Introduction to Forecasting

and Demand Planning

Ayman Elrafie, CPIM, CSCP
Hair & Skin Care Demand Planning Manager | Unilever Gulf
Agenda
Forecasting basics.
The demand management process.
The demand planning cycle.
Maintaining a high quality forecast.
The show stoppers.
Agenda
Forecasting basics.
The need for a forecast.
The forecast dilemma.
The principles, components, aggregation, sources of data and KPIs of a forecast.
The demand management process.
The demand planning cycle.
Maintaining a high quality forecast.
The show stoppers.
The Need for a Forecast
Forecasting in FMCGs is of a great importance to the business:
1. It gives the organization the needed visibility to future demand and
requirements, hence capacities, budgets and utilizations can be
planned.
2. Forecast is used to ensure products availability OTIF.
3. Used to estimate the financial forecast.
4. Used by business partners in both the upstream and downstream to
better plan their resources ahead.
 Senior Management disbelief
forecasts
The Vicious Circle Fail to deliver forecast Micro-Management
Poor Forecasts
Lack of Empowerment Lack of Team
Do not see real gap work
early on Short term focus

TO, Margin gaps increase

Forced to do ad-hoc Forced to sell
activities unforecasted bread &
Working capital increases & SLOBs are butter SKUs
generated

Forecast Bias
P&L suffers
Trade stock > norms
Margins suffer as Supply Chain
Margins suffer as Supply Chain expedites expedites

Stock Availability suffers

The Forecast Dilemma
Different functions have different
views of the forecast & expectations
as well!! Key stakeholders are:
Marketing
Sales
Finance
Supply Chain & Operations
Top Management
The Forecast Dilemma
Marketing:
High growth rates and sometimes
exponential especially in the long term.
Intensive promos & innovations.
High budget to make it happen.
Try to maximize the product mix to
meet all consumers needs.
I have many great ideas
that consumer will love!
The Forecast Dilemma
Sales:
Little bit conservative, and sometimes
pessimistic too.
Probably knows the markets the best.
Always pointing out to stock availability
issues and its effect on sales.
Always playing it as safe as possible.
Wishing to have the biggest product This month will be a
mix to fulfill all customers needs. very tough one!
The Forecast Dilemma
Finance:
Looking for a stable growth for the
P&L.
Willing to give the least possible budget
as much as possible to promote
Trying to rationalize the product mix to
minimize SLOBs.
Hoping to release the minimal possible Were about to
budget for promotions. consume our budget!
The Forecast Dilemma
Supply Chain & Operations:
Looking for a & growth to gain
economies of scale.
Looking for stability to better utilize
assets.
Trying to rationalize the product mix to
the minimize the changeovers.
Always emphasizing on lead times. This is not abiding with
our lead times!
The Forecast Dilemma
Top management:
Looking for achieving the
organizations targets, which are
usually very stretched.

Have we achieved our

target?!

Target
The Forecast Dilemma
The best forecast is the one which
takes into considerations all the
different functions views, concerns
and assumptions. And here comes
the role of the.

Demand Planning
Lets develop it together
guys!!

