Explain the differences between Sales Forecasting, Sales Budgeting, Promotion Plan and Demand

Plan, after defining them. Provide some numerical examples of these differences. How can you
calculate promotional uplift, based on the forecast baseline? Sales forecasting is a quantitative
forecast of future demand for the products/customer groups, typically it is calculated using time series
methods (but also with qualitative forecasting techniques, made by marketing due to their knowledge
about demand and causal methods such as linear regression, help to understand what the relevant
factors are influencing demand and what the relationship is with sales). It is a very important input for
the sales budget, so it must be done before the sales budget; Sales budgeting is the commercial plan
for the sales more precisely it occurs by mixing: Sales Forecast, trade promotional management and
Commercial orders in current portfolio. A promotion plan, instead, contains an endogenous increase
in demand expected in the future, it can Increase in absolute quantities or as a percentage of the basic
forecast, so total forecast (volume) = base forecast + promotion increase. In the promotion plan the
attributes and the regularity of promotion should be decided (product - product groups/ customers
-customer groups, mode: discounts on single purchase or joint purchase (discount percentage), 3 x 2
shares, gift box (on pack), convenience format, gadgets (Cyclical promotions → predictable as they
are seasonal, Spot promotions → unpredictable, user-defined, outliers to be eliminated. In the end
demand planning plays an integral role in creating an effective S&OP strategy. It is the output of the
collaborative process of negotiation and balancing of the Sales Budget between “Demand” and
“Supply” functions. The Sales Budget is submitted to the feasibility comparing the sales budget with
production capacity constraints, inventory capacity, distribution/transportation capacity, purchasing
budget constraints. By using this multi-step process, companies are better prepared to anticipate
various kinds of demand and factor those demands into the supply chain management process.
Demand planning enables companies to make sure they have the supplies ready to meet any expected
demand changes. It also gives them more information to provide their manufacturers, so the
manufacturers can be better equipped to know what, when, and how much they’ll need to produce. In
other words, it ensures that the company has the capacity and materials available to meet projected
demand. It also informs future demand based on available supply.To better explain the difference
among them we can provide a numerical example:

Promotional uplift is
the percentage increase
in sales or site traffic
attributed to a
promotional campaign.
Promotional lift is
measured by calculating
the percent change in
sales or traffic between
a regular (non-promotional) time frame for the business versus the promotional forecast time period.
𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡 𝑇𝑜𝑡𝑎𝑙𝑒 = 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝐵𝑎𝑠𝑒𝑙𝑖𝑛𝑒 ∙ (1 + 𝑈𝑝𝑙𝑖𝑓𝑡%) = 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝐵𝑎𝑠𝑒𝑙𝑖𝑛𝑒 + Delta promo. Per il
calcolo della Promotion Effectiveness percentuale si utilizza la seguente formula:

Describe the Time Series Classification Tree. A

new item “early sale” can be characterized by a
sporadic historical pattern? What are and how
to forecast “mono-seasonal” items?
The Time Series classification tree allow us to
understand which forecasting method use basing
on different aspects of the Time series, such as if
historical series refers to new or permanent data,
then for both of two types there are other two sub-
division refers to the pattern of the series, so it can
be continuous or sporadic, in order to understand if a series is sporadic we have to consider the zero
density factor, so if the series contains at least 50% zeroes it can be considered having a sporadic
behavior.
A mono seasonal item is an item that is sell every year in the same season, such as Christmas food
like Panettone, you can forecast mono seasonal items by using the Holt-Winters Algorithm.

Explain the difference between Sell-In, Sell-Out and Sell-Through. Sell-In refers to the POS
demand, it is estimated by a company of the SC that not operate directly with the final consumer such
as wholesaler and distributors, so the demand is indirect. Wholesaler modifies the retail Sell-Out
demand, adding safety stock and additional stocks due to price discount.
Sell-Out represents the final consumer demand, it is estimated by the POS manager or retailer, so the
demand is direct because is directly expressed by the final consumer.

Sell-Through indicates the commercial performance of the individual store, measuring the ratio
between the total quantity sold in a certain period t, so the actual sell-out, and the quantity arrived at
the POS, replenishment/receipts (sell in), plus the initial stock I 0. If the ratio is 1 means that all the
goods arrived at the POS are sold by a specific retailer.

