Forecasting

One of the critical business tool that have been growing in recent days with growth of the business intelligence through big data science is forecasting. According to a simple rule of statistical analysis is that all data are following the pattern of normal distribution, the need to analyze the old data to predict the short and mid-term future one. In this article we are going to have a brief overview on what is forecasting, the different types and what is the best method according to the data type.

Forecasting can be simply known as the process of predicting future data based on historical data. Businesses apply forecasting methodologies to decide how to distribute their budget lines for projected expenses for any forthcoming period of time. The term forecasting in supply chain usually correlated to the demand planning as a predictive analytics field.  This is typically start with what is the expected demand for the goods and services they offer; then proceeding with the quantities that should be produced to cover the market demand and offset any controllable variance in demand.

The central pointers to the forecasting process are uncertainty and risks; the uncertainty about the future and any unexpected events might incur the risk of supply chain and market sustainability like what happened in some countries during the beginning of COVID-19 epidemic when market was shorted in medical supplies, like face masks and alcohol disinfectant sprays, due to high unpredictable consumption.

The major types of forecasting techniques are

·         Qualitative forecasting which is concerned about limited scope forecasts as they are very much dependent on surveys and opinions of experts.

·         Quantitative forecasting which is concerned about quantitative data like quantities sold or dollar sales. 

The use of quantitative forecasting method is the common in the world of data. There is multiple common quantitative methodologies to perform forecasting such as moving averages, exponential smoothing, and trend projection. The selection of a method depends on several factors like the framework of the forecast, the wanted degree of accuracy, the accessibility of historical data, and the forecast’s time horizon.

The quantitative forecasting methods can be grouped into the moving averages, exponential smoothing, and trend projections. The difference between moving averages and exponential smoothing is that the moving average is giving an equal weight to all observations in the study. While in exponential smoothing, the weight is assigned in a decreasing way over time. The trend projection is used when there is obvious style in the data over a specific time period either linear or exponential.

As a demand planner, the method selection is depending on the behavior of the data. For example, for a monthly sales of a specific product, does it sold every month with high coefficient of relation to the average; then the moving average method seems to be suitable there. The same is for seasonal products, to compare current season with the previous season using the same time frame, i.e. weeks, months, or quarter. On the other hand, the data with low coefficient of relation to the average; we can use trend projection methods such as linear regression, or exponential regression methods.

Sales and Operations Planning

In order to coordinate and match demand planning with supply planning, we need to go through the process of sales and operations planning, (acronym S&OP). In this article we are going to have a look on what is sales and operations planning, its benefits and steps to execute.

Sales and operations planning is a part of supply chain planning that is considered as an integrated business management process where both business’s top management and executives are collaborating and continually focus on that every business function is going toward balancing business’s supply with market demand. This will lead to generate more detailed business plans and forecasts for the predicted sales; but also, production and capacity plans, inventory and storage plans, plans for the development of new products, and strategic and financial plans. The extensive goal is to bring daily operations into line with corporate strategy.

The sales and operations planning can benefit business by increasing transparency between business departments. Furthermore, S&OP can help improving inventory management process and enhancing the forecast accuracy for both sales and budget. Additionally, it will help to understand the product life cycle and how to manage it, and improving the overall customer satisfaction. This will help all of both managerial and operational departments to be on the same page.

The sales and operations planning process consists mainly of five steps,

·         Collecting Data: this step is concerned with gathering all historical data required for statistical forecasting including old forecasts and actual data and their variances. This will help to understand the behavior of the market during the last period to estimate the future behavior, taking into consideration internal and external factors that may affect future sales.

·         Demand planning: in this step planners are going to analyze the sales forecast resulted from the previous step, comparing it to the annual operation and business plan, and making necessary adjustments to inventory and customer services policies.

·         Supply Planning: this phase is called either production planning. It is concerned with evaluation of the production and distribution capacity and any resources limitations. This step is performed by finance, materials and production agents.

·         Pre S&OP Meeting: in this step, a reconciliation is made from all the above three steps and arrange for any necessary recommendations. The sales forecasts is compared with the demand and supply plans and ensuring that all are brought into line with both the financial targets and company’s objectives.

·         Executive S&OP Meeting: in this phase all concerned executives come across the analysis of all forecasts, plans, and recommendations from the previous step. The result will be the final approval of the S&OP to be implemented and to provide a regular basis evaluation to guarantee success.

Sales and operations planning is like any other process that need to be evaluated on regular basis to make sure of its efficiency. The metrics of S&OP is divided into two categories,

·         Demand and Supply metrics: such as demand and production forecast accuracy, inventory turnover, and capacity utilization.

·         Financial metrics: such as total sales in a period versus forecast, actual working capital versus plan, and gross margin.