Target
Forecasting Basics Principles
1. Forecasts are (almost) always wrong.
2. Forecasts should include an estimate of error.
3. Forecasts are more accurate for groups than for single items.
4. Forecasts of near-term demand are more accurate than long-term
forecasts.
Forecasting Basics Principles
1. Forecast Target.
Forecasting Basics Principles
1. Forecast Target.
2. Forecast is not only used to secure
stocks.
To increase the customer service level:
1. Review the stock model:
Increase coverage
Increase safety stocks
Increase safety lead-times
2. Increase supply responsiveness.
3. Insure availability of contingency plans to
cover any delays.
4. Revise your forecast.
Forecasting Basics Principles
1. Forecast Target.
2. Forecast is not only used to secure
stocks.
3. Forecasts must be timely
bounded, with specific time
buckets.
Usually a forecast is covering a long period of
time. This is primarily used for tactical -strategic
decision making purposes.
Time buckets will vary based on the product and
the companys requirements, however
commonly used time buckets are:
Weeks
Months
Forecasting Basics Principles
1. Forecast Target.
2. Forecast is not only used to secure
stocks.
3. Forecasts must be timely
bounded, with specific time
buckets.
4. Forecast must have a clear
ownership.
Developing forecast is a cross-functional
responsibility, all participants need to agree on
the forecast and reach consensus.
Ideally, the S&OP process insures the
consensus and company-wide ownership of the
forecast, however some companies holds
functions different functions accountable on
different forecast horizons as follow:
Short term: Sales
Medium to long term: Demand planning
Promotions and advertising: Marketing
Forecasting Basics Principles
1. Forecast Target. Predicting the future is something that we
cannot do using quantitative inputs only due to
2. Forecast is not only used to secure ambiguity, hence forecast consists of qualitative
stocks. inputs based on the best of our knowledge
Documenting the assumptions and doing our
3. Forecasts must be timely best to quantify them is an integral part of any
bounded, with specific time forecast.
buckets.
4. Forecast must have a clear
ownership.
5. Forecast is based on robust and
fact-based assumptions.
Forecasting Basics Principles
1. Forecast Target. Forecast should always be a mid-point; where
the chances of selling more are equal to the
2. Forecast is not only used to secure chances of selling less.
stocks. A conservative forecast can result in out-of-
stocks and missing sales opportunities, while an
3. Forecasts must be timely optimistic forecast can result in higher stocks
bounded, with specific time level and SLOBs
buckets.
4. Forecast must have a clear
ownership.
5. Forecast is based on robust and
fact-based assumptions.
6. Forecast must be an unbiased
Forecasting Basics Components
All forecast consists of four
components that shape it:
1. The basic value:
Which controls the vertical placement of
the forecast.
Forecasting Basics Components
All forecast consists of four
components that shape it:
1. The basic value.
2. The seasonality:
Which reflect the seasonality of the
demand. Seasonality doesn't only mean
weather seasonality, but any event
affecting the demand seasonality in
general. It usually repeats itself year on
year.
Examples include:
The back to school season.
The Dubai shopping festival season.
Christmas
Forecasting Basics Components
All forecast consists of four
components that shape it:
1. The basic value.
2. The seasonality.
3. The trend:
It controls the growth of the demand and
usually governed by the market growth
rates and the organizations market
share growth rates.
Forecasting Basics Components
All forecast consists of four
components that shape it:
1. The basic value.
2. The seasonality.
3. The trend.
4. The business cycle:
Cycle are usually long term, and are
generally very hard to predict and are
macro trends.
Forecasting Basics - Aggregation
Aggregation of forecast is very important especially since the forecasted
units are usually too many.
Aggregated products should share the common characteristics and demand
patterns.
Aggregation will not only provide more accurate forecast, but it will save lots
of time too.
Forecasting Basics Sources of Data
Obtaining data is an integral part in
building a quality forecast.
Using fact-based assumptions helps in
validating qualitative inputs and
quantifying.
Documenting assumptions is an
important task that DP must apply.
Forecasting is a mix of
science & art, where
underling assumptions
resemble the foundation
Forecasting Basics KPIs
Forecast bias
Forecast accuracy
Month-on-month forecast changes
Agenda
Forecasting basics.
The demand management process:
The four components of demand management.
The S&OP cycle.
Case study: Managing & Prioritizing demand.
The demand planning cycle.
Maintaining a high quality forecast.
The show stoppers.
 The Demand Management Process
The Demand Management Process is a process
that weighs both customer and a firms output Planning
capabilities, and tries to balance the two. demand

So basically, it is a process to match demand &

supply!
Managing &
Communicating
prioritizing
demand
demand

Influencing
demand
 The Demand Management Process
Planning Demand:
Planning demand is not only about forecasting, Planning
but that is just the start. demand

It is a plan for action based on consensus over the

Demand Plan including assumptions, promotion
plans, New Product Introduction plans and pricing
Managing &
plans. prioritizing
Communicating
demand
demand
A typical planning horizon is 24 rolling months,
which is regularly reviewed on a monthly basis.