Total sales∆ t
Sell−Through= ∆t
I 0 ∑ Rt
t =1

Replenishment = Net Requirements = Forecast – Initial inventory

Best performance = 100%

Define the customer target service level. Describe some KPIs to calculate the actual service level.
Calculate the safety stock for an item, knowing only that the contractual delivery lead time from
a supplier is 1,5 weeks and the standard deviation of demand is 100 pieces / month.
We can define the service level as:
The probability to avoid the stock out during the lead time: PSO = Prob [( D ¿ ROP)]
The item fill rate (IFR): demanded quantity – available quantity ratio: IFR = 1 – (Lost demand / Total
demand)
And we can see it as the ratio between quantity on hand/ qty request. These formulas allow us to
understand how we can satisfy the demand, because if we are in stock-out we will have lost demand,
so we will lose money.
Regarding the SS we know that the variance of the demand in one month is 100, so it can be +/- max
100 if our replenishment LT is 1,5 week and the weekly variance demand is +/- 25, in order to be
“safe” we should keep at least 30 stocks as SS: 1:25=1,5:x x= 37,5=38 = SS
Describe the sales cleaning algorithm (static approach)? Confidence Interval is a sales cleaning
algorithm, that is a method of identification and removal of outlier. We have to determine a
confidence interval with lower and upper bound. If a historical value falls within the confidence
interval [LB; UB] it is not adjusted. If a historical value falls outside the confidence interval [LB; UB]
it is adjusted, as appropriate:
➢ to the Lower Bound LB value, if lower than it
➢ the Upper Bound UB value, if higher than it
Alpha: indicates the probability that the outlier is actually such (it is therefore correct to adjust it to an
appropriate value)
k: indicates the number of standard deviations alpha
➢Identifies the width of the confidence interval (half-width above the average, half-width below the
average)
➢Examples: alpha = 99.8 → k = 3; alpha = 98.0 → k = 2.06. It is determined by the z table of normal
distribution.
Static method: Mean and standard deviation: they are calculated over all historical periods (by
definition: not yet "processed"). A single confidence interval is obtained for all periods of the time
series to be cleaned.

Dynamic method:
Mean and standard deviation are recalculated period by period, from left to right along the time axis,
taking into account only the historical periods already processed (clean or not). A different confidence
interval is obtained for each period. The algorithm "learns" from the cleaning of previous historical
periods, moving from left to right along the time axis, improving - period after period - the accuracy
of the calculation of the confidence interval

What is the Customer Order Decoupling Point (CODP)? The two management (Make-to-Stock,
full forecast and Engineering-to-order that is No forecasted phase because DLT is very high) modes
coexist divided by a point, known as CODP (Customer Order Decoupling Point) or decoupling point,
this represents the separation between the production management mode based on forecast and the
one that operates on order.

Describe two different forecasting methods for New Item Planning. The first is life cycle curve
(matching pattern):
1) build a pattern library (% or abs. series of numerical values with time flag identifier: Sales % of the
first week of the second week, etc.) based on historical values of the new item introduction occurred
in the past. 2) The initial sales pattern for the new segment or couple of products- market is chosen,
manually or using automatic criteria, inside the pattern library built inside the sales Datamart
The second algorithm is Analogy forecasting (product links)
The forecast of the new couple of products, client is calculated using classic Time Series algorithms,
playing as the new couple had an historical pattern sale. The historical sales patterns of the new
couple are “created” by linking the historical series of an old products/client to the new one. The
underlying hypothesis of this method is that the customers will perceive the new product sold in a
given market as “Substitutional” (totally or partially) of an absolute one, progressively removed from
the market offer of the company.
Link 1:1 -> 1 new product / 1 absolute product - Link 1:n -> new product / n obsolete products
The linearity of the link:
 Linear: the historical sales of the old product are copied “as is” over the new item phantom
“historical series”
 Not linear: to the historical sales of the old product, we apply multiplicative coefficients for
increasing or decreasing historical sales (the new item is only partially substitutional)

Describe some KPIs to calculate the actual service level, in presence of orders, lines of orders,
different items to sell. An order (or line) is filled if all
the items ordered are available in the required
quantity for the shipment. The Fill Rate:
–  is correlated with the number and typology of the
items kept in the inventory (which part of the product
range) and the quantity held in stock per item
–  is directly perceived by the customer if the required
order cycle time is zero (e.g.: supermarkets)
–  otherwise influences the average order cycle time: the
higher the fill rate the lower the average cycle time

How can you calculate a percentage forecast error when you have some historical periods with
zero sales? In the answer distinguish continuous series and sporadic ones. So, if you want
calculate percentage forecast error on historical series with zero sales you can use Croston algorithm
to eliminate the zero period and be able to calculate a new future demand historical series. In order to
be able to distinguish a continues series and sporadic you have to use zero density method if the result
is above 50% the series is sporadic, however is continuous.

Why do you need to have two complete sales cycle periods in a historical series? Are they enough
for modeling seasonality and trend component of the demand? If we do not have 2 complete sales
cycle and so we do not have 2 symmetrical peaks, so in the same period but in different years, we
cannot correctly modelized seasonality. When we want to forecast a new period F(t+1) starting from
an historical time series and we want to consider trend and seasonality we must use Holt-Winters
model. This model needs 2 years, so 2 complete sales cycle, to
be initialized.

