThFr
FrWk. 2
Wk. 3Wk. 4
Wk. 1
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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Apr Ju
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History Forecast Linear (History)
TrendingTrending
Statistical Forecasting- Uses of History Seasonality
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1 4 7
10 13 16 19 22 25 28 31 34 37 40 43 46History Forecast Linear (History)
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
Jan Feb Apr May Jul Aug Sep Nov Dec Feb Mar May Jun Jul Sep Oct Dec
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.)