What are the big differences between the 4.0/5.0 vs. 7.0?  There are some marginal improvements that the tech shop may admire but anything for the planning community?!

We also hear that the planners have not been using the Statistical modeling features in APO.  Will upgrading to 7.0 persuade the planners to use the Stat Models more?  Not just more, just even barely?

IT implementation teams say that Stat models are not a priority given the budget constraints they have.  So more millions before and no stat models.  Now five years and many millions later, we have a shiny new upgrade and again the stat models are not a priority.

I have been preaching Usability for the past few years.

Put together fine tools  – But help the users in making the transition to the tool – give them better understanding – Make the new tool more usable!

Give them the reports they need.  Provide them an exception based workflow!

APO has good statistical models.  They will help you move the peanut forward but only if these models are better understood and leveraged.

We just re-launched the marketing campaign for our Usability Consulting – Model tuning and model matching to product profiles are important elements of the Usability training. 

Once implemented the Usability project will harmonize the use of models across planners from various geographies for the same business/product family.  There will be streamlined work flow.

We help you answer the following questions:

1. Am I using a Pareto Approach in my APO planning process?
2. How can I leverage APO DP to improve our forecast accuracy?
3. Why does APO mostly give me flat forecasts? How do I fix this?
4. What are Alpha, Beta, Gamma, Sigma and Theta? How do I leverage these parameters?
5. What is the correct level to model so as to improve the overall accuracy at the SKU level?
6. What are weighting profiles? How does it affect my final forecast?
7. How can I control time trend using trend dampening profiles?
8. Are there products and customers that are better left to APO’s automated modeling strategy?
9. Which models to choose for what family of SKUs?
10. What are custom modeling profiles?
11. How is APO helping us simplify and improve the promotional planning process?
12. How do I create Multiple Linear Regression Models in APO?
13. Are we using the system defined error metrics in APO? Why are they different from the classic MAPE calculations?
14. How do you conduct phase-in/phase-out of products?
15. When should I not use the Croston’s Model?
16. Why am I getting 9,000+ alerts every morning?

Perhaps the stress test of your new implementation or upgrade will be to ask the team if they can answer the above questions.

Our Model tuning and training project can be launched any time -but it is better to launch it sometime during the middle of the configuration calendar before the go-live.  This way the training to the planners can be combined with the Navigation training.

The benefits will be substantial:  improved forecasting process, workflow and significant supply chain benefits and cost savings.

What does it cost you?  Not much – perhaps one-fiftieth of what you paid for the APO DP implementation or some where in that ball park.  We finish everything in ten to twelve calendar weeks.

The detailed brochure on this Model Tuning and Training service is available for download at http://demandplanning.net/documents/SAP-APO-DP_ModelTuning_v2.pdf.

Happy Forecasting!

Mark Chockalingam

One of the key reasons for outsourcing is the cheaper labor available elsewhere – but is that offset by the higher cost to transport goods into the point of consumption in the USA?  We talk continuously about the goodness of shortening lead times and try to stabilize lead times.

Lead times are essentially an evil when it comes to managing a tight inventory balance sheet.  Putting this mantra into practice, one would think we are better off moving production close to the point of use.  This cuts lead times and reduces uncertainty on the supply side.  This helps you operate almost just in time and hence lower your costs across the board.

What else could drive the change?  What do you see as trends in the newly emerging recovery?

Demand Planning LLC is currently researching this area, particularly container and bulk movement.  We noticed in our research that most shipping companies are struggling. Their stocks have declined gradually to multi-year lows – Carriers that transport oil, dry goods and bulk haulers have all declined in value over the last few years.

Is this a forecast of continued weakness in the global economy or shrinking international trade or just move to making more production happen domestically in their respective countries?

Companies that own Oil tankers have suffered the most – Frontline, General Maritime Corporation etc.  The latter is trading close to multi-year low of $1.  The other bulk carriers have also been hit with excess capacity and declining demand.  This could be the classic boom-bust scenario where the carriers have invested in excess capacity during the boom and get caught when the slow down hits them.  However, there are other possibilities.

Stay tuned for the results of our research study.  Please drop me a line if you are interested in an abstract of our findings.

