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About Demand Planning LLC

Demand Planning LLC, based in Boston MA, is a consulting boutique comprised of seasoned experts with real-world supply chain experience and subject-matter expertise in demand forecasting, S&OP, Customer planning, and supply chain strategy.

We provide process and solutions consulting, as well as customized training across a variety of industries.

Through our knowledge portal DemandPlanning.Net, we offer a full menu of training programs through in-person and online courses, as well as a variety of informational articles, downloadable calculation templates, and a unique Demand Planning discussion forum.

  • 11Jan

    As a consultant, I get asked this question a variety of times.  Why should we improve forecast accuracy?  What is it worth to us?  What is the business case to spending money to improve the process and implement some expensive demand planning software?

    There is value in this for sure – the evidence comes from the fact that year-after-year companies continue to hire more demand planners and invest millions of dollars in putting together processes and software packages.  Now to dissect this, let us look at the Service-Cost Balance model that we preach in our workshops.

    Improving the demand forecast directly gets to two things that are important to companies:

    1.  Increasing the top-line – Improve customer fulfillment and delivery and increase the level of Sales.  Nothing works like reputation or service performance.  People flock to your company products and services if they are satisfied with what you offer.  The converse will be painful – bad news spread like wild fire.

    2.  Improve the bottom-line through process efficiency – Optimize inventories by trimming the level of inventories, cutting obsolescence and producing just enough to meet your demand.

    3.  Eliminate process costs – Expediting, over-time that may otherwise be required to fulfill volatile and unpredicted customer demand.

    Now if we want to quantify the benefits from forecast accuracy, it is difficult to quantify the first item.  What is our lost sales?  What is the effect of one point reduction in fill rates?  Did it cause lost sales?  Did we lose a customer?

    It is a little easier to look at the savings in inventory through improvements in forecast accuracy.

    At any time, your inventory level is comprised of Safety Stock to meet demand and supply uncertainties and the inventory needed

    But your average inventory = Safety Stock + Lead time demand or (order quantity if you are using the min-max method to deploy).

    We can find a relationship between the amount of safety stock you can decrease for each percent point reduction in Forecast Error, since forecast error figures directly in the Safety Stock calculation.

    Safety Stock = Forecast Error * Service Level Quotient * Square Root (Lead Time)

    From simple calculus, the effect of one unit reduction in Forecast Error is just the product of Service Level Constant * Sqrt (Lead-time).  So at 98% service level with a lead time of say two months, the effect of one unit reduction in Forecast Error is 2.90 Units.

    What is the impact of a % point reduction in MAPE?  The answer depends on the level of your current forecast quality.

    However, the relationship of inventory reduction to your current MAPE Level is not linear.   The calculation on the reduction in inventory is a function of your current level of forecasting.  This determines the quantity of inventory reduced for each percent point improvement in Forecast error.

    If you are at 50% MAPE on average currently, the reduction would be 2% of inventories for each point improvement in forecast error.  IF you are at 25% MAPE currently, the improvement will be 4% for each point reduction.

    This is actually a conservative estimate since it considers only the safety stock component of the total inventory.

    If your forecast is an over-estimate of the Lead time demand, then you carry additional inventory not accounted for in the above calculation.  This will also introduce obsolescence risk.

    So a lower bound is to just use the reduction in safety stock but being aware that a better forecast will also allow you to deploy better to the lead time demand.  Better forecast can also help you reduce production and logistics costs such as over-time and expediting costs.

    So if you have $200MM in inventory and let us assume that 25% of that total is safety stock then you have $50MM in safety stock.

    A reduction of 10 point MAPE will result in a reduction of $10MM in safety stock.  10 point MAPE reduciton =20% reduction in Safety Stock or $10MM assuming currently your average MAPE is 50%.

    Again this does not consider any reductions in the inventory carried to cover lead time demand (particularly due to forecast bias) or obsolescence that results from unsold inventory.  Obsolescence is a bigger risk since you lose all of the inventory investment.

    Next question is what does the reduction of $10MM in inventory really mean to you?  This completely depends on the inventory carrying cost for your company.

    Inventory carrying cost can be any where between 12% to 40% per year.  So in financial terms, a $10MM reduction in inventory could result in bottom line improvement of $1.2MM (at 12% carrying cost) to $4MM.

    Now we are talking real dollars……………..

