Forecast Demand Managing PDF

Forecasting and Demand Management
Forecasting
And
Demand Management
Strategy
And
Development
A concise writing on the actions needed to begin the

implementation of world class forecasting and demand
management program.
Copyright © 2000 by ECRU Technologies, Inc. 1


Forecasting
And
Demand Management
Strategy
And
Development
J. Martin
R. Roth
ECRU Technologies Publisher

A portion of the
KNOWLEDGE TRANSFER SERIES™
from the WORLD OF LEARNING.™
Copyright © 2000 by ECRU Technologies, Inc.

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Library of Congress Cataloging-in-Publication Data

Martin, J./Roth, R.
Forecasting and Demand Management Strategy and Development: A concise writing
on the actions needed to begin the implementation of world class forecasting and demand
management program / J. Martin / R. Roth.– 1st ed.
ISBN 1-931186-02-2 (papercover)

1. Science 2. Organization 3. Theory 4. Systems 5. Behavior I.
Title
First Edition
First Printing September 2000
The information included in this book is further amplified when used in

conjunction with other books from ECRU Technologies, Inc. Other titles are:
“Supply Chain Management Direction Strategy” and “Supply Chain Management
Development Strategy”.

Contents
1 INTRODUCTION........................................................................................................... 9
2 WHAT DO WE TRY TO ACCOMPLISH?............................................................... 11

2.1 DETERMINE FORECAST-ABILITY OF END PRODUCTS ................................................ 12
2.2 INSTALL A FORECASTING TOOL AND PROVIDE TRAINING IN ITS USE ........................ 13
2.3 DEVELOP DEMAND MANAGEMENT PROCESS OUTLINE ............................................ 13
2.4 IDENTIFY NECESSARY SUPPORT REQUIREMENTS ..................................................... 13
2.5 DETERMINE KEY METRICS ...................................................................................... 14
2.6 DETERMINE TIME / RESOURCES TO IMPLEMENT THE PROCESS................................. 16
2.7 DOCUMENT DETAILS IN “PROJECT DOCUMENT” ...................................................... 16
3 PROCESS DEFINITION:............................................................................................ 18
THE ORGANIZATION VIEW: ................................................................................................. 18
THE FORECASTING SCOPE.................................................................................................... 20
4 FORECASTING SUPPORT REQUIREMENTS ...................................................... 21
4.1 IT PLATFORM ASSESSMENT ..................................................................................... 21
4.2 INFORMATION SYSTEMS AND SERVICES INTEGRATION ............................................ 22
4.3 BUSINESS LOGISTICS AND PROCESSES ..................................................................... 23
5 PROCESS OUTLINE................................................................................................... 25
5.1 UNDERSTANDING THE FORECASTING PROCESS:....................................................... 25
5.2 BACKGROUND: WHAT FORECASTING “IS” .............................................................. 25
5.2.1 Statistical Forecast.......................................................................................... 26
5.2.2 “Demand Management” of the Statistical Forecast ....................................... 26
5.2.3 The Forecasting Process................................................................................. 27
5.3 DEFINING “WHAT” TO FORECAST – THE “SKU”....................................................... 28
5.4 DISCIPLINE AND RESPONSIBILITY ............................................................................ 30
5.5 METRICS – MEASURES OF PERFORMANCE ............................................................... 31
5.5.1 Forecast Metrics ............................................................................................. 31
5.5.2 Performance Metrics....................................................................................... 32
5.6 OTHER IMPLICATIONS .............................................................................................. 32
6 FORECASTING’S ROLE IN CORPORATE FUNCTIONS ................................... 33
6.1 MARKET & PRODUCT VIEW..................................................................................... 33
6.2 STRATEGIC / CORPORATE VIEW ............................................................................... 35
6.3 TIME / SEQUENCE VIEW ........................................................................................... 36
6.4 TACTICAL / BUSINESS VIEW .................................................................................... 38
6.5 OPERATIONAL / PROCESS VIEW ............................................................................... 40
6.6 FORECASTING PROCEDURES VIEW ........................................................................... 40
6.7 ROLES, RESPONSIBILITIES, AND METRICS VIEW ...................................................... 42
6.8 SUMMARY ................................................................................................................ 43
7 ROLES & RESPONSIBILITIES DEVELOPMENT ................................................ 44
8 METRICS DEVELOPMENT PROCESS................................................................... 45
9 DEMAND MANAGEMENT DRIVERS..................................................................... 47

9.1 TERMINOLOGY: DRIVERS, ASSUMPTIONS, DEMAND MANAGEMENT ...................... 47
9.2 TYPES OF DRIVERS................................................................................................... 49

9.2.1 External Drivers.............................................................................................. 49

9.2.2 Internal Drivers............................................................................................... 50
9.2.3 Sector Drivers ................................................................................................. 53
9.3 DRIVER IDENTIFICATION .......................................................................................... 55
9.4 DRIVER MANAGEMENT ............................................................................................ 57
9.5 APPLYING DEMAND MANAGEMENT RESULTS ......................................................... 62
10 THE FORECASTING & DEMAND MANAGEMENT CYCLE ......................... 64
10.1 DOWNLOAD AND CYCLE START............................................................................... 65
10.2 FORECAST REVIEW & DEMAND MANAGEMENT ANALYSIS ........................................ 66
10.3 CHANGE CONSOLIDATION, FORECAST ADOPTION, UPLOAD ....................................... 67

The Authors
J. Martin is an international consultant providing services in

supply chain management, e-commerce, organization change
management, and ERP system project management. He has
worked with a variety of industries ranging from heavy equipment
manufacture, transportation, paper, automobile, healthcare, and
electronic components. He has spoken before many industry
groups which include AT&T and IBM His educational
background includes a B. S. in operations management, M. S. in
computer science and a Ph.D. in psychology. He can be reached
via email at 103700.676@compuserve.com.
R. Roth is founder and president of Systems Services International

Ltd., providing business management and technology integration
services since 1975. Clients are in many industries – construction;
automotive; communications; space and defense; manufacturing;
governments; medical devices. R. Roth and his team have proven
their multi-cultural experience and sensitivity in Europe, the
Middle East, South East Asia, North East Asia, and North
America. R. Roth is a seasoned economist with extensive
experience in information technology implementation. He can be
reached via email at RolfRoth@compuserve.com


1 Introduction
Accurate forecasting can play a decisive role in an organization’s

planning, budgeting and performance monitoring process. The
meanings of “forecast" are:
(1) the statistical forecast derived from historic data,
(2) the demand-managed forecast incorporating specific
assumptions into the statistical forecast, and
(3) the process used to develop and control the two former.
Statistical formulae are used to derive the forecast model, baseline,

trend and seasonality of the units as well as predict the likely future
quantities of the units. Historic data that has been accumulated
under past conditions of influence factors (Drivers) such as market
development, promotions, or other company actions are used. If
the past conditions continue to prevail, and if no changes are made
to influence the future development, then the forecasted quantities
are likely to occur. If the actions described are being taken in the
described quantity/value and time and if no other influences will
take effect, then the statistical forecast plus the changes resulting
from the described assumptions [heuristics] will likely occur.

In order to determine whether or not the assumed effect actually

takes place we must:
(1) measure the actual quantities/values observed (i.e. the
new historic data), (
(2) compare the actual data to the demand-managed forecast
data to determine the difference if any,
(3) analyze, in the event of a significant difference between
actual and forecast, the underlying assumptions to
determine whether they were correct.
At completion of the analysis, the resulting new assumptions (more
optimistic/pessimistic, different actions, etc.) must be applied to
the then current statistical forecast.
This process should be performed at least monthly, to achieve a

reasonable measure of actual performance early enough to
implement any corrective action. Companies may have thousands
of “SKUs” (Stock Keeping Units”) subject to independent demand.
Clearly, forecasting all of them would require a tremendous effort.
Consequently, a selection process must be put in place to forecast
only meaningful data. Criteria for the selection could be any SKU
defined for forecasting purposes as any measurable unit that can be
extracted and/or composed from historic data.

The forecast process will result in improved business forecasts

accuracy if, and only if, the organization implements the process in
a disciplined fashion. Assumptions must be noted in detail; their
‘correctness’ must be analyzed; corresponding changes must be
defined.
This necessitates two implementation tools:

(1) a description of the forecast process (from timing through
data extraction, analysis, note taking, to applying changes),
and
(2) assignment of responsibility for each step in the process.
Typically, companies develop roles and responsibilities for the
process, and incorporate them into the position descriptions of the
responsible functions.
2 What do we try to accomplish?
This book outlines, at a high level, the “forecast and demand

management process”. It is intended as a comprehensive
summary, and as a guideline for developing your own “work-in-
progress” to be modified and amended as you progress with the
implementation.