1. Assess the key objectives of the Planning Process- Identify and Involve stakeholders in Sales, Supply Planning, Operations, Marketing, and Finance during the process definition phase. Interview key General Managers and understand their informational needs from the Sales and Operations Planning process
2. Identify the key pain points- Since Sales and Operations Planning is a collaborative process, the key is in establishing and improving internal communication and collaboration. The best approach is to start with the question, where do we have communication roadblocks? We need to identify areas where communication is missed, or ineffective. We also need to identify where communication is too late to be acted upon. An example of such a pain point will be to learn of a service failure for the first time in a score-card meeting after the end of the month
3. Identify the Key Component Meetings- The key step in the process design is to plan and establish effective communication and decision sessions among the various functions. Our meeting design will derive from several white boarding sessions that revealed the various pain points in the process (step 2) and the key touch points in the organization. Where the touch points are heavy and involves frequent information sharing, that will indicate the need for a formalized information sharing session. Typically, the key meetings include the Demand consensus meeting, Supply Collaboration Meeting, the General Manager Review meeting, and the Operations Review meeting. In most organizations, there will be an executive Sales and Operations Planning meeting. But the type and content of the meeting depend on the needs of each organization
4. Design Content and Timing of Meetings- Working with functional players from the key touch points, we will establish the type, sequence and timing of each meeting during the planning period. Through white boarding sessions, we will help you establish the key contents and the objective of each meeting
5. Meeting Templates- we will help you design appropriate templates and summary reports to facilitate the meetings to be focused on key issues and arrive at a consensus recommendation. Demandplanning.net, with a vast collection of process reports in its knowledgebase, will help you design a template that is customized to the process needs
6. Supply Collaboration Process- Once a consensus demand forecast is finalized, Supply planners will refresh their planning systems to arrive at their new schedule with constraints. The new demand may point to imbalances in their supply process including issues in raw materials, finished goods inventory, manufacturing schedule, and capacity constraints. The collaboration process should consider these issues to problem solve and decide a set of supply constraints to be acted on in the Operations Review meeting
7. Budget Shortfall Review- Depending on the pain points of the current organizational process, we design this meeting to reconcile top-down financial and marketing forecasts with the operational demand plan. The GAP identification and resolution is a major part of the Sales and Operations Planning Process
8. Exception Management- A well-defined process will thrive on exception management. All Component meetings will start with a follow-up of issues from the previous meeting and deal with exception issues highlighted by the meeting templates. A concise design of meeting templates will help you achieve brief, sharply focused, effective meetings
9. Sales, Operations and Inventory Planning- This is a key part of the Operations Planning and review. The organizational consensus team will examine the Sales, Production and Inventory Plans and discuss major issues and bottlenecks
10. Supply constraints and Scenario Management- The budget shortfalls may trigger management decisions on additional promotions and even key new product introductions. The process should be designed to be flexible enough to accommodate key top management requests to verify supply availability for key sales generating events. Promotions on key items can only be offered if adequate inventory is available or can be turned around in time to meet the promotional demand
11. Value Chain Metrics- The Sales and Operations Planning process will be guided by the various value chain metrics that highlight performance and pin point areas of improvement. The Metrics should be a good indicator of the state of the business and should call for quantifiable corrective action. The design of the metrics should help you align incentives holistically to help achieve the organizational objectives. The key metrics include customer service (FTFR), inventory targets, forecast accuracy, on-time delivery, order cycle times. Demandplanning.net will help you design metrics customized to how various functional players are aligned in your organization. With our research and analytics in this area, we have a unique advantage in designing proper Supply Chain Metrics and implementation

Balancing Inventory and Service

With a “hot” new product, or even your cold old products, how do you balance inventory and service? Forecasting isn’t the way. Who even listens to the weather man anymore?

This makes me think about the utility of demand forecasts in corporate Supply chains.

1. Do Supply chains really use demand forecasts?  I have seen many inventory strategies actually using the standard deviation of historical demand in their calculations.  What happened to the forecast error?
2. If forecast is not used, what is the alternative?  What happened to medium to long-term planning?

So I decided to summarize my response to this question:

As long as you don’t leave your demand forecasting to the weather man, you should be alright.  Most supply chain problems originate by ignoring the forecasting that is happening through out the organization.  In a survey I remember reading a couple of years ago, on average 50% of the people in an organization were forecasting something or other.