Influencing
demand
 The Demand Management Process
Communicating Demand:
Communication must be as early as soon as Planning
possible to minimize surprises. demand

Structure communication to ensure that they

occur.
Focus communication to fit audience. Managing &
Communicating
prioritizing
demand
demand

Influencing
demand
 The Demand Management Process
Influencing demand:
Influencing demand describes the activities of the Planning
marketing and sales to convince customers to demand
purchase the organization's products.
The purpose of demand-influencing activities is to
support the organizations business objective.
Managing &
Examples of demand-influencing activities: prioritizing
Communicating
demand
demand
Settling on the most profitable product mix.
Strategic pricing.
Product distribution.
Influencing
Promoting the product.
4 Ps demand
 The Demand Management Process
Managing and prioritizing demand:
It is optimizing demand across the system as
measured by optimum organizational profit, Planning
demand volumes, sales revenue and customer demand
service (including customer retention).
Managing and prioritizing demand must be
restricted to appropriate management levels.
Examples of managing and prioritizing demand Managing &
are: prioritizing
Communicating
demand
demand
Rationing supply to warehouses or retailers in case
of shortage so that each receive a portion of their
full demand.
Prioritizing and changing production schedule to
cater for shortage in A class items.
Influencing
Fulfilling a large, one-time order that would impact demand
regular orders.
 Sales & Operations Planning
Sales & Operations Planning (S&OP) is a Product Review Meeting:
decision-making process involving the 1 Attendees: R&D & Marketing.
business leaders and a number of middle
Demand Planning Meeting
managers and specialties. Attendees: DP, Marketing & Sales.
2
S&OP Mission is to:
Balancing supply & demand at an Supply Planning Meeting
aggregate level. 3 Attendees: SP & Operations

Aligning operational planning with Financial Review Meeting

financial planning. 4 Attendees: Finance
Linking strategic planning with day-today
sales and operational activities. Reconciliation Meeting
5 Attendees: All

Executive Meeting
6 Attendees: Board & All.
Plans Information Flow
Demand
Plan

Production
Sales plan
Plan

Gap closure Constrained

plan supply plan
 S&OP is a robust process,
however its success is mainly
S&OP Plans dependant on having the
right behaviours
Product Review Meeting:
1 Attendees: R&D & Marketing.

Demand Planning Meeting Demand Plan

2 Attendees: DP, Marketing & Sales.

Supply Planning Meeting

3 Attendees: SP & Operations Constrained Plan

Financial Review Meeting

4 Attendees: Finance
Gap closure plan
Reconciliation Meeting
5 Attendees: All

Executive Meeting
Final Sales plan
6 Attendees: Board & All.
 Case Study Managing & Prioritizing
Demand
The outlook:
Lack of team work
Home care business in Africa and a blame game!!
Rapid Market growth.
Capacity is constraining the demand. - Margins are too low to invest in
further capacity in the region.
- We can actually sell everything we
- Allocated budgets for promotions
make, but we are constrained by the
are not used efficiently due to supply
factory capacity.
shortage & constraints.
- Whenever we push sales we always
have customer service problems

- We keep changing the production Target

plan which affects our reliability.
Marketing & Sales - We are always chasing our tails to Finance - We are losing
meet demand shares and we are
- They keep cancelling our not meeting our
maintenance plans which affects our financial targets
Operations
machines efficiency. Top Management
 Case Study Managing & Prioritizing
Demand
The action plan: The results:
Form a cross-functional team, who are
empowered to take tough decisions.
Meet every week to make sure that Margins Sales
everyone is aligned on the updates. (value)
Constrain the demand to demonstrated
capacity
Increase the price since demand is Demonstrated
constrained. Customer
Capacity
Priority was given to key customers. service level
Reduce the promotions drastically, and
increase the lead time for approving them.
Exceptions and late changes are no more Fire-fighting
accepted.
Put the factorys maintenance plan back in mode
place.
Look for an opportunity to source from
different business unit.
Agenda
Forecasting basics.
The demand management process.
The demand planning cycle:
The eight steps process.
The Bulls-Eye, baseline and building blocks.
The demand variability sources.
Maintaining a high quality forecast.
The show stoppers.
The Demand Planning Cycle
The demand planning cycle is an eight-steps Analyze sales
approach. data

In this process, forecast is developed by using

Communicate Clean sales
sales plan data

the baseline forecasting and the forecast

building blocks.
The demand planner is also responsible to Constraint
demand
Generate
baseline
communicate the company-wide agreed sales
plan.
Communicate Develop
demand forecast