In this way we can determine the initial trend, mean, and

seasonality of the last period which we know the demand.

Describe one safety stock formula. Define the formula of Sell-Through.

SS= k * √ ¿∗σD 2+ σ 2¿∗D 2 this function allows us to calculate safety stocks by determine a target
service level that is the probability to not have Stock out during a replenishment period, and the
standard deviation of the demand during the LT of replenishment.
Sell-Through is the total quantity sold (total sales) divided by the quantity arrived at the POS plus the
initial stock on hand I 0, so (Total Sales (in the ∆ t ¿/ I 0+ the sum of all replenished qty) x 100 the
Max % of sell-Through is of course 100%, so it represents the percentual of final goods effectively
sold to the customer on the total goods delivered on the market by a specific reseller.

Explain three reasons why to hold inventory into warehouses.

1.To absorb demand uncertainty (“value” = product availability) and thus to ensure the target service
level (also to reduce the delivery lead time):
Safety stock (to face variability)
Seasonal stock (to face lack of capacity).

2.To reduce operative costs and so to decouple different operations phases (“value” = supply
efficiency)
To keep stock is a way to allow source, make and delivery systems to work with different rate, as it
allows the different phases to be “asynchronous” and it absorbs upstream variations.

3.To gain profit through speculation (“value” = profitability)

Take investment opportunity for example in the commodity market.
Buy a product when is cheaper in view to an increment of price generates inventory.

Inventory is a Lever of Efficiency in order to decrease the costs of other processes/parts of the
production/logistic system and a Lever of Effectiveness, in order to better satisfy the customer needs.

Describe the inventory balance equation, in the most detailed way, distinguishing the possibility
to have backlog or not. Which is the difference between Scheduled Order Receipt and Planned
Order Release?
Inventory INV(t) is conventionally projected at the end of each period t Inventory at the end of period
t is equal to the inventory at the beginning of period t+1

 Replenishment R(t) – production or distribution volumes – is available to sell at the

beginning of delivery period t («receipt» date of goods, first date of inventory
holding)
  Demand Forecast F(t), composed by the mix of forecasts and orders portfolio, is due
and served during the period t, in a «uniform» shape in the subperiods forming the
whole period t

INV(t-1) + R(t) = F(t) + INV(t)

The standard stock balance equation, referred to the period t: INV(t-1) + R(t) = F(t) + INV(t)
is not working properly if it happens the following condition: INV(t-1) + R(t) < F(t)
one possible solution to the issue of reduced stock availability:
B(t)→backlog
INV(t-1) + R(t) + B(t) = F(t) + B(t-1)+INV (t)
In the period t, the company has to serve two types of demand:
the forecast F(t) [on-time customers]
the backlog B(t-1) cumulated in the previous periods [delayed customers from previous periods
t]→backlogs can be solved in the next periods
The standard stock balance equation has to be modified as following

INV(t-1) + A(t) + R(t) + B(t)= F(t)+∆ SS(t)+ B(t-1) +INV(t)

Initial availability planned in previous periods
Planned availability at current run of the system
Needs consuming availability
B(t): current «delay», generated over the forecast on period t
B(t-1): total delay, «cumulated» from previous periods
ΔSS(t): planned increment or reduction for the safety stock
Regarding A(t) it is scheduled orders receipt is the quantity send to POS, able to cover the net
requirements, with a JIT delivery to avoid stock out, it represents receipt at their physical delivery
date)
R(t): planned orders receipt: quantity send from the “supplier “node (warehouse) to the customer node
(POS) it is the departure date of then goods.
Release date = (Receipt Date – distribution lead time)

Why overforecasting and underforecasting generate issues in supply chain planning?

Under-forecasting:
 Customer service level reduction
- Potential periods measuring stockouts
 Safety stock level increased
 Continuous review of demand & supply plans
 Reduced sales and market quota
Over-forecasting:
 Inventory holding costs increased
 Risk of physical or technology obsolescence
 Reduced Capacity allocation

What are the differences between MTS, MTO, PTO and ATS? In make to stock (MTS) all
activities are carried out on the basis of demand forecasts. The response time requested by the
customer is almost instantaneous. This category includes the production of goods such as food,
clothing, etc. Clearly in these cases the company must have a reliable customer demand planning
system¹.

In the ETO (engineer to order) case, the delivery time is so great that it also includes the design phase
that will be implemented starting from a customer order. Often the "order" in these cases includes
specific functional requirements requested by the customer and this makes it rather difficult to keep
components or materials in stock (except for some standard elements), in fact the production activities
begin with the receipt of the functional specifications.
In the other cases two management modes coexist divided by a point, known as CODP (Customer
Order Decoupling Point) or decoupling point, this represents the separation between the production
management mode based on forecast and the one that operates on order.