If the forecasting process is bad, fix it! You ignore and move on at your own peril!

Even folks in supply chain who badmouthed forecasting actually were using an average run rate of some sort to determine their inventory calculations.  There is an article from the Harvard Business Review in that talks about most organizations operating inside the inventory curve rather than on it.  The inventory curve is a set of feasible points that trade off between service levels and required inventory.

Perhaps the reasons many companies operate inside the inventory curve, as suggested by the article, is because the supply chain function ignores the demand forecast and uses the historical average as their forecast for their inventory strategy.

If there is a reasonably good demand planning process installed in any organization, we can establish this will easily beat out the “run-rate” or any other average hands down.

Even in the case of iPad, a hot new product, the decision to create the product was a result of a market forecast that estimated potential users and share. The decision to build capacity and manufacturing was based on a long-range forecast.

Why different functions create forecasts?

Inventory is a problem but is only one of many problems. Organizations need to solve a variety of challenges and constraints to solve so they can thrive and grow. Organizations need to plan for the medium to long-term and manage the business accordingly. 50% of the functions forecast but NOT necessarily for inventory purposes.

• Senior management needs to forecast an EPS for investors and need to hit it within a reasonable threshold.
• Companies need a long-term forecast to assess what they need in capital investment and where and how to build the facilities for expansion.
• Even HR needs a forecast.

Thinking every function will be forecasting for the supply chain is like the Dilbert Cartoon “Sure – I will drop everything else and will focus on your problem.

So forecasting and planning is embedded in various functions and various forms through out the organization and is unavoidable.  The key is how to leverage the forecasting responsibility and accountability already installed into a holistic process that can let you piggy back and obtain a supply chain forecast for your short-term and long-term planning.

Ignoring the corporate forecasting machine and creating an isolated forecast or an inventory deployment algorithm is a sure way to significant troubles – what we preach as the fragmented planning process or the lack of the often glorified “S&OP” process.

In reality, 50% of the organization involved in forecasting is not the problem. The real problem is when supply chain decides to ignore the forecast or the forecasting process and decide to move on in isolation.

Demand Planning LLC does use and recommend advanced algorithms for demand forecasting and leveraging customer input. But that is only half our story.  We work with Sales, Marketing, Supply chain and Senior management to drive a holistic process to leverage demand information and build forecasting processes that are used across most of the organization.  We call this consensus demand process or integrated business and operations planning.

APICS and supply chain professionals need to re-think their philosophy when they decide to abandon/ignore/side-step the demand forecast.  Anyone who does so actually does a dis-service to the organization and to the profession!  Ignoring the forecast can be a great marketing technique to sell expensive software that preaches using volumes of transactions data.

You can read more about the Demand Planning process at

http://demandplanning.net/demandplanningconsults.htm

and the S&OP process at

http://demandplanning.net/sales-and-operations-process-redesign.htm

Excess inventories happen as a matter of fact:

• Forecasting problems – not knowing what the customers need.  This may also result in some obsolescence.
• Forecast Bias – Just keeping the forecasts high generally on everything.
• Sudden Demand reduction due to market place volatility or losing a key customer.
• Economies of Scale in production – Higher lot sizes are way too attractive to resist.

Excessive inventory can also be carried as a price Hedge.  Steel prices are expected to rise and quantities may even be in short supply. So you buy up and keep more of it.

Life time Buys – Rare earth materials or a supplier that is close to a single source is facing financial difficulties.

Utilities some times carry spare parts inventory for the next 100 years. Perhaps one or two ancient grids use these parts. If we stock out of these parts, the Utility has no choice but to scrap the old grid and build a new one. The opportunity cost may actually outweigh many times over the cost of carrying these parts.
Excess inventory can also result from supplier uncertainty. If supplier does not meet schedule or if the lead time is time varying over a period, you have to carry more inventory to meet the uncertainty in supply.

There is perhaps another reason but really a different version of the price hedge. IF suppliers offer a quantity discount, then that ends up lowering your cost of production with the consequent higher price to pay on the inventory carrying cost.

The punch here is the lowered cost per unit from the discount that applies to your consumption as well. This may result in ordering and carrying a quantity much higher than the dictated EOQ.  Now here comes the distinction between items above the COGS line and items below.  If a quantity discount is offered, this lowers the COGS and boosts the Gross Margin.   You may have to order more than your calculated EOQ to avail the discount.