Reach demand
consensus
The Demand Planning Cycle
Analyze sales
data

Communicate Clean sales

sales plan data

Constraint Generate
demand baseline

If I had eight hours to chop down a tree, I'd spend

Communicate Develop
six hours sharpening my axe demand forecast
- Abraham Lincoln Reach demand
consensus
The Demand Planning Cycle
This is the step where you are should sharpen your Analyze sales
axe, by interpreting the sales history carefully. data

Compare actual sales data with the old forecast Communicate

sales plan
Clean sales
data
along with its underling assumptions to identifying
what went wrong and what went well.
Analyze year VS year, month VS month, and Constraint Generate
channel by channel. demand baseline

Understand the factors that supported sales, and

make sure to update your assumptions accordingly.
Look for up-normal demand patterns, and try to Communicate
demand
Develop
forecast
understand the root cause jointly with the team.
Reach demand
consensus
The Bulls-Eye Concept
Outliers, such as out of stocks or stock-ups due
to price changes

Big events, unlikely to be repeated

exactly the same way and worth
planning

Normal or routine promo

events, likely to be repeated, but not
always worth planning

Pure baseline sales excluding all

activities
The Bulls-Eye
The Bulls-Eye

Baseline is the amount of

sales with minimal or almost
no support
The Bulls-Eye

Examples can be:

- All-year-round promotions
- All-year-round TV ads
- All-year-round in-store visibility
The Bulls-Eye

These events must be execluded since

they dont happen all-year, and when
they happen supporting assumptions
change
The Bulls-Eye

Including such events will lead to a

wrong forecast, since these data points
are outliers
The Demand Planning Cycle
This is the part where correcting the history takes
place. Analyze sales
data

From analyzing sales data, outliers and events Communicate Clean sales
uplifts are identified. sales plan data

The most common way to identify outliers is using

upper and lower limits (25% of average sales), or
by using standard deviation () Constraint Generate
demand baseline
Common root causes of outliers can be:
Out of stocks
Competitors out of stocks
Sales prior to price increase rumors Communicate Develop
Channel stuffing demand forecast

Correct the previous data jointly with the team. Reach demand
consensus
Sources of Demand Variability

Competition

Seasonal
Distance
effects

Economic
Disasters
Demand and other
external
Variability trends

PLC trends
and
Promotions
customers
expectations
Bullwhip
effect
The Demand Planning Cycle
Baseline generation is usually done using Analyze sales
statistical forecasting. data

Most common statistical modes used to

Communicate Clean sales
sales plan data

generate baselines are:

Moving average & weighted moving average
Seasonal liner regression
Constraint Generate
Exponential smoothing demand baseline

Holt-winter exponential model

Validate your baseline with the updated
assumptions. Communicate
demand
Develop
forecast

Take into account the seasonality patterns. Reach demand

consensus
The Demand Planning Cycle
After the baseline is generated, events and Analyze sales
forecast building blocks should be included. data

Each event should have an uplift (or a down-

Communicate Clean sales
sales plan data

lift) that affects the forecast.

The challenging part is to determine the
incremental volume. Constraint
demand
Generate
baseline

Communicate Develop
demand forecast

Reach demand
consensus
 Demand Building Blocks

Total Forecast
Event

Baseline Event
Event

Events

Distribution Customer Consumer Increased in- New Product

Advertisement Price plans
drives promotions promotions store visibility introduction
The Big Picture - Cannibalization
A promotion or innovation success standalone can make a perfect sense,
however there are many external factors that will affect the success of that
and an internal one; which is cannibalization.
An innovation and promotional grid must be always in place to insure that
the big picture is there, and in order to be able to asses cannibalization effect
properly.

=
The Demand Planning Cycle
Forecast is a cross-functional responsibility, Analyze sales
hence final demand plans must be aligned data

with the team. Communicate

sales plan
Clean sales
data

Demand consensus is an integral part for a

successful S&OP process.
Constraint Generate
demand baseline

Communicate Develop
demand forecast

Reach demand
consensus
The Demand Planning Cycle
Communicate the demand to the supply side Analyze sales
of the organization as an unconstrained data

demand plan. Communicate

sales plan
Clean sales
data

Demand Plan Constraint Generate

demand baseline
Constrained
Plan

Gap closure
plan
Communicate Develop
Final Sales demand forecast
plan
Reach demand
consensus
The Demand Planning Cycle
Include the supply constraints to reflect reality Analyze sales
to your Constrained demand plan data

