Use of Statistical

Forecasting Methods to
Support the Demand
Planning Processes at
Nestl
Predictive Analytics Konferenz, Wien
September 2012
marcel.baumgartner@nestle.com

Agenda

Nestl
Supply Chain Management
Planning and Forecasting
Applying Statistical Forecasting
Experiences with SAS
Demand Analysts and Competence
Centers

June 2012

Nestl at a Glance

CHF 83.6 billion in sales in 2011

328,000 employees
461 factories
10,000 brands
1 billion Nestl products sold every day

Nestl vs. our Competitors

Food & Beverage sales in bn USD

Top Food & Beverage Companies in 2011

The Nestl Story

Products
Strategic Business Units

Nestl requires a flexible

organisation to fulfill
business needs effectively

Geography

Functions

Zones, Regions
Market ing & Sales

Zone Americas

Finance
Technical

Zone Asia, Oceania, Africa

Supply Chain & Procurement

R&D

Zone Europe

Human Resources
Etc

Supply Chain Management

Physical Objects

Sales

Suppliers
(Raw and
Packaging
Materials)

Marketing

Supply Chain
Customers
Finance

Manufacturing

Nestl
Information
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June 2012

The Supply Chain Solves Trade-Offs

Two main Key Performance Indicators:
Customer Service Level (% of orders completely delivered)
Holding Inventory

To improve Customer Service, you can hold more inventory.

But inventory costs money: cash is blocked, physical storage, risk of
ageing products.
The overall goal of Supply Chain Management is to improve Customer
Service whilst optimizing the costs, by solving this trade-off.

June 2012

The engine of Supply Chain: Planning

Forecast:
A description of where we think we are
heading, based on current assumptions. The
reason to forecast is to make informed
decisons.
Plan:
A set of related future actions designed to
reach an objective.
Planning:
The process of defining a set of future
actions with the aim of achieving an
objective.

June 2012

The Need for Forecasting

At Nestl, most of our production is driven by "Make to
Stock", and not "Make to Order".
We often have to produce large batches, both for cost (larger
batches = smaller costs per unit) and sometimes quality
reasons.
Therefore, we need to forecast the future orders of our clients
to have the right volumes of the right product, at the right
location, at the right moment in time.

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June 2012

Balance Demand and Supply

Sales and Operations Planning (S&OP)
Align demand with supply and financial
plans (budgets, targets, )
Integrate operational plans with strategic
plans
Align product mix with total volume
Ability to act pro-actively

At Nestl, this is a combination of Demand &

Supply Planning and Monthly Business
Planning at Nestl.

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June 2012

Available through
www.ibf.org

Forecasting: Judgmental vs. Statistical

There are basically two ways to make forecasts about future
volumes of our products:
Judgmentally (manually, subjectively, )
Statistically
Research shows that statistical forecasts, based on adequate
historical data, can perform better. Particularly for low volatile
products.
Judgment will always be necessary, but it needs to be used
wisely. See this research from Robert Fildes et al.

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June 2012

Six Truths about Forecasting

1.
2.
3.
4.

5.
6.

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June 2012

The future is never exactly like the past.

"Complex" statistical models fit past data well but don't
necessarily predict the future.
"Simple" models don't necessarily fit past data well but
predict the future better than complex models.
Both statistical models and people have been unable to
capture the full extent of future uncertainty and been
surprised by large forecasting errors and events they
did not consider.
Expert judgment is typically inferior to simple statistical
models.
Averaging (whether of models or expert opinions)
usually improves forecasting accuracy.

Forecast Performance

Volatility is driving Forecasting Performance

Volatility of Demand
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June 2012

SAS told us this: the COMET plot !

Mike Gilliland
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June 2012

The Animal Farm: Driving Behavior !

Originally published by Whirlpool in a SAP conference in 2009.