They plan their demand for two important reasons among many others -

1. Cash Management – Keeping cash balances to serve customer needs versus loaning out to make a living
2. Project retail demand for Gift Cards – somewhat of a much less interesting problem than the first one.

However, they forecast the sale of gift cards by outlet and type.  They have displays and floor stands in super markets just like any other Consumer goods company.

Chase may be selling a Mickey Mouse gift card at Target.  They have demand planning departments and their own print and design facilities to produce these plastic cards.

Print and ship to stores so they are available during the holidays.

The forecast for Gift cards is truly a unit demand plan – the dollars do not matter at least for producing the plastic.  These are loaded at the point of purchase.

They know later how much has been sold from the retailer remittance net of commission.

How does Chase make money – by playing the float!!  A portion of Gift Cards remain unused for long periods of time – the bank keeps the money in its lending operations for a long time.

The demand for Gift card is seasonal, holiday driven!  They are promoted on TV and at point of sale.

More on the forecasting issues and challenges later.

This was very well attended with over 2000 professionals from across the world.  The committee mentioned that this was one of the largest turnouts.

I particularly enjoyed the general session keynotes by the General and by our own Bert Jacob of Life is Good from New England!  Bert was talking about the optimism and positivity surrounding us and to see the values in simple things in life!  His company grew from less than $55k revenues in 96 to almost $500MM in 2010.

The break-out sessions on S&OP were all packed – Bob Stahl talked about myths and misunderstandings in S&OP implementations.  JE Boyer gave a folksy presentation on S&OP to a packed audience – although he had a much short-term horizon on S&OP than most others including mine.  My philosophy on the S&OP horizon is somewhat in the middle between JE and Bob – S&OP needs to discuss three months to 24 months and an annual look at the strategic five year plan.  Bob talks about looking five years ahead JE talks about one year.

There was a presentation by Peter Murray and Greg Schlegel on Demand forecasting and S&OP in the 21st century – kind of a prediction on where we are headed.  They drew a lot from AMR research and other predictors of the future including some fancy stuff like dynamic inventory planning.

There was an excellent presentation by Jeff slater of Sunoco on supply chain optimization including some neat discussion on metrics.  This was a practical presentation that would excite a lot of practitioners.

And finally a presentation by Daniel Castle of TATA communications on Lessons from India was the lasting impression for years to come.  Very insightful and humorous capture of experiences in India including Indian STretched Time and the Yes sir phenomenon.

I will post additional links in my future update of this entry.  Of course, Las Vegas is always fun and fantasy!

“I am trying to use the Moving Average option in APO DP but I get a static forecast that remains constant for all the future months based on the history.  I would like the statistical forecast to be a moving target not a constant.  Not sure how to achieve this?!

“All I get is the same statistical forecast volume for all 24 months. This is not want we are looking for.  The system is giving me a forecast like this:  month1 – 915, month2 – 915,… month 24 – 915

“But I want the system to give me forecast that is different each month: 
Future: month1 – 915, month2 – 902,… month 24 – 908.”

Before we go too far with the micro details of these numbers, let us first realize some qualities of a good statistical forecast. 

One of the important qualities of a forecast is robustness. Robustness means the forecast does not change like a yo-yo just based on new historical data point.

So the objective is not to mimic the history but to produce a forecast that minimizes the error. Theoretically, Moving averages should produce a constant forecast into the future at least after the first two periods.  The idea of the moving average is that it will change by at least one third of the impact of the new observation that is different from the
forecast.

Other than this, let us understand the difference in error in what is being proposed here.  A forecast that is 915 each month is off by 1% from another forecast that varies between 902 and 915 over the entire forecast horizon. 

A contrived model that looks fancier with oscillations in results between 902 and 915 perhaps can be 1% better on average than another model that proposes to use a constant 915 every month. I don’t think the trade-off to improve forecast quality by 1% is worth the model search to come up with a more complex model that mimics
the history better.

The fact that you are choosing moving average means that the data series is relatively more stable. We as planners should let moving average do its job and move on to more complex items that need your attention – items that
have a persistent trend or seasonality or both.