Communicate Clean sales

sales plan data

Demand Plan Constraint Generate

demand baseline
Constrained
Plan

Gap closure
plan
Communicate Develop
Final Sales demand forecast
plan
Reach demand
consensus
The Demand Planning Cycle
Now as the plans are agreed, communicate to Analyze sales
the sales team the companys agreed plan data

Communicate Clean sales

sales plan data

Demand Plan Constraint Generate

demand baseline
Constrained
Plan

Gap closure
plan
Communicate Develop
Final Sales demand forecast
plan
Reach demand
consensus
Agenda
Forecasting basics.
The demand management process.
The demand planning cycle.
Maintaining a high quality forecast:
10 steps for improved bias & accuracy
Classification of the losses
The show stoppers.
Maintaining a Quality Forecast
Maintaining a quality forecast is an endless journey:
Validate your baselines statistical model using historical data.
Validate the assumptions related to your events building blocks.
Validate the assumptions related to market & economic insights.
Regularly update and correct your forecast.
Work on improving your FA & FB.
How to Minimize Bias?
Start by analyzing your data along with the assumptions.
1. Investigate top-down VS bottom-up.
2. Investigate VS previous periods and growth rates.
3. Insure sustainable supply for products with bad stock-out history.

Common sources of forecast bias

Wrong Stock outs and

Regulars Promotions Innovations Growth rates
assumptions supply issues
 How to Minimize Forecast Error?
1. Eliminate sources of bias.
2. Start a housekeeping cleaning activity.
Quick
win

3. Investigate at a brand level looking for cross-cannibalization.

4. Review your products proportional factors.
5. Analyze your time buckets sales.
Quick
win

6. Post analyze your promotions and innovations.

7. Rationalize your product mix portfolio.
Classify the Losses
Forecasting is a journey and forecasting quality improvement is a continuous
improvement process. Hence prioritizing your effort is so important, and this
can be done through:
Sales variation & forecast accuracy matrix
ABC classification for FUs (by forecast error, volume, value, etc..)
Ad-hoc requests
The most sophisticated
forecast & the one in its
simplest form will both fail to
reflect reality, if they are not
updated and validated
periodically
Classify the Losses - The Sales Variation &
Forecast Accuracy Matrix
Identify what is the average sales
variation.
Identify the coefficient of variation
using sales variation divided by
average sales of product.
Plot a scatter diagram between the
forecast accuracy & the coefficient of
variation.
Divide your graph to four zones
Classify the Losses - The Sales Variation &
Forecast Accuracy Matrix
Zone A: Well done! Keep up the good
job. Zone A Zone D
Zone B: Try different mathematical
model.
Zone B
Zone C: Collaborate with sales and
Zone C
start digging further as there is a big Quick
room for improvements. win

Zone D: Try to minimize the sales

variation.
Classify the Losses - ABC
Work smart by classifying your
forecast errors based on ABC
classification, as the As will result in
a significant improvement to the Quick
forecast quality win

On the average the A

items represents 70% of
the issues and are less
than 20% of the total
count
Classify the Losses Ad-hoc Requests
FMCG business is a very dynamic business, where consumers, customers and
competition are always changing the rules of the game.
Examples of ad-hoc requests might be :
Unplanned customer order
Counter promotion
Welcome plan for a competitors launch
Document
assumptions &
late change &
exceptions
Agenda
Forecasting basics.
The demand management process.
The demand planning cycle.
Maintaining a high quality forecast.
The show stoppers.
The Show Stoppers
1. Shortage of talent and high employee turnover.
2. Data quality & availability.
3. Complex portfolio.
4. Team discipline.
5. Too many meetings.
6. Corporate politics.
7. Inefficient use of the systems.
Summing-up
DP is not only about SC.. It is somehow a position taking into
account all different functions views and reflecting reality to
the forecast.
Forecast is crucial for success in the FMCG business. Show stoppers
are always there,
Always stick to the forecast basics and principles. it is up to you to
make it happen.
Forecast is a mix of science and art, but always do your best
to validate and quantify the assumptions
Tailor youre the forecast quality KPIs to better fit your needs.
Behaviors are the key of the success of the demand
management and the S&OP processes.
Email: ayman_elrafie@hotmail.com
LinkedIn Profile: Ayman Elrafie