Define the Inventory Turnover Ratio. How can you improve its current value? Which company’s
function have the responsibility to improve it? How (with which leverages)?
Inventory turnover is a ratio showing how many times a company has sold and replaced inventory
during a given period. There are several ways in which the inventory turnover ratio can be improved:

BETTER FORECASTING. The company needs to pay more attention to forecasting techniques. If
you can forecast the demands of the customer correctly, you need to stock only those items. This will
reduce your inventory levels, which in turn will increase the inventory turnover ratio.
REDUCE THE PRICE
If you cannot increase the demand/sales by marketing, apply the discount strategy or reduce the price
to an attractive level so as to increase the sales. 
BETTER ORDER MANAGEMENT
Focus more on obtaining advance orders. This will help to eliminate unnecessary inventory and
improve your inventory turnover ratio.

Describe trade-offs between inventory carrying costs, ordering costs, transportation costs and
stockout costs, depending on the lot size (being the lot size the decision variable). Regarding the
inventory costs it will increase if the lot size increase, this because we have stock more goods in the
warehouse, on the other hand the ordering costs will decrease if we order more good this because the
ordering costs usually will be the same regardless the quantity bought, instead for the transportation
costs we have to look to the FTL qty, this because if the lot size is equal to FTL we have saturated the
track load so we have amortized the transportation costs. Finally, the Stock out costs will decrease if
we order more quantity of lot, that because we have more stock in our inventory to cover stock out
period, so we don’t have lost demand.

Brown’s Model: Single Exponential Smoothing (without trend and seasonality)

This type of method consider the t-1 forecast and it will corrects it by keeping in account the error by
using a paramenter called a this model is used in absence of trend and seasonality

Given demand time series d1, d2, ..., dt, t+1 period forecast is:

a: SMOOTHING COEFFICIENT (0  a  1) the optimal one it is obtained as:

min (MSE) =
mina
{∑
t =1
(Dt−Ft )2 }
n

Forecast is obtained by the weighted average of actual dt and previous forecast ft.

a value must belong to interval [0,1]

 - a high: reactive model (> weight to new data)

- a low: static model (> weight to past)

- if a = 1: F t+1 =D t

- if a = 0: F t+1 =F t

How can you calculate a percentage forecast error when you have some historical periods with
zero sales? In the answer distinguish continuous series and sporadic ones.

L’errore medio assoluto percentuale (MAPE) in questo caso non è applicabile in quanto al periodo 6 è
presente una domanda nulla. È invece applicabile il Cumulated MAPE (CMAPE), calcolabile secondo
la seguente formula.

pattern of the series, so it can be continuous or sporadic, in order to

understand if a series is sporadic, we have to consider the zero-density
factor, so if the series contains at least 50% zeroes it can be
considered having a sporadic behavior.

Define the customer target service level. How is it calculated using the Gauss distribution?
Describe some KPIs to calculate the actual service level. Provide a numerical example. The
"service level" refers to the meaning of the "k" factor relating to standardized normal distribution. The
coverage probability indicates the “stock coverage ratio”, which corresponds to the probability of
meeting the requests that arise during the reorder period. In the figure below, "𝑃" 𝐶 represents the area
to the left of "k", it does not depend on the reordering lot and is linked biunivocally to the factor "k"
itself (fixed "k", to the sharpening and flattening of the Gaussian distribution " 𝑃” remains unchanged,
while the level of emergency stocks varies as a function of 𝜎𝐷, 𝐿𝑇).

The level of availability, on the other hand, indicates the performance that the company offers to the
customer during restocking, measured by the ratio between
the pieces requested and not available (stock out) and the
pieces requested overall. This performance can be exactly
quantified in the average number of pieces in stock out
through an “I (k)” index, and graphically represents the tail
to the right of “k”. Contrary to "𝑃", the size of this queue
varies 𝐶 as the Gaussian distribution sharpens and flattens:
the more the curve is concentrated around its average (the
less the demand is variable during the lead time), the smaller
it will be the tail to the right of "k".

Coupled system
If safety stock is allocated to the Regional Warehouses only, it faces:
- The demand variability Di (downstream variability):
o during the replenishment lead time of the Central Warehouse (LTc)
o during the replenishment lead time of the Regional Warehouses (LTrw)

- The lead time variability (upstream variability):

o the replenishment lead time of the Central Warehouse (LTc)
o the replenishment lead time of the Regional Warehouses (LTrw)
Independent system
If safety stock is allocated to both the Regional Warehouses and the Central Warehouse, it faces:
- In the CW the variability of:
o the downstream demand (σDC) during the lead time LTc
o the upstream replenishment Lead Time LTc (i.e., σLTc)

- In the RWs the variability of:

o the downstream demand (σDi) during the Lead Time LTrw
o the upstream replenishment Lead Time LTrw (i.e., σLTrwi)