Note that the “forms” referenced in this book, and shown as

examples, easily can be created in electronic format. This will
enable company-specific modifications to be made, and the forms
can be used as a “blueprint” for the development of automated
recording and tracking facilities.
This book is not a primer on statistical forecasting, forecasting

methodologies, or related theories. Numerous publications are
available that cover these subjects.
2.1 Determine “Forecast-ability” of End Products
As a “first cut” it is necessary to determine which independent

demand (the end products as sold to customers) are in effect
“forecast-able” – with applicable forecast model, trend, seasonality
etc., and determination of A, B, etc. classification. This provides
the base for focus on the most important products. Spending 80%
of your effort on the top 20% of your products produces
measurable results, quickly!

2.2 Install a Forecasting Tool and provide Training in its use
Forecasting is best performed using automated tools. Ideally,

several forecasting applications available in the market, should be
tested and evaluated. After installation, the system can be used for
forecast processing (both initial statistical forecasting and
subsequent demand management), and as a training tool for
personnel.
2.3 Develop Demand Management Process Outline
The forecasting and demand management process starts with

processing the historic data, and ends with the preparation of
forecast data (including demand management input) for the next
period.
This book comprises the process outline. It can be used to develop

your own action plan.
2.4 Identify necessary Support Requirements
Requirements covering organization functions directly involved in

the forecast and demand management process (i.e. departments,
managers, etc.), as well as such requirements that need to be
addressed but are outside the scope of the topic, are identified.

Directly involved functions and their roles are described in this

document. Others need to be identified and documented as part of
the development process. Note that the organization should
address these requirements reasonably urgently, as the quality and
timing of many forecasting and demand management activities are
directly influenced by them.
2.5 Determine Key Metrics
“Metrics” measure the difference between established “targets”

and actual performance against these targets. This necessitates that
both target and performance are quantifiable in the same unit of
measure. Example:
a) TARGET: Improve Sales, month-over-month, by

10%
b) PERFORMANCE: Improved sales by $ 100, $110, $ 121,
etc.
Does this imply the target has been met? No – since the
performance unit of measure (dollars) is different from the target
unit of measure (percent). Under these conditions, seemingly
conclusive data is meaningless or worse, misleading. The fault in
the example could be corrected in either of two ways:

a1) TARGET: Improve Sales, month-over-month, by

10% BASED ON $ 1000 start
b1) PERFORMANCE: Improved sales by $ 100, $110, $ 121,
etc.
OR
a2) TARGET: Improve Sales, month-over-month, by
10%
b2) PERFORMANCE: calculate based on following actual data:
Sales in Month1 Month2 Month3 etc.
Sales$ 1000 1100 1210 etc.
Sales% 100% +10% +10% etc.
Consequently, a system of metrics must be developed if the

company is to have accurate and meaningful performance
measurement capability.
Ironically, forecasting is the business process that least lends itself

to performance measurements. The reason: “forecasting is a
“scientifically calculated prediction” of future sales UNDER
CONDITION THAT the assumptions and resulting actions that
were effective in the past and are reflected in the data history, will
REMAIN UNCHANGED”. Yet it is the purpose of the demand
management process, to lead to assumption corrections and
different action conclusions. Paradoxically, the forecasting and
demand management process is most successful if actual
performance continually exceeds forecast, either with positive
(such as for sales) or negative (such as for costs) trends.

Initially, the “success” of the forecasting process, itself, usually is

measured by determining whether actual sales for the forecast
period were equal to the forecasted sales for that period (or within
a pre-determined percentage-band around the forecast, e.g. +/-
5%). In the long term, this inadequate measure should be replaced
by metrics aimed at business functions leading to, and resulting
from, the forecasting/demand management process.
2.6 Determine Time / Resources to implement the Process
Once the Action Plan is drafted, for planning, training and

implementation actions resulting or identified in this project phase,
a high-level estimate of required efforts and likely time frames can
be developed.
2.7 Document details in “Project Document”
Throughout your project, issues will be identified that are out of

scope of the topic but will require addressing in the short term.
SKU (Stock Keeping Unit) planning and related Information
Services requirements are a good example. All project-related
information should be documented in clearly identifiable separate
binders, such as:

a) The Forecasting and Demand Management Process

Implementation Manual
b) The Forecasting System Implementation Manual
c) The Forecasting System User Manual
d) The Training Plan (which might be combined with “process
scripts”)
e) The Action Plan

3 Process Definition:
Forecasting and corresponding performance monitoring are an

integral part of most organization’s management functions. A
high-level indication of such functions can be represented as
follows:
3.1 The Organization View:
External Events / Trends

Demand Management Package Evaluation &
Related Topics Channels, Relationships, Blueprint for Change
Promotions, Events
Product Planning Forecasting / Modeling
Groups & Families, Form, Product X, Quantity Y, Project Implementation
Fit, Function, Cost Delivery Z
Package
Inventory / Service
EDM - Engineering Data Policy Implementation
Management
Laboratory / Prototyping
Design, Specifications, Transition Management
Revisions
Concurrent Sales Force / Automation
Design Product Structure,
Continuous Updates
Configuratiog, Pricingn, Concurrent
ALL Areas
Items / Kits / Assemblies Variants, Std. Costing Design
Bills of Materials Bid / Contract -

Documentation Contracts Management
Routings/Ass'y Instruct.
/ Process Formul. Customers
CRP - Capacity
RCCP - Rough Cut (& theirCustomers
Customers)
Constraint Planning Requirements
Capacity Planning (& their Customers)
Planning Sales Orders / Entry &
Billing
Performance Metrics
Joint Specifications &
Development PRP - Project Performance Metrics
FCP - Finite Capacity / Requirements
MPS - Master FFC Finite Forward Planning
Production Scheduling
Scheduling Order Fulfillment
DRP - Distribution
Requirements Order Fulfillment
MRP - Materials
Concurrent Planning
Purchase Orders / Requirements
Design
Contracts Planning
Replenishment /
Distribution Centers,
Suppliers / Vendors Vendor Managed
(&Suppliers
their Suppliers) Production Orders Distributors / VMI
/ Vendors Inventory
(& their Suppliers)
Distribution / Outbound
Maintenance - preventive
Inbound Logistics Logistics
and remedial
(VMI?)
QA & Staging
Materials Issue
Labeling, Packaging
Data Provision & Acquisition
Damaged and Returned Damaged and Returned

Products Products
Parts / Subassemblies Product Inventory
Management Process & SFC - Shop Floor Control Management
Production Management Line, Cell, Job, Repetitive, Customer Service,
Claims and Refunds & WIP Control Process Technical Services,
Customer Service,
Claims and Refunds Maintenance
Technical Services,
Maintenance
Cash Management Credit Management
Supply Chain Mgmt Training & Help

Finance - GL, AP, AR EDI & e-commerce Desk
Payroll / Human Resources Asset Management
Budget, Planning, Data Base Network /
Costing Budget - P/L & Applications
Administ- Security
Legacy Rollout Mgmt
Standards & Actuals / Cost Management Management
Performane ration Management
Metrics Accounting
Targets
Metrics &
Hours Accounting Completion Reporting Backflushing Hardware System Software Utilities/Monitors
Y2K Review
Measurements
Note that forecasting and related functions (such as order

fulfillment, customer satisfaction, etc.) ultimately relate to virtually

all functions in the company. Accurate forecast data can drive

production and financial planning, logistics and distribution
management, service and parts management.
For the topic, the scope is limited to “forecasting proper”. This

includes the forecasting process, and the application of “demand
drivers”. It excludes any of the “uses” of forecast data, such as for
MRP (Materials Requirements Planning), production and
purchasing planning, etc. Forecasting can be considered a “stand-
alone” function concerning methodology, training, and process
execution. However, without “translating” the forecast results into
usable manufacturing planning data, and without monitoring the
accuracy of periodic forecasts and making corresponding policy
adjustments, the efforts expended on forecasting would be wasted.
“Forecasting proper” includes the activities in the periodic cycle

from “accepting historic demand data” through “statistical
forecasting” and “demand management” to “providing forecast and
demand-managed data to other systems and functions”. This
process is graphically represented as the “High-Level Forecast
Process Flow”: Note that the following explanations and
descriptions are based on this representation of the forecast and
demand management cycle.