Trying to fit a holt-winters model when the series begs you for a constant model is NOT a good use of time. Note that SAP APO classifies moving average under constant models.  In fact, specifying that you want Holt-Winters models in such a scenario will give you a First Order smoothing model which again gives you constant forecasts into the horizon. 

If you want to learn more about error metrics, you may be interested in http://www.demandplanning.net/apoMetrics_webworkshops.htm.

Intel (NASDAQ: INTC), a member of the Dow Index, has gone through a tough time in the market lately. The stock has been beaten down, though there is some relief rally in the last week thanks to an analyst upgrade.

Are things that bad for the Santa-clara and Chandler, AZ based chip maker? Are the glory days over for this PC chip giant? I feel like I am back to the late 90s since I had seen these questions being asked then with the Intel bears citing a mature PC market.

Computers are certainly not going away…….. But not so sure about PCs. Is it possible for another appliance to take over the role currently served by the PC? Perhaps the role may be much more diminished and diluted by say, a cell phone or a PDA device for lot of the common things like email and internet surfing. Will they totally supplant the PC?

The migration of the roles would certainly slow down the growth of the PC market and perhaps rapid advances in the PDA or cell phone technology will definitely make a dent into the PC market share. Newer technology is definitely in the application chips that drive devices through out the home and office, the set top boxes, cell phones, PDAs, black berries, and perhaps a little device on your fridge, and washer and dryer and your oven, and your telephone.

But you do need a central device that hooks up and communicates with these scattered devices through out your home or the office. It is much easier to surf the web on my PC or laptop than on the TV through my set top box. Even if I want to know about a movie before ordering the PPV, I don’t like the four line description on the TV guide available after several presses of the remote control buttons. Hop on your laptop, google the movie, ……….. there you have it; the rating, the reviews, the cast, the director and every thing that is ever written about the movie.

So would that central device that connects my Ipod, my set top box, the refrigerator, my calendar, be the PC? Perhaps. If not a Wintel PC, may be something similar? Will that be a small PDA or a blackberry?

May be this central device is not a windows device, but perhaps a device controlled by Linux or the Apple OS. A device that does not crash often, does not ask you to download updates every working hour of your day…….. Even in such a world, it seems Intel is the natural processor on such a computing device.

May be Mr. Jobs thinks so. With the new alliance with Intel, Macs and Ibooks are going to be powered by Intel processors. There could be four possible scenarios that could develop. And in reality, it could be a combination of these scenarios that may actually thrive.

Scenario 1: Microsoft and Intel dominate this space and the central computing device is a Wintel PC…….. Perhaps Microsoft discovers the magic OS that cleans up most of the current ills, and continues to rule the home and the office.

Scenario 2: The central device is an open source OS controlled computer with an Intel Processor.

Scenario 3: The central device is an “IHub” from Apple powered by a new MAC OS and a new Intel Processor for the MAC.

Scenario 4: Oh wait……. it is a Gdevice from google in alliance with Oracle. Just a dumb device with a keyboard and Mouse with access to google online appliances and home gadgets. All your home devices are centrally linked into your Gmail account.

Of all the above possible scenarios, only scenario 4 smells trouble for the Intel empire. You don’t need powerful processors to run a dumb terminal device………… most of the brain is supplied by google.

Given Intel has the first mover advantage, its chips have a better than fair-share advantage to dominate the first three scenarios.

The above scenarios summarize what will happen to the home PC market. However, what fraction of Intel’s PCs are sold to the home market versus the business market? Even if Intel loses its dominance in the home PC market, it has a major presence in the business market and the server market.

There has to be radical shifts in technology and corporate thinking to move away from windows based workstations into something different. With Dell and other PC makers churning out low cost Wintel PCs, it is hard to think of a substitute with similar computing power.

So you wonder about the pessimism behind Intel…….. is it priced for the temporary hiccups in processor upgrade releases in its race with AMD? Mostly that and also the halo effect from Microsoft…….. its much awaited but ever delayed new version of Windows.

However, wall street is waking up to the strong fundamentals of the company with a series of upgrades in the past two months. The opinions state that the fundamentals have some what improved but the selling is somewhat overdone.

Disclaimer: The above is not an endorsement of Intel or a recommendation to buy INTC.