    Let us try to save some of those costs by bettering the demand plans!

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  • 20Jul

    Is there a single KPI for the entire organization? Possibly, two metrics qualify as good KPIs.

    1. Net Profit = Total Income minus all Expenses. This is a Dollar number and ignores the scale. It can be measured with a target like an EPS target or a profit target. But this measures fails as a comparison metric. So the correct format will be Return on Investment. I believe this is highlighted in APICS CSCP courses. Remember Dupont Analysis.

    1. OTIF – This is a noble measure as well. Most supply chains should strive to provide the required service level to keep customers happy. But service levels cost money – real money in fact plenty of dollars. So this has to be balanced against the cost of providing the service ==> inventory costs, expediting costs, reserve capacity costs. One can provide OTIF if they have an unlimited cost budget.

    So this OTIF does not qualify as an organizational measure unless measured against cost. So we have the problem of “no denominator” here. No corporate management will like an OTIF level at a very high execution cost. You can lose your shirt and go out of business. Even Charitable organizations should have an OTIF measured against execution cost.

    I generally believe there should be two metrics for every function.  See my other entries on this blog and the www.demandplanning.net web pages.

    Going back to single KPI for the entire organization, that may still be possible if we look at Corporate Finance literature………

    Even ROI does not qualify as that single measure. Finance literature says that ROI is not adjusted for firm risk. For example, you can borrow a lot of money and invest. This will increase your firm risk.

    At least according to the Noble laureates in Finance, the single best measure for a company is its stock price. The goal of a CEO is to maximize stockholder value.

    Perhaps that sounds too capitalistic, but that is one reason most middle management to upper management gets rewarded with stock options. Perhaps everyone in the organization should be rewarded with some stock options.

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  • 24Jun

    There was big discussion on the APICS Board about the single KPI to use to measure the manufacturing operation.  This is a great question because the user forces people to think of a single KPI to preclude all others.  So the idea is to cull out the most important metric – not a consultant’s omnibus recommendation that provides a laundry list of metrics.

    What should it be?

    • Cost of production per unit
    • TAKT time
    • throughput
    • waste
    • service levels
    • profit
    • Return on Investment
    • Yield

    They all look like good measures but none of them would qualify as the single most important metric for manufacturing.  I always preach that there should be two metrics for each function-

    1. A local functional metric – to measure what they do best and how they best they use what they learned in college for their particular operation.
    2. A holistic organizational metric that they control – This measure is not so obvious and easy to miss.

    It so turns out that many organizations measure their functional organizations by the first one but totally miss the boat on the second one.  To compensate for this grand miss, they come up with another metric that is really a functional metric for some other function.

    For example, they may measure manufacturing by profits or ROI or service levels – which they do not control.

    Let us examine service levels or profits. Measures that are noble indeed but manufacturing does NOT control them. They need to be measured on these as well, but these two measures are indeed KPIs for the entire organization. There is no special incentive for manufacturing to achieve these measures.

    The holistic organizational metric for manufacturing is Schedule Adherence – the percent of production plan that they achieved on time (may be with some slack say +/- 2 days), in full (may be with some slack say +/- 5%), perfect quality (99% acceptance).  Manufacturing fully controls this metric and the rest of the organization is desperately hoping that they will produce to the production plan – a plan that was carefully put together after considering the demand forecast and the degree of the forecast error in the form of safety stock.

    If they do not adhere to the production plan, then everything else is a hog wash. Driving to profits or ROI is indeed wasted effort – one that involves everyone in the organization chasing their tails.

    Schedule Adherence – YES the one KPI that manufacturing controls almost exclusively.

    Schedule Adherence – YES the KPI that tells the rest of the organization that manufacturing is a team player. It reviews and adheres to the demand plan or the demand forecast and the resulting production plan or MRP run that it uses in its detailed production schedule.

    Schedule Adherence – YES the KPI that gives confidence, as you rightly mention, to the rest of the organization that they can deliver to the required customer service levels and manufacturing will NOT produce too much or run large batches to improve their efficiency and lower their cost.

    Their functional metrics can be costs, throughput and efficiency but their organizational metric should be Schedule Adherence.

    A manufacturer’s passion to drive to lower costs and better thoroughput is rightly checked by schedule adherence.  Produce the right quantity at the lowest cost possible!

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