3.2 The Forecasting Scope
Set-up and Initialization

Create Operating Environment for Forecasting
Process (one-time) Tools, on the Target Platform
Cyclical Forecasting
Perform initial Data Setup and Forecast
Process (monthly) Calculation
Start-Up Data
Systems and Applications "History" may be a single file, or

that store / provide data Flat
menu selection of multiple files
File X
Applic. 1 1 of n
(monthly data)
Historic Data
X
Extractions
History File
Flat
Applic. 2 File Y
Y 2 of n Common Format suitable for
Forecast Processing
Applic. n Flat
Z File Z Forecasting
3 of n SYSTEM (1)
Historic Data,
Periodic: Actual Definitions,
Data Reports Cycle as needed
Calendars Statistical
extracted from Statistical
Forecast
Applications Files Forecast
(Snapshot - IF
(Snapshot
nothing is done- IF
Multiple nothing
Regression then...)is done
then...)
Analysis
(occasional)
Driver 1, Keep Record of

Apply "Driver Keep Record of
Location 1 "Driver" data used Assumptions and
Updates" to the Assumptions and
to manage the Bases
forecast data = Bases - update as
Driver X, forecast process needed
Demand
Location 2
Management
Driver Z,
Location n
Sales Input Forecasting

SYSTEM (2)
Use of forecasted data in other systems
Operations
Input MONITOR for
Managed
Managed
Forecast Delta (FC/Actual)
Forecast
(Snapshot -IF
and applications
(Snapshot
Demand Mgmt-IF
Demand
applied, Mgmt
then ..)
Flat applied, then ..)
File X
1 of n
Generate "Flat
Forecast
Flat Files" with Forecast
Output Format
File Y Data for source
for MRP,
2 of n systems and
Reporting etc.
applications
Flat
File Z
3 of n Forecast Scope
High-Level Forecast Process Flow - HL-FC-Flow.vsd - 03/06Jan00 - RR

4 Forecasting Support Requirements
Forecasting and Demand Management are business functions

which require extensive cooperation between functions and tasks.
The forecast frequency itself (which depends, in turn, on the nature
of the business) usually is monthly. However, all related activities
must be performed and completed within a very short time frame.
If the forecast is not completed within at most two or three days
after month-end closing, the forecast intelligence could become
useless as not enough time would remain in the period for sales
and operations to take forecast-inspired actions.
To operate in this compressed time fence, three specific business

areas must be addressed.
(1) IT Platform Assessment
(2) Information Systems and Services Integration
(3) Business Logistics and Processes
4.1 IT Platform Assessment
Most of the forecast-related data can be collected from existing

systems, supplied from front-end input prepared by sales persons
and other functional heads, and distributed via existing information
systems. Therefore, the information technology platform should
be analyzed to determine its suitability as a “support platform”.

Specifically, this involves:
• Inventory of and Access Mechanisms to Hosts, Servers,

Networks, PCs
• Capabilities and Use of Extranet, Intranet, Internet, Virtual
Private Networks, etc.
• Host and Server Interfaces capabilities and functions, for
data feeds and use
• Interim Data Structures (data warehouses, data marts, etc.)
to facilitate focused data management
• Development of Platform Architecture document – with
Training and Development Plan
4.2 Information Systems and Services Integration
Forecasting is a tool – consisting of limited and specific-purpose

software applications that perform only one set of functions:
assessing historic information, classifying items, determining their
forecast-ability, and forecasting anticipated future quantities (of
units, dollars, etc.) based on supplied history.
Specifically, the forecasting tool set does not address issues such
as how the SKU (the item or part) is defined, how the data is
massaged during extraction from the host data bases, how it is
summarized, and how transitions from “old” to “new” SKUs will
be accomplished.

For all these capabilities, the organization relies on its Information

Services department or provider. Specifically, this involves:
• Design and implementation of pre-processing capabilities

• Design and implementation of post-processing capabilities
• Split-and-Bypass-and-Merge (Windowing) requirements –
design and implementation
• Cutoff, Transfer and Balance Management – between host
applications and forecasting
• Generational File Maintenance for Simulation, Restart,
Backup and Restore Purposes
• Support and Analytical Software such as Multiple
Regression Analysis, automated Data Feeds (Duns, Dodge,
etc.)
• On-line Documentation Support Capabilities – for instant
access to assumptions, action decisions, etc.
• Development of IS Support Structure Architecture document
– with Training and Development Plan
4.3 Business Logistics and Processes
Forecasting has a very intimate relationship with other business

functions. For example, the independent demand quantity forecast
for any one product and period, will depend not only on historic
data but also on the company’s decisions such as customer service

levels, safety stock requirements, distribution points and supply

logistics, etc.
To link these functions to the forecasting and demand management

process, it is necessary to define their contributions to the process,
through business logistics mapping. Typically, this involves:
• Development of Business Functions Matrix with focus on

FC/DM
• Organization Skills Assessment (Forecasting, Statistics,
Data Analysis etc.) and Training Development
• Roles and Responsibilities Development and Position
Description Updates – to reflect contributions
• Updating of Compensation / Incentives programs to reflect
weight of FC/DM and related functions
• External Interfaces Considerations such as reporting (SEC),
compliance (documentation), etc.
• Automating Integration of FC/DM into the Business Flow
• Development of “to-be” business process flows – with
Training and Development Plan
Without these support processes firmly developed and in place, it

will be difficult, though not impossible, to maintain the discipline
of preparing monthly forecasts, reliably, with reproducible analysis
and assumption options.

These support functions are excluded from scope of this book -

they should be included, at a high level, in the Action Plan.
5 Process Outline
5.1 Understanding the Forecasting Process:
The term “forecasting” often is mis-used – as a set of statistical

formulae, as a “sales predictions” process, or as an “educated guess
as to what might happen”. Properly used, forecasting can play a
decisive role in the organization’s planning, budgeting and
performance monitoring process. Therefore, an outline of what
forecasting really is, is required.
5.2 Background: What forecasting “is”
For the purpose of this book, we distinguish three specific

meanings of “forecast”. They are:
(1) the statistical forecast derived from historic data,
(2) the demand-managed forecast incorporating specific
assumptions into the statistical forecast, and
(3) the process used to develop and control the two former.

5.2.1 Statistical Forecast
Statistical formulae are used to derive, from quantitative history of

independent demand for “units”, the forecast model, baseline,
trend and seasonality of the “units”, as well as a ‘prediction’ of the
likely future quantities of the units. Historic data has accumulated
under past conditions of influence factors (or “Drivers”) such as
market development, promotions, or other company actions.
Consequently, the “statistical” forecast derived from this data, has
a narrow meaning:
“IF the past conditions continue to prevail, AND IF no changes

are made to influence the future development, THEN the “forecast
quantities” are likely to occur.”
5.2.2 “Demand Management” of the Statistical Forecast
To make the forecast more meaningful as a “predictor” of the

future, decisions must be made about the factors that influence
demand, the strength of these factors, and their likely impact on
future demand. For example: “a targeted promotion estimated to
cost $ X for a specific market, will result in a Y% one-time sales
increase in that market, for a period of four months, commencing
one month after the start of the promotion.” In practical terms: the
forecast quantity/value for the future periods 2, 3 and 4 would have

to be increased by Y%. The resulting “demand-managed” forecast

has the following meaning:
“IF the actions described are being taken, in the described

quantity/value and time, AND IF no other influences will take
effect, THEN the statistical forecast plus the changes resulting
from the described assumptions, likely will occur.”
5.2.3 The Forecasting Process
In order to determine whether or not the “assumed effect” actually

takes place, the following steps are required, at least at the end of
period 4 (in the above example):
a) Measuring the actual quantities/values observed (i.e. the new

historic data)
b) Comparing the actual data to the demand-managed forecast data

to determine the difference if any
c) In the event of a significant difference between “actual” and

“forecast”, analyzing the underlying assumptions to determine
whether they were “correct”. (Note that several assessments
must be made to determine, inter alia, whether there may have
been a systemic error in the assumption, whether the assumed

effects where weaker, stronger or in a different time frame than

expected, etc.)
d) At completion of the analysis, the conclusions drawn must be

noted (with the original assumptions), changes about the
assumptions must be noted, and the resulting new assumptions
(more optimistic/pessimistic, different actions, etc.) must be
applied to the then current statistical forecast.
This process should be performed at least monthly, to achieve a

reasonable “measure of actual performance” early enough to
implement corrective action if necessary.
Note that the repetitive period refinement of assumptions “forces”

the organization to continually improve its analysis and
conclusions process, thereby increasing its knowledge of
customers, markets, the competition and other influence factors
(drivers).
5.3 Defining “what” to forecast – the “SKU”
In many instances, companies have thousands of “SKUs” (Stock

