Forecasting has historically been an isolated activity, with multiple departments’ independently creating forecasts for the same products—all using their own assumptions, measures, and level of detail. Many consult the marketplace only informally, and few involve their major suppliers in the process. The functional orientation of many companies has just made things worse, allowing sales forecasts to envision growing demand while manufacturing second-guesses how much product the market actually wants.

Such independent, self-entered forecasting is incompatible with excellent supply chain management, as one manufacturer of photographic imaging found. This manufacturer nicknamed the warehouse “the accordion” because it had to cope with a production operation that stuck to a stable Schedule, while the revenue-focused sales force routinely triggered cyclical demand by offering deep discounts at the end of each quarter. The manufacturer realized the need to implement a cross-functional planning process, supported by demand planning software. Initial results were dismaying. Sales volume dropped sharply, as excess inventory had to be consumed by the marketplace.
But today, the company enjoys lower inventory and warehousing costs and much greater ability to maintain price levels and limit discounting. Like all the best sales and operations planning (S&OP), this process recognizes the needs and objectives of each functional group but bases final operational decisions on overall profit potential. Excellent supply chain management, in fact, calls for S&OP that transcends company boundaries to involve every link of the supply chain (from the supplier’s supplier to the customer’s customer) in developing forecasts collaboratively and then maintaining the required capacity across the operations. Channel-wide S&OP can detect early warning signals of demand lurking in customer promotions, ordering patterns, and restocking algorithms and takes into account vendor and carrier capabilities, capacity, and constraints.

Aval Sethi