Using Collaborative and Synchronized Planning to Achieve Better Forecast Accuracy through Organizational Alignment

Imagine this scenario. Every week, the sales department claims that because goods coming from the manufacturing department are not on schedule, many customer orders are going unfulfilled and even goods which make up fixed orders are being sent late to customers. Even when orders are fulfilled and do go out on time, it leads to problems in availability of one kind of product or another, due to shortages. This disconnect it causing marketing promotions to run even before the goods being promoted are actually available resulting in no stick stock situations. This scenario is unfortunately far to common.

The sales division naturally blames the logistics division or the supply chain for the unavailability of goods within the promised time. From there, one division blames another division and so on. This routine situation generally happens sadly without any revamping or solution found in which to fulfill customer expectations.

It is easy to see that there is no coordination between departments even through all department activities seem to be running normally. This lack of cross functioning causes supply and demand to go out of sync and although each individual process seems to run according to the correct procedures and rule, it is not enough. The problem lies in silo processes and it will ultimately endanger the entire company. The first step to solving this problem is to create a preliminary map of initial forecasting, finalized forecasting, inventory planning optimization, available to promise, DRP, MRP, procurement planning, supply commitment and transportation planning. These all must be synchronized in order to match a company's supply with demand. Order fulfillment and on time delivery can be achieved but discipline must be maintained throughout the organization.

Every initial forecast which is submitted by the sales division goes to the company's demand planning division, which processes and analized the data until it can propose a suitable recommendation forecast or recommendation of demand order. With a course set from the demand planning division, a consensus must be found between the sales, marketing, finance, manufacture, including Production Planning Control (PPC), logistics and procurement divisions. In fact, every division must approve of the plan in order to achieve the agreed number of forecasts. It is much better if there is at least one senior top level member, like a director or CEO, who can participate in the consensus and agree with the number of forecasts.

With a consensus on demand planning a rolling forecast can be established among the division with the sales division having the final word. The demand planning division will then give forecast recommendation based on historical data and information about upcoming events, like new product launching, marketing promos and other marketing events, both local and national. From promotion activities, the finance division should project a level of sales attainment to help set the budget, which will be ultimately issued by the finance division to support promotional activities. After that, marketing may commonly challenge sales, if the given numbers are perceived as way over or way under their prediction. In this consensus, arguments both optimistic and pessimistic will arise and forecast numbers will be highly scrutinized. After the finance, marketing and sales division have come to an agreement, then the factory division will make arrangements related to capacity, shift times and how many employees will be needed at the factory. Meanwhile, the PPC division will calculate whether that forecast number can indeed be fulfilled in the period of time desired by sales on a weekly or monthly basis. To properly plan these times, it is usually divided into three parts: fixed orders, slushy order and liquid orders. This is important because it is related to the procurement plan and the purchasing of both raw materials and packaging materials. By considering the delivery lead times, the supplier will be better prepared with critical materials when needed, especially ones which have very long lead times.

These consensus seeking activities, collectively known as sales and operational planning or synchronize planning, allows demand planning to initiate organizational alignment. All parties must be involved to ensure the end result, which is total customer demand, by successfully matching supply with demand. If this process is run routinely, it will give benefit to every division as it will likely lead to the company reaching its goal. However, it should be noted that the actual implementing process may not be standardized and depends highly on the company's culture, including its owners and board of directors, who make all final decisions.

Also, if the consensus process fails, there could be chaos if every division decides to flex their muscles at the same time. For example, if there is animosity or bad blood or hidden agendas, divisions could go rouge and a supply and demand match will never be reached as they waste time debating details without any good and clear results attained. Thus, it is essential that there in consensus, because result of that decision will become the joint agreement of all participating divisions.

The results of the consensus will be processed again by the demand and supply planning divisions and the evaluated by the DRP and MRP before being synced with the daily production schedule and just-in-time purchasing data to ensure that production runs on time. At this stage, if demand cannot be satisfied, then it should be easy to find the root cause.

The phenomenon of the "blame game" among divisions is nothing new, but it should be all but eliminated as long as key performance indicators (KPI) are shared with each division involved with the consensus. By running routine processes, it will help participants of the consensus, particularly in supply and demand planning, to sharpen their forecast accuracy levels and minimize error rates.

A first may very well look like it is out of control, but may become more focused after the implementation of this synchronization planning process. This process can only materialize if there is a serious commitment from management and after a detailed discussion of the matter, but after consensus has been reached, future discussions about the synchronization planning process usually take only two to three hours. So the process of implementation highly depends on the needs of management and the company's unique culture.