Keeping Units”) subject to independent demand (by customers in
the market). Clearly, forecasting all of them would require a
tremendous effort. In most cases, the result would not be

significantly different than when only 25% (or some other

measure) of the SKUs would have been forecast. Consequently, a
selection process must be put in place to forecast only
“meaningful” data. Criteria for the selection could be:
a) “SKUs that have the greatest effect on results”. Typically,

about 10% of all SKUs account for more than 35% of sales,
with another 15% accounting for an additional 25% of sales.
Forecasting these 25% of all SKUs (often described as A and B
items) will result in a meaningful forecast of 60% of sales.
b) “SKUs that allow the best possible assessment of influence

factors”. In many instances, relatively few large customers
account for a very large proportion of all sales. Therefore,
seeking to influence demand by these few customers will have a
large effect on anticipated sales. Similarly, a few “product
models” out of thousands of end items, components and parts,
are much easier to control and forecast, than the total
population of thousands of SKUs.
Note that the definition of “SKU” changes with the desired degree
of control. Forecasting software will allow determination of A, B,
etc. status, forecast-ability, forecast model, for any measurable
unit. Therefore, the desired SKUs must be carefully designed and
corresponding data must be extracted from the historic data files.
Consequently, a stock keeping unit for forecast purposes is vastly
different than an SKU for production and inventory purposes:

“An SKU defined for forecasting purposes, can be any measurable

unit that can be extracted and/or composed from historic data”.
Note that forecasts for SKUs that are too narrowly defined, can
become meaningless because the number of “items” becomes to
small, for meaningful statistical analysis.
To enable tracking of actual performance against forecast for these

“constructed SKUs”, the same cycle of assumptions,
measurements, corrections (the demand management) must be
applied as for real SKUs.
5.4 Discipline and Responsibility
The forecast process as described, will result in improved business

forecasts, IF and only if the organization implements the process in
a disciplined fashion. Assumptions must be noted in detail; their
‘correctness’ must be analyzed; corresponding changes must be
defined.
This necessitates two implementation tools: (1) a description of

the forecast process (from timing through data extraction, analysis,
note taking, to applying changes), and (2) assignment of
responsibility for each step in the process.

Typically, companies develop “roles and responsibilities” for the

process, and incorporate them into the position descriptions of the
responsible functions.
5.5 Metrics – Measures of Performance
Determining responsibility is not, by itself, sufficient to ensure the

discipline of the process. To do so, a set of performance
measurements are required. They fall into several basic categories:
5.5.1 Forecast Metrics
The quality of the forecast process itself can be measured by

constantly monitoring how “close” the observed actual data track
to the forecast data. The better the process, the smaller the
difference between them. Note that the forecast merely reflects the
organization’s past history and its best judgment on how to
influence future demand. In and by itself, “the forecast” cannot be
right or wrong (unless underlying statistical formulae are
incorrectly applied).
If external influence factors are used to modify the statistical

forecast, additional statistical evaluations will be required to ensure
that these factors are correctly applied. For example, to determine
the effect of an interest rate rise on an interest-sensitive

organization, a multiple regression analysis might be necessary to

determine the degree and the time of the influence.
5.5.2 Performance Metrics
In many instances, forecasting can be “accurate” as measured by

forecast metrics, yet not reflect severe problems. For example,
actual total shipment volume can be exactly as forecast, while
many of the shipments could have been very late. In this instance,
customer dissatisfaction eventually would result in sales reductions
event though other sales and marketing assumptions might be
adequate.
Consequently, regular business metrics must be employed as part

of the forecasting process. Such metrics can be operationally
relevant (late shipments, partial shipments, excess damage, out-of-
stock situations etc.), reflective of market changes (new
competition, un-anticipated seasonal influences, etc.)
5.6 Other Implications
It is both probably and likely, that the forecast process – as a

methodology, a discipline, and a set of usable results – might
influence corporate decision-making more than any other
application of business knowledge. “Customer Satisfaction” – the
ultimate measurement of success – will be as good as the

organization’s capability to anticipate the customers’ requirements

and expectations.
Forecasting is the process used to define and quantify these

expectations.
6 Forecasting’s Role in Corporate Functions
A “top-down” view of the corporation reveals a progressively

more detailed focus – from the perception of the market, to the
metrics to be tracked for measuring performance in that market.
These views can be represented as follows:
6.1 Market & Product View

The first view indicates how the company’s products/services must

compete in the market. Typically, production and distribution
Life Cycle Product "Make" Product "Value"
continuous
replenishment
Make to Stock FCH
Hours / Days MtS / POS Repl. cents / dollars
Customers
Suppliers
Make-to-Stock Order
Forecast Horizon Delivery &
Assemble-to-Order Replace't
Days/Months MtS / AtO '00s / '000s
EtO Forecast Horizon one-of-a-kind
9 - 60+ months EtO / DBO '00,000s,millions/billions
Markets Competition Compliance Regulation
Production and Distribution Characteristics
Design Drivers Industry Drivers Market Drivers

Long Lead Time Manufacturing & Materials Lead Time Short Delivery Time
Poor Process Capability Reliable Fabrication / Assembly Processes High Reliability
High Set-up / Tooling Costs Continuous Asset / Tools Utilization Immediate Consumption
Irregular Demand Regular Demand High Throughput
"Forever" Use "Replacement Lifetime " Use 1000's Suppliers, Millions Customers
Customer-specific Market-specific Low Inventory Levels
One Customer - One Contractor Thousands Customers - Dozens Suppliers "State" Risk Reduction
Forecast & Demand Management

- Market & Product View
Models(2).vsd - 18Feb98 - RR
characteristics – as well as forecast time fences – are a direct result
of the market environment.
Note that the “forecast horizon” – the time available to forecast

likely demand, and to supply that demand, becomes ever more

short as the corporation moves from an “engineered-to-order”

environment, to a “make-to-stock” operation.
6.2 Strategic / Corporate View
At the next ‘level’, the corporation identifies the business planning,

and sales and operations planning required to successfully operate
in the market.
The “Tactical / Business View” then defines how customers and

business partners become the focus of tactical planning, while the
“Operational / Task View” defines the production and operational
requirements.

Strategic / Corporate View
Business Planning
FC & DM
Sales and Operations Planning (S&OP)
Tactical / Business View

Customer Relationship Management (CRM)
Supply Chain Management (SCM)
Operational / Task View

Master Scheduling
ERP
Materials Requirements Planning (MRP / II)
Manufacturing Execution (MES)
Logistics and Service
Forecast & Demand Management

- Strategic / Corporate View
Forecasting and demand management apply the “time fences”

around these views.
6.3 Time / Sequence View

The forecast horizon is “long-to-medium-term” – attempting to

predict the likely independent demand for the company’s products
(services) based on business, and on sales and operations planning
(i.e. based on the Corporate View!). Note that this horizon shrinks
the closer the company comes to “make-to-stock” operations.
Strategic / Corporate View
Projection
Business Planning
FC & DM
Sales and Operations Planning (S&OP)
Forecast "Horizon"
long term
Tactical / Business View
Customer Relationship Management (CRM)
TIME HORIZON
Supply Chain Management (SCM) near term
Orders
tomorrow
Operational / Task View
detailed
Master Scheduling
ERP
Materials Requirements Planning (MRP / II)
WIP
today
Manufacturing Execution (MES) Shipped
history
Logistics and Service
Forecasting & Demand Management

- Time/Sequence View
The accuracy of the forecast – especially in a short-term delivery

environment – cannot be “proved” using actual orders. Ideally,

orders booked should be “equal to” the independent demand that

has been forecast.
In reality, the periodic forecast is a snapshot that predicts “what

will happen, based on past history, IF the company does not
change its underlying policies and procedures – which are reflected
in that history”.
Using the forecast result as an indicator, the company needs to

determine which factors or drivers it needs to change, in order to
improve its likely result, compared to the initial forecast.
These influence factors are identified and applied, as part of the

tactical / business operations.
6.4 Tactical / Business View
The forecasting process – together with customer relationship

management – commences the periodic (usually monthly) tactical
review process. It aims at quantifying the desired results – in
dollars and high-level product “units”, and determines which
contributions are necessary to achieve these results.