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June 2012

Forecast Value Added (Mike Gilliland)

We have very good methodology to measure the
forecast performance.
FVA = The change in a forecasting performance metric
that can be attributed to a particular step or participant
in the forecast process.
Demand
History

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June 2012

Nave
Forecast

Statistical
Forecast

Demand
Planner

Generic FVA Report

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June 2012

Process
Step

FVA vs.
Nave

Error

Nave
Forecast

25%

Statistical
Forecast

20%

5%

Demand
Planner

30%

-5%

FVA vs.
Statistical
Forecast

-10%

Applying Statistical Forecasting @ Nestl

Started early 2000, we are at stage 4

Explain Demand
Planners how
the methods
available in SAP
APO DP work

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June 2012

Give Demand
Planners clear
guidelines to
apply, without
explanations

Provide fully
automatic
method
available in R,
based on the
'forecast' library of
Prof. Rob J.
Hyndman

Create a new
role of a
Demand
Analyst, fully
dedicated to
statistical
forecasting

The Expert in Exponential Smoothing

otexts.com/fpp/

In R, check out the

package 'fpp' and
the function ets().
Simply brilliant !
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June 2012

www.exponentialsmoothing.net

SAS Forecast Server and Forecast Studio

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June 2012

SAS Forecast Server Highlights

Highly Scalable
Highly Automatic
Hierarchial and Temporal Reconciliation
Event Handling Included
Contains Causal Time Series Forecasting Methods

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June 2012

A Strong Feature: Choosing the Appropriate

Reconciliation Strategy

Top-down

Bottom-up

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June 2012

Results from One of Our Markets

Context:
We ran the HPF (High-Performance Forecasting)
procedures of SAS Forecast Server on their defaults.
We used original order history, no cleaning, 3 years of
monthly data.
These are back-tested results, covering a period of 10
months.
We measure performance for 3 months lag forecast.
These results therefore show what can be achieved
with very little effort, and they have a clear potential
for improvements.
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June 2012

Results from One of Our Markets

DPA
Demand Plan Accuracy
MFR
The performance of the
existing planning
process, mostly
judgmental
SAS
The performance of the
SAS engine with very
little changes to the
defaults.

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June 2012

 and only for "Long History" Products

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June 2012

Another Market:
Weekly Forecasts
71,5%

Back-test period is 11 weeks

Minimum adjustments to SAS
procedures
The Nestl forecasts are
statistical, but using multiple
regression and not time series
methods

71,2%

71,0%

70,7%
70,5%

70,5%

70,6%

70,0%
69,6%

69,9%
69,5%

SAS Forecast Server

69,6%

69,0%

69,1%

68,5%

68,0%
W-1

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June 2012

W-2

W-3

Nestl

W-4

SAS Forecast Studio Ease of Use

Pros
Cons
New models more complicated
Intuitive navigation
(training)
Point/click between series, tables,
No way to truncate history in tool
etc.
Events difficult to create and
Reasonable initial forecasts
maintain
All-in-one: connect disjointed
processes

Handling Promotions: Need for Causal

Methods

Step 1: Forecast Scan Data using causal

time series methods (e.g. Unobserved
Components UCM in SAS Forecast
Server) and explanatory variables like the
retail price

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June 2012

Step 2: Translate these forecasts into exfactory orders, using ad-hoc phasing rules.

Demand Analysts support Demand Planners

Historical Data

Demand Analyst
provides statistical
forecast services
and FVA insight,
using best-of-breed
software

Sales and Marketing

Finance

Demand Planner
owns plans, focus is on
Mad Bulls and
integration with the
Business

Customer
Works in Analytical
Competence Center

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June 2012

Fully integrated in the

Nestl Business

The Competition for Data Scientists has

Started !

Statistics
Forecasting

Business
Understanding

Data
Management

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June 2012

Statistical Modeling /
Forecasting (what
statistics can and
cannot achieve), no real
need for Ph.Ds
Business Understanding
Data Management and
Programming

Thank You !

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June 2012