The above explanation mentions that there are three parts to the process. They are:

a.        Fixed order > an order that cannot be changed or canceled (e.g. weekly, monthly…), because the order has been integrated into the production plan, procurement plan and material purchases

b.       Slushy order > an order which is semi fixed and less frequent (e.g. every other month) that may still be revised or adjusted according to customer demands and market patterns. A slushy order may be changed to around 10-15% depending on the agreement struck between planning (the sales/marketing team) and supply planning (the procurement/purchasing team).

c.        Liquid order > an order which occurs even less frequently than a slushy order (e.g. every third month). A liquid order may be changed by around 25% depending on the agreement between the factory and distribution parties.

To implement the planning time horizon, it is required that an agreement is reached between the manufacturers and distribution. For distribution, which must be ready to often di additional orders, emergency order, or inserts orders, the mechanisms of each internal process should be clear enough as to eliminate the need for emergency orders, but it is not easy. Success often depends on properly reading the ever changing market situation, specifically, being able to adjust quickly to customer order fluctuation. Somehow, orders need to be controlled if we do not want to always be interrupted by unexpected orders. The idea of controlling orders is a very good one, but complete control is probably not possible, so the sales team should grow accustomed to accommodating additional or emergency orders.

If your business does not practice collaborative synchronized planning though organizational alignment now is the time to start. If you already do practice this, then consider yourself fortunate. This need for organizational alignment is more critical than ever before. Why? Here is an interesting note that I obtained from an Aberdeen report entitled "S&OP: A Proven Process to Maximize Your Business Results". It states that the speed of business continues to accelerate and with the empowered consumer now dictating most channels, any confusion about priorities or delays in fulfillment will most likely result in increased costs, higher inventory and at its most extreme, business bankruptcy. Sales and Operations Planning, also known as (S&OP), focuses on collaborative and synchronized planning.

The need to master the timing and volume shifts which results from these channel charges it critical to maintaining customer service and fulfilling orders profitably. The collaborative synchronized planning, known as S&OP process is the perfect process to recognize, evaluate and determine the impact of these changes, and then effectively communicate them in order to align the organization into one plan.

Forecast accuracy is a process directly related to the S&OP process itself. For example, the Best in Class companies, according to the Aberdeen report, have consistently 20% higher success rates than all other companies. In general, most would agree that higher accuracy is better without a lot of in depth thought, but one factor is pivotal. The key is to look at the opposite of accuracy, which is error. Best in Class companies have error rate for most companies is 37%. This means that others companies have twice as many orders to correct on their factory floors or on supplier schedules compared to the Best in Class companies studied in the Aberdeen report.

Forecast accuracy determines the first steps in S&OP when the company is beginning to supply/demand match and determine core functions though the S&OP process. The umbers provided are usually fairly consistent over time and probably reflect an error rate that is inherent to the company's processes. This is why it is perhaps the most important variable to improve in terms of opportunity and impact, as we will see when it is time to review process capabilities.

Many companies use and apply S&OP and it leads to significantly better business results. Forecast accuracy improvements are driven largely by the S&OP process, which requires a forecasted demand as the starting point and performance is reviewed every cycle. The impact of improving the accuracy alone justifies the effort spent in S&OP processes.

The S&OP process is a real game charger for companies striving to maximize their business performance. The basic elements are the same, but the frequency of review has increased to support the ever increasing speed of business as well as the issues created by channel shifts. Just keeping up with the changes and exceptions in such a dynamic market environment accentuates the need for robust S&OP processing. These are the keys to success for those who need to establish S&OP:

1.    Establish format, collaborative and synchronized planning (S&OP) and have the sub processes reviewed. Don't forget to periodically plan sign offs to keep the responsibilities of each division clear.

2.     Determine the frequency of processes for your business. Some fast moving businesses may even review their plans on a bi weekly basis. At least monthly is recommended, unless the pace of change allows for quarterly reviews.

3.      Formalize the demand planning process and start measuring forecast accuracy if it is not being done already.

4.   Implement a statistical forecasting solution along with the analytics to allow segmentation reviews and timely management alerts.

5.      Formalize the process of supply demand to allow for the planning of multiple iterations and scenarios.

6.      Establishing process sponsorship at the top level with the CEO and even owner of the company is strongly recommended.

S&OP, also known as collaborative synchronize planning, though organizational alignment, is a "must have" process for all organizations in order to maintain alignment as the speed of business continues to accelerate. If you don't have it, get it, in order to maximize your effectiveness.

Report of reference: "S&OP: A Proven Process to Maximize Your Business Results.

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Logistics+ Vol. XI Issue No. 63