MIS - Platform and Applications Support
Sales Force Commitment &

Production Marketing & Senior / Participation
Management Sales Finance Mgmt
Customers
Products
Forecasting Process
Oriented towards Improving
s the Bottom Line Markets
i.e. Product Dollars and Quantities Competitors
DPAS Governments
Seasons
CRM and Forecasting Systems
Overlapping Interests / Functions possible and likely
Bills of
Materials MRP II /
RCCP etc.
Routings MIS / Nets
Contracts DBMS etc.
Engineering and Drawing Systems - Production Planning

Overlapping Drivers possible and likely
Production and "Back-Office", Logistics Systems
Capacity
Planning / Scheduling Process Equipment

Oriented towards Operational Efficiencies Labor
i.e. Production Costs and Units
Raw Materials
Governments
Manufacturing Purchasing / Distribution / Maintenance
Management Logistics Logistics & Service Seasons

- Tactical / Business View
This view makes it obvious that “forecasting” alone cannot deliver

results. Forecasting is customer and market oriented. Production,
back-office and logistics are “parts” oriented.
The gap between the two spheres must be bridged by a functioning

“engineering and data management” system. It allows rapid

translation of high-level unit forecast, into detailed parts

requirements.
6.5 Operational / Process View
The periodic nature of forecasting – and the short time available to

satisfy the predicted independent demand – necessitate that the
forecasting and demand management process can be performed
speedily, with as little effort as possible. The process needed to
meet these requirements is represented below.
Note that the process is “bound” between extraction and provision

of historic data (last period’s), and the “uploading” of forecast data
for MRP and reporting purposes.
6.6 Forecasting Procedures View
At the most detailed level, the procedures view (relative to

forecasting and demand management) identifies the steps required
to implement the process, and the tasks that must be performed
regularly and repetitively.

Initial Definitions & Periodic Maintenance
Business
Platform MIS Startup
Logistics
Forecast & Demand Management - Cycle Start
Marketing Sales &

Business & Operations
& Customer
Finance & Logistics
Economics Relations
Consolidation - Assumptions, Contributions
Demand Management & Forecast Evaluation
Forecast Acceptance & Targets Update
Forecasting & Demand Management: Cycle End

- Task / Procedures View
The start of the forecasting and demand management cycle

produced the “statistical forecast” – the calculated amount of
independent demand that would result from historic sales data –
provided the company would not change underlying policies and
procedures.
Various business functions must assess these quantities and their

timing, and determine which factors likely would change the
quantities. These factors and their specific values are called
“drivers”. They exist in business and finance management

(interest rate sensitivity), marketing and economics (housing starts,

restrictive regulations, whether), sales and customer relations
(promotions, sales events, floor space support), operations and
logistics (distribution locations and distances, expediting costs,
materials lead times), and in any other corporate function.
Successful and reliable forecasting can be achieved IF these

drivers are vigorously tracked, analyzed, and used to shape
corporate policy and practice (service levels, inventory, etc.).
The ability to measure success, depends on two corporate
objectives: (1) setting targets for each function that identify and
quantify what is required of the function in order to meet the
company’s targets, and (2) establishing data collection, calculation
and reporting capabilities that allow evaluation of the functions’
actual performance against their respective targets. Usually, the
two objectives are addressed through the development of “roles
and responsibilities”, and of “metrics”. This is the most detailed
and common “view” of corporate operations:
6.7 Roles, Responsibilities, and Metrics View

From Corporate Objectives Objectives CSF - Critical Derives Tasks Roles &
President Defines Derives
Success factors
through Roles and Responsibilities Responsibilities
Development, to Accountability and Development
Performance Measurements Negotiate Suggest, Direct, Suggest, Direct,
Link Guide
in performing Business Processes Agree Guide
Consistent &
Corporate Performance
Vice Objectives Derives
CSF - Critical
Derives Tasks Dependable
Defines Success factors
President Linkage
Suggest, Direct, Suggest, Direct,

Negotiate Link Guide
Agree Guide
Accountability
Development and
Team Objectives CSF - Critical
Defines Defines Success factors
Derives Tasks Performance
Customers Expectations Leader Measurements
Negotiate Suggest, Direct, Suggest, Direct,

Link Guide
Agree Guide
My Team Team Objectives CSF - Critical Tasks

Defines Derives Derives
Member Success factors Consistent &
Fulfillment Dependable
Require Require
Require Linkage
Event
Objective 1 CSF 1.1
Task 1.1.1
Task 1.1.2
Task 1.1.1
Task 1.1.3
Business
Processes Position
Task n.1. 2 Objective n CSF n.1
Descriptions and
Task n.1.1
Performance
Task n.1.2
Etc. Targets
Objective On CSF On.1

Other Teams' Task On.1.1
Close Other Teams'
Objectives, TaskOn.1.3
Objectives,
CSFs, Tasks
CSFs, Tasks
6.8 Summary
“Forecasting” is a tool. It calculates likely outcomes based on

performance history. Business functions must determine how to
sustain or change the predicted outcomes, through active
management of the “drivers”. Setting specific performance targets,
and measuring each function’s actual performance against target,
enables “success control” and remedial action.

7 Roles & Responsibilities Development
Forecasting is a tool to calculate likely outcomes, based on past

performance, under the assumption that "nothing changes" – that
all policies, procedures, market environments, customer relations,
etc. remain static. In reality, this is highly unlikely. Consequently,
each business function must be assigned specific targets. The
targets, when met, would enable the company to achieve its
objectives for results.
The development of “roles and responsibilities” is a four-step

process.
(1) For each corporate level, establish quantifiable objectives

(2) For each objective, establish its critical success factors
(CSF)
(3) The CSF of the higher level, become the objectives of the
respective lower level
(4) Operational tasks (procedures) are developed to ensure that
CSFs can be achieved.
The development process is out of scope for the purposes of this

topic.

8 Metrics Development Process
Performance Measurement is at the core of the organization’s

determination whether or not its plans have met with success. The
assessment process involves four steps:
1. Setting Performance Targets for each business function

in the organization
2. Collecting data about actual performance, for all business
functions
3. Calculating actual performance based on collected data,
versus targets
4. Acknowledging success / non-success of target
achievement
The process of collection data for performance measurement

usually is referred to as “metrics”. “Metrics” measure the
difference between established “targets” and actual performance
against these targets. This necessitates that both target and
performance are quantifiable in the same unit of measure.
Initially, only the “accuracy of the forecast” is established as a

metric. It indicates that this specific metric (were actual sales
within x % of the forecast for the period?) is subject to company

action on the preceding period’s forecast and, therefore, very

subjective and prone to change.
To develop meaningful metrics for the organization –measures that

allow assessment of performance even in the short term – requires
a development and implementation program to be put in place.
Development of the metrics and performance measurement process

is out of scope of this topic.

9 Demand Management Drivers
Statistical forecasts are a calculation of expected independent

demand, based on historic performance (sales). Policies and
procedures that were in effect in the past, are reflected in the
historic data.
9.1 Terminology: Drivers, Assumptions, Demand Management
For example, an earlier decision to heavily promote a specific

product, could be reflected in increased monthly sales quantities of
the product, since the promotion. Alternatively, the initial increase
could have been followed by a decline to ‘traditional sales levels’.
In the first instance, the promotion would have led to a permanent
“gain”, while in the second instance, the data would indicate the
specific promotion had a time-limited effect.
The statistical forecast would project a higher “trend” in the first

case, and a “seasonality spike” in the second. Whether or not this
projection would be “accurate” (better: whether actual sales would
by equal or similar to projected sales), depends entirely on the
analysis of the data, and on the conclusions the company draws
from the analysis.

The process of analysis and conclusion can be described as

“demand management”. Technically, the company attempts to
influence (manage) demand by creating favorable conditions.
These conditions are aimed at specific factors, the “drivers”.
Conclusions drawn from prior factor analysis and assessment were
“assumptions” at the time the conclusions were drawn. Since
then, actual sales history indicates whether or not these
assumptions were “correct”.
Any relevant new conclusions must be recorded, as well as specific

action decisions taken to better influence the factor(s). To achieve
measurable results, actions and expected results must be quantified
in terms of effort and time. For example: “The most recent
product promotion has resulted in sustained sales increases, where
for each dollar spent, we have seen an increase of 150 dollars.
Analysis indicates that we need to increase, permanently, our
promotion budget for this product by $ x (the budget target) in
order to sustain improving sales every month by y % (the result
target), recognizing that the improvement effect will be noticeable
approximately 2 months after the initial promotion (the time
target)”.

