Sales and Operations Planning
The sales and operations planning process has the basic mission of balancing of supply and demand over the medium term. The exact forecast horizon for S&OP varies with the type of business, but 18 months or 24 months are very usual. Some types of business, such as pharmaceuticals, have much longer planning cycles, therefore the S&OP horizon can be much longer. With medium term forecasting, such as that for S&OP, the emphasis is different compared to short term forecasting. Forecasting needs to take account of planned product innovation and expected market and technology changes, therefore there is an element of subjective judgement. And there is usually greater importance placed on the financial outcome.
Medium Term Forecasting Methods
For medium term forecasting it is usually best to work at an aggregated level, so product group rather than SKU. Even if the short term forecast is carried out on daily or weekly time buckets, for medium term forecasting it is usually preferred to work in months.
In terms of modelling demand patterns over the medium term, curve fitting methods can be very useful. In certain markets, including pharmaceuticals, curves to reflect product life cycle can be helpful. Due to the uncertainties around innovation and technology changes, the application of commercial judgement can be just as important as statistical modelling.
Forecasting using causal analysis, taking account of factors such as relative prices and economic indicators can be helpful. But it should be remembered that the projection of the causal factors that impact on the forecast can become difficult with longer forecast horizons.
Avoiding Pitfalls in S&OP Forecasting
Companies often have forecasting systems that are set up primarily for the purpose of short term forecasting. The temptation for medium term forecasting is to simply extend the forecast horizon to an unrealistic level. Projections that are perfectly adequate over the short term can become unrealistic if they are simply extended forwards too far.
The difficult part of demand planning for S&OP is often the judgemental input that is needed to deal with future new products and likely technology changes. This should be recognised, not lost in a forest of detail produced from a short term perspective.
So there is a need for a different mind set in medium term forecasting, often involving different forecasting methods. If reconciliation of short and medium term forecasts is necessary, consideration should be given to the adoption of a top-down process at some point along the forecast horizon.
Forecast Solutions can help by recommending effective processes and methods in forecasting for S&OP, together with suitable ways to integrate short term and medium term forecasts.