The resulting actions would be reflected in these ways:
(1) the budget would show a promotion cost increase of $ x

every month,
(2) the sales forecast would be increased by y% every
month, but
(3) with a time delay of two months between the cost
increase and the sales increase
9.2 Types of Drivers
Specific business functions need to be responsible for identifying

and quantifying drivers on a regular basis. Which functions’ “roles
and responsibilities” will be so affected, depends on how the
drivers are classified, based on the company’s past experience.
Some classification options are:
9.2.1 External Drivers
These are drivers that are beyond the company’s control; they are
encountered in the many areas such as (with examples):
• customer (vacation shutdown, short order lead time)

• market (development permits, housing starts)

• competition (aggressive promotions / pricing for “brand

builders”
• government action (mortgage rate deductibility)
• fiscal / monetary policy (interest rate change)
• licensing requirements (gas installation inspections)
• engineering standards etc. (new UL requirements)
• whether (seasonal influences, snow – predictable,
unpredictable)
• etc.
Some of these drivers occur infrequently (such as interest rate

reductions / increases, changes in engineering/UL specifications,
etc. ), while others occur quite often (such as snow falls – could
delay construction starts, our customer shuts down for vacation –
could “drop” some demand or simply postpone it, etc.)
9.2.2 Internal Drivers
These are those that influence our demand because of actions we

take, internally. They can be found in many areas such as (with
‘negative’ examples):
• Accounting (credit approvals take too long)

• Distribution (too little stock in our distribution
warehouses)

• Customer Service / Administration (installer calls kept on

hold, slow inquiry response)
• Engineering (design not friendly for “install ability”,
insufficient specs, etc.)
• Facilities (shipping dock too small, inadequate handling
equipment
• Finance / Treasury (pre-determined price curve / price
points not flexible enough)
• Forecasting (do not consistently analyze last period’s
assumptions)
• Human Resources (slow data entry causes ‘backup’ of
orders)
• Information Systems and Technology (no quick order
status inquiry)
• Inventories (commodities safety stock too small for
ensured acceptable cycle time)
• Logistics (competition for LTL space in regions increases
shipping costs)
• Maintenance (equipment/tools breakdowns lengthen
average cycle time)
• Marketing (we don’t promote to “brand builders” for
profitability)
• Materials (steel too thin – excessive freight damage)
• Management (too many special pricing requests – real
exceptions take too long)

• Manufacturing (capacity constraints, scheduling, labor

availability etc.)
• Overhead (too many ‘salaried heads’, expensive but
ineffective controls on quality etc.)
• Systems / Processes / Procedures (retroactive price break
application too time consuming)
• Production / Shop Floor (scrap and efficiency not
controlled)
• Projects (effects of special projects – subdivision
development promotion? – not reflected in production
scheduling / materials purchases)
• Purchasing (long lead times, pricing, quality assurance on
receiving)
• Quality (high warranty costs)
• Sales (incentives promote volume regardless of
profitability)
Some of these drivers require “quick action” from period to period

(such as responding to competitive promotions), others may
necessitate internal improvements in order to maintain or expand
demand (customer service / installation support, credit policies and
approvals etc.); still others may require investments to improve
profitability (inventory levels for immediate availability allow
profitable pricing).

9.2.3 Sector Drivers
Other classifications can be made by sector or function. Some

examples follow.
9.2.3.1 Business and Finance Drivers
• Existing Markets
• New Markets
• New Customers
• New Product Potential
• Interest Rates
• Capacity and Inventory Financing Constraints
• Production and Distribution Facilities Planning
• Service Levels
• Product Replacements / Phase outs
9.2.3.2 Economic and Market Drivers
• Political Action
• Fiscal / Monetary Policies
• Economic Conditions
• Competitive Environments / Imports
• Distribution Structures
• Market Outlooks
• Industry Trends

• Construction Starts
• Whether
9.2.3.3 Customer Relationship and Sales Drivers
• Existing Customers / Sales Profiles

• Existing Sales – Channels, Markets
• Demand Potential – Existing Products
• Demand Potential – New Products
• Customer Relationships and Data Exchange
• Promotion Campaigns
• Co-packaging and co-marketing
9.2.3.4 Operations Drivers
• Capacity Constraints – short / long-term

• Materials Acquisition – Trends and Logistics
• Labor Markets
• Distribution Logistics – Time and Cost
• Manufacturing Scheduling
• Assembly Scheduling
• Inventory Policies

9.3 Driver Identification
The company needs to identify the business functions that are

responsible for the specific drivers by type and sector. The roles
and responsibilities for the respective positions need to be updated
to reflect driver-related objectives, and compensation and
incentives programs need to be adjusted to reward early change
detection and assumption management
Initially, the top 10 drivers in each area should be identified, as a

starting point. This allows the company to concentrate on the most
important focus areas right away. Over time, additional drivers
should be identified and included in the demand management
process.
It is particularly important that all functions cooperate in driver

identification and subsequent assumption management.
Forecasting is not a sales function, and cannot be used successfully
without input from many sources.
The “forecast manager” (the person or function assigned to plan

and manage the periodic/ monthly forecasting and demand
management process) must ensure that each identified function
participates in the analysis and assessment process.

The combined input from all functions will be consolidated in a

single forecast change for each affected product.

9.4 Driver Management
To facilitate identification and management of specific drivers, a

standard format should be used that would allow tracking of each
driver, by applicable product, customer, market, etc., and support
“generational maintenance” so that each forecasting cycle would
have access to preceding assumptions and resulting action
conclusions.
To facilitate the process, a manual work sheet is provided as an

example. It can be used for all drivers until such time as
Information Services can support on-line documentation.

Drivers and Assumption Work Sheet Ref.ID:
Subject: Briefly describe the "subject" to which this particular assumption / note applies:
Internal:
ID. Identification / Description
Customer:
Model:
Product:
Part:
Service:
External:
ID. Identification / Description
Market:
Industry:
Competitor:
Comp.Product:
Government:
Date & Period: Identify the specific date and / or period to which this assumption / note applies:
Date: Week: Month: Year:
Period: from date: to date:
Background: Briefly describe the "environment" of the event or fact or development etc. dealt with:
Assumption / Note: Briefly describe the conclusions drawn / actions to be taken etc., as a result:
Anticipated Effect: How will the the the event or fact or development likely impact on us? (describe)
Positive:
Neutral:
Negative:
Information Only:
Calculation Model How will "factors" be measured, and what calculations are used to arrive at :quantification"
Process: Determine Variables and their units of measure

Determine Result Values and their units of measure
Determine Calculation Formulae
using these variables as input,
and producing Results as output
Identify Sources for each variable (time series, report field, responsible function, etc.)
Identify Use of each Result (in forecast, other functional actions, etc.)
Quantification: Quantify the effect that we need to ancticipate, for the stated "Subject":
Month & Year In/Decrease Quantity In/Decrease Dollars other Comments:

+/- units or % +/- value or %
expand as needed transfer these changes to the Change Form for the respective SKU
Follow-up: "Accuracy, Dependability, etc." of Assumption as observed from ACTUAL development:
Date:
Completed by Name: Position: Date:

The following example illustrates the possible use of such an

“assumption work sheet” for many different but related or
associated drivers.
For each applicable (important) driver, the company needs to

identify which “events” can occur, and what would be the time and
quantity and price impacts of each event on the demand. Initially,
the aim should be to concentrate on the “top 10” drivers that will
have the greatest impact on performance.
The intended result is the eventual ability to answer the question:
• IF event “X” happens, what will be the effect on my

demand (sales) ?
• Which action can we take to enforce positive / mitigate
negative effects ?
• How much will it cost us to take that action ?
• How much more (sales volume, profitability, cost
reduction etc.) do we expect as a result?

An example of a “forecast cycle” involving “market share” would

be:
a) take expected housing starts (per state) as an “objective”

basis
b) develop an explosion for each type of start (i.e. for single,
multi family, commercial housing, how many “units” of our
models do we expect to result from each start
c) multiply the starts with the expected units of models
d) (Differentiate on the basis of ‘quality and price’ based on
state, etc.)
e) this is the possible market size – by month and state,
expressed in units of our models (with added “average net
prices” if required)
f) define the “share of this market” that the company wants to
attain, in the respective next forecast period (month, quarter,
etc.)
The result is a “forecast market size”
g) now derive a statistical forecast from historic data and

“scrub it” to remove known errors
h) note assumptions (drivers and their values) that would
increase, decrease the demand volume, change the
profitability in a market or for a model; estimate the effect of

these assumptions (by market, customer, brand, month etc.

as appropriate) and update the assumptions accordingly
i) apply the assumptions (with estimates as noted) to the
“scrubbed statistical forecast”
j) re-generate the forecast (in units, and apply average net
prices)
k) measure our “forecast quantity and value” against the size of
the potential market and note the resulting share (%)
The result is a “forecast market share”
l) For the period, track the actual sales (units with average net
prices) with required / desired degree of detail (by product
and customer per state and region etc.) and calculate actual
units and dollars
The result is an actual sales report for the respective period;

assuming that the “forecast market size” has not changed in or
prior to the period (refer to assumptions!), the company can
calculate its “actual market share” (sales versus forecast market
size)
m) measure the actual market share against the forecast market

share and note the difference if any
n) for differences, analyze assumptions and determine likeliest
cause(s) of difference(s)
o) refine assumptions to arrive at better forecast estimates.

9.5 Applying Demand Management Results
Once all “inputs” have been obtained, and their respective

quantitative impact on the statistical forecast has been determined,
the cumulative effect of the anticipated changes, on each affected
product, needs to be calculated.
Again, on-line facilities should be made available to track

assumption-based changes on a generational basis.
In the absence of an automated tool, the following work sheet may

be used to consolidate the various inputs for a product:
Forecasting - Demand Management Data Changes
Effective for Forecasting beginning with "Month 1" as month/year: _________________
This form is intended to capture all desired changes in the forecast of an SKU, as indicated in one or more Assumptions for the SKU
The form assumes "no integration" with front-/back-end processes, and allows you to apply changes in a controlled fashion.
1) Note that the definition of "SKU" may change depending on the forecast data you use (e.g. parts, customers, models, combinations, etc.)
2) Prepare one of these forms, for each SKU for which you plan to apply demand management (e.g. make changes resulting from assumptions)
3) For each assumption affecting this SKU, enter one "line of data changes", with cross-reference to the assumption form or file (for later tracking)
4) The desired changes must be shown as 'modifying quantities' for the applicable month(s) - note that "month 1" is the next applicable month
5) Change (or 'modifying" quantitites can be shown as absolute changes (e.g. +100 or -50), or as percent of the original forecast quantity (e.g. +/- 7%)
Note that your specific "front-end" and "back-end" processes may determine how to enter changes for subsequent automatic calculations.
6) In the absence of front and back-end integration, add up all individual changes, per month (lines 1 through n) in line B, then add/subtract this change total from line A.
7) Add/subtract the total changes (line B) to/from the original forecast quantity (line A) to arrive at the new, desired forecast quantity (line C)
Seq. SKU # SKU Description Assumpt. Xref. Mo.1 Mo.2 Mo.3 Mo.4 Mo.5 Mo.6 Mo.7 Mo.8 Mo.9 Mo.10 Mo.11 Mo.12
A DPAS Forecast Quantity before Changes:

Changes resulting from Assumptions (1 line per A.), below
1
2
3
etc.
B Total Changes for this SKU (total for 1 through n):

C Resulting new Forecast(s) for this SKU (C=A+B)

Line C – the “Resulting new Forecast(s) for this SKU” will be

entered into the forecast system.
These values will replace the calculated “statistical forecast

values” and be used for subsequent processing.

Forecasting Strategy and Development
10 The Forecasting & Demand Management Cycle
On a periodic – usually monthly – basis, the forecasting and

demand management process is performed with least loss of time.
A forecast that takes too long to produce, becomes useless as a
predictive and tracking tool.
There are three “phases” in the periodic cycle. They should be

integrated – in terms of required activities and their timing – into
the company’s normal “month-end closing” schedule (or such
other periodic calendar event as may be decided). The three
phases are:

10.1 Download and Cycle Start

Periodic Forecasting & Demand
Management Cycle Develop
Procedures
All non-electronic Use to regenerate in the
FC/DM MANAGER:
All non-electronic
f
documents Generational event of system failures, and
FC/DM ba
Ensure complete MANAGER:
ckup copy of
documents - P-1 Maintenance of for simulation purposes
allEnsure
FC/DMcomplete
data as atbathe
ckup copy of
end-of-
Forecast and requiring old / re-start
all FC/DM
the-la data
st-cycle daas
te at
(FCthe end-of-
files,
PARTINFO. Demand information
PARTINFO. the-la st-cycle
a ssumtion, da document
cha nge te (FC files,
etc.)
All electronic TXT Management Data
TXT a ssumtion, cha nge document etc.)
Files P -1 FROM: _______
Ensure Cut-off Sched. DATE/TIME _______
Management Act. DATE/TIME: _______
PARTINFO. Develop Scripts File Names received:
IS: CLOSE Month TXT P-1
1: ______________
Extract Reference Data Updates 2: ______________
FC/DM MANAGER:
Extract Shipment Data 3: ______________
USETRAN. FC/DM
receive / loadMANAGER:
P -1 data
Format as required
TXT P-1 receive / load P -1 data
Transmit to Forecast Manager etc.
Perform.Targets
P-1 Calculated based on updated
Performance Targets - all R&R FC/DM MANAGER: Perform.Metrics history ASSUMING all prior
FC/DM MANAGER:
produce "statistical forecast" for Assumption remain
P-1
Metrics from "FC systems" produce "statistical
periof P; forecast" for unchanged
periof
produce Performa nceP;Metrics for Stats. Forecast P Performance Targets &
Metrics from "other systems" produce Performa
Period P-1nce Metrics for Metrics - may be at different
Develop PM Period P-1 periods
Ensure Perform. Data Process
collection and Metrics Forecast(s) for Forecast Reports:
Calculations All non-electronic Period P-1 1: __________
Non - / Electronic
f
documents n: __________
Support Informat. Actual Sales for
FC/DM MANAGER: Sales Reports:
Period P-1
Prepare FC/DM
Cycle PMANAGER:
Forecasting & 1: __________
Mktg / Sales
PARTINFO. Prepare
Demand Cycle P Forecasting
Management Material for& n: __________
PARTINFO.
DPAS Master Drivers/Assumpt's
TXT Demand Management
Distribution Material for
, in agreed format Assumtion/Change Copies
and Ref.TXT
Files used in P-1 FC
Distribution , in agreed format 1: __________
Oper's Drivers / n: __________
Assumptions used etc.
Develop HR in P-1 FC
Process
Roles & FC/DM MANAGER:
Responsibilities From updated FC/DM MANAGER:Chart /
Organization
DISTRIBUTION LIST To "Responsible
From
List, prepaupdated Organization
re Distribution List forChart /
Attachment List Positions" for
List,red
prepa prepa re Distribution
ma teria List for
ls, a nd distribute
Expected Actions Analysis, Updates,
prepain red ma teria
agreed ls, a
format nd expectations,
-set distribute
Organiz. Expected Return Dates Response
Charts and in agreed
return format -set dates
requirements expectations,
and return requirements dates Develop WEB ?
Develop Calendar
distribution ?
IF simulation desired:
re-load backup files, adjust
using DPAS Menu
12
Forecasting - Download & Cycle Start Selections, re-start process
(DPASFCTG.vsd (12) - 01Mar00 - RR)
These activities must be performed as soon as the financial month

is closed. All referenced information must be produced as quickly
as possibly and supplied to all parties involved in the forecasting
and demand management process.

When these parties receive their documents, the second phase of

the periodic cycle takes place.
10.2 Forecast Review & Demand Management Analysis

Perform.Targets Management Cycle
P-1 Receiving Process may
Perform.Metrics
differ, depending on agreed-
P-1
RESPONSIBE ROLES: upon distribution method /
Stats. Forecast P RESPONSIBE
Receive ROLES:
"Foreca sting a nd Dema nd formats
May require re-issue
of correctd FC ReceivePackage"
Management "Foreca sting
and a nd Dema nd
Management Package" and
ensure completeness To correct obvious errors and
ensure completeness extraneous influences, such
Forecast(s) for
as
Period P-1
Develop "spike" in demand
Actual Sales for RESPONSIBLE ROLES: Guidelines "exceptional" demand
Period P-1 Change Form for etc.
RESPONSIBLE
review ROLES:
sta tistica l foreca st
Mktg / Sales Statist. FC Correct.
review
ma ke sta tistica
correction cha lnges
foreca
a sst
Drivers/Assumpt's P to Forecast
ma ke correction
needed cha nges a s
used in P-1 FC provide Change needed
Form to FC Mgr Manager for
Oper's Drivers / provide Change Form to FC Mgr Forecast updating,
Assumptions used and re-issue with
in P-1 FC instant turn-around
Business & Finance

Driver Front-End
Economy & Market RESONSIBLE ROLES:
Intelligence
collect RESONSIBLE ROLES:
"driver intelligence" as
Reports collect "driver intelligence"
a ppropria te for specific Rolea s
Customers Anaa ppropria te for for
lyze "Drivers" specific
ImpaRole
ct Develop
Supporting Ana lyze "Drivers" for Impa ct Analytical
Systems Operations Methods Show:
Develop RESONSIBLE ROLES: a) changes to assumptions
Procedures RESONSIBLE
review/analyze FC P-1ROLES:
/ Sales P-1 Assumpt. Updates b) quantitative effect of
review/analyze FC P-1
review and/ Sales
updateP-1
P-1 for FC P changes
Assumptions forreview and update P-1
Intelligence c) expected FC changes
Assumptions
qua ntify for Intelligence
resulting cha nges Changes for
d) "net" FC changes
qua ntify
prepare resulting
Change forcha nges
P Forecast Assumpt. Intellig.
prepare Change for P Forecast
RESONSIBLE ROLES:
RESONSIBLE
Metrics ROLES:
a nd Performa nce Metrics Changes -
MeaMetrics a ndAssessment;
surement Performa nce suggested
Mea
suggest Tasurement Assessment;
rget Cha nges, Metrics
suggest Ta rget Cha nges, Metrics
Changes
Changes
Results Transmittal
RESONSIBLE ROLES: to FC Manager using agreed
RESONSIBLE
Implement AssumptionROLES:
Changes methods to deadlines
Implement Assumption
in P Changes
in P
13
Forecasting - Forecast Review & Demand Management Analysis
Lastly, when all assumption updates and resulting forecasting

value changes have been completed, the third and last phase –
consolidating all suggested changes –takes place.

10.3 Change Consolidation, Forecast Adoption, Upload

Management Cycle
Change Form for
Statist. FC Correct.
P
FORECAST MANAGER: may involve
Assumpt. Updates FORECAST
Receive Assumption MANAGER:
Upda tes, "instant" re-
for FC P Receive
cosolida tedAssumption Updact),
Cha nges (Impa tes, generation of
cosolida
suggestedtedTa
Cha nges (Impa
rget/Metric Chact),
nges Statistical Forecast
Changes for suggested Ta rget/Metric Cha nges Forecast Reports:
for corrections
Assumpt. Intellig. 1: __________
n: __________
Metrics Changes - Sales Reports:
suggested 1: __________
FORECAST MANAGER: n: __________
FORECAST
ensure complete MANAGER:
and timely Assumtion/Change Copies
ensurefrom
receiving complete and timely
a ll Responsible 1: __________
receiving from
Rolesa ll Responsible n: __________
Roles etc.
FORECAST MANAGER:
Validated Probably requires
FORECAST
consolida te a ll MANAGER:
cha nges,
Assumption "codification" of "tribal
va lidaconsolida te a llUpda
te Assumption cha nges,
tes &
Updates knowledge" as to what
va lida te Assumption
resulting Qua ntificaUpda tionstes &
constitutes "sanity"
resulting
("Sa nityQua ntifica tions
Check") Validated FC
("Sa nity Check") Changes
involves ALL
Responsible Roles FORECAST MANAGER: Ensure distribution accordsing
and Senior FORECAST
enter FC Changes,MANAGER: to all Responsible Roles
Management - for enter
run Eva luaFC tionChanges,
Reports
ACCEPTANCE Forecast P
run Eva
generate lua tion Reports
/ document / enter
generate / document
a dditiona l cha nges a s needed/ enter
a dditiona
genera tel cha ngesstaPs needed
Foreca
genera te Foreca st P Forecast Files
for
FORECAST MANAGER: UPLOADING
FORECAST
ensure ma intenaMANAGER:
nce of Host MRP &
ensure
genera tiona ma intena nce
l Assumption Updaof tes Host Reporting
genera
a nd tiona l Assumption
Cha nge Inputs, forUpda tes
a nd Cha
"reproducible" nge Inputs,
re-genera tionfor
as
"reproducible" re-genera tion a s
needed
needed
IS: Update HOST Files
FORECAST MANAGER: perform Host MRP analysis
ensureFORECAST
forwardingMANAGER:
of "Target and perform Host reporting as defined
ensurechanges
Metrics" forwarding
- andof of
"Target and
Metrics"
suggested changes - and of
performance
suggested
mea surementperformance
cha nges
mea surement cha nges
14
Forecasting - Change Consolidation & Forecast Adoption
Throughout the periodic process, the procedures involving demand

management – the review and updating of assumption that were
used to produce last period’s forecast, an assessment of current and
anticipated changes and preparation of resulting new assumptions,
quantification of volume and timing changes, etc. – play a much
more dominant role than the use of the forecasting tool set itself.




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Forecasting and Demand Management

A concise writing on the actions needed to begin the

Copyright © 2000 by ECRU Technologies, Inc. 1

Copyright © 2000 by ECRU Technologies, Inc. 2

ECRU Technologies Publisher

Copyright © 2000 by ECRU Technologies, Inc.

ECRU Technologies, Inc.

Library of Congress Cataloging-in-Publication Data

ISBN 1-931186-02-2 (papercover)

The information included in this book is further amplified when used in

Copyright © 2000 by ECRU Technologies, Inc. 4

2 WHAT DO WE TRY TO ACCOMPLISH?............................................................... 11

8 METRICS DEVELOPMENT PROCESS................................................................... 45

9 DEMAND MANAGEMENT DRIVERS..................................................................... 47

Copyright © 2000 by ECRU Technologies, Inc. 5

9.2.1 External Drivers.............................................................................................. 49

Copyright © 2000 by ECRU Technologies, Inc. 6

J. Martin is an international consultant providing services in

R. Roth is founder and president of Systems Services International

Copyright © 2000 by ECRU Technologies, Inc. 7

Copyright © 2000 by ECRU Technologies, Inc. 8

Accurate forecasting can play a decisive role in an organization’s

Statistical formulae are used to derive the forecast model, baseline,

Copyright © 2000 by ECRU Technologies, Inc. 9

In order to determine whether or not the assumed effect actually

This process should be performed at least monthly, to achieve a

Copyright © 2000 by ECRU Technologies, Inc. 10

The forecast process will result in improved business forecasts

This necessitates two implementation tools:

2 What do we try to accomplish?

This book outlines, at a high level, the “forecast and demand

Copyright © 2000 by ECRU Technologies, Inc. 11

Note that the “forms” referenced in this book, and shown as

This book is not a primer on statistical forecasting, forecasting

2.1 Determine “Forecast-ability” of End Products

As a “first cut” it is necessary to determine which independent

Copyright © 2000 by ECRU Technologies, Inc. 12

2.2 Install a Forecasting Tool and provide Training in its use

Forecasting is best performed using automated tools. Ideally,

2.3 Develop Demand Management Process Outline

The forecasting and demand management process starts with

This book comprises the process outline. It can be used to develop

2.4 Identify necessary Support Requirements

Requirements covering organization functions directly involved in

Copyright © 2000 by ECRU Technologies, Inc. 13

Directly involved functions and their roles are described in this

2.5 Determine Key Metrics

“Metrics” measure the difference between established “targets”

a) TARGET: Improve Sales, month-over-month, by

Copyright © 2000 by ECRU Technologies, Inc. 14

a1) TARGET: Improve Sales, month-over-month, by

Sales$ 1000 1100 1210 etc.

Sales% 100% +10% +10% etc.

Consequently, a system of metrics must be developed if the

Ironically, forecasting is the business process that least lends itself

Copyright © 2000 by ECRU Technologies, Inc. 15

Initially, the “success” of the forecasting process, itself, usually is

2.6 Determine Time / Resources to implement the Process

Once the Action Plan is drafted, for planning, training and

2.7 Document details in “Project Document”

Throughout your project, issues will be identified that are out of

Copyright © 2000 by ECRU Technologies, Inc. 16

a) The Forecasting and Demand Management Process