The Secrets behind Demand planning

Demand planning role is very essential in each business, it has the ability to change the business into the right road of growth if these 7 factors are executed well.

1-Understanding the route to market for business including all the trade channels and the distribution nodes.

2-Understanding the financial language.

3-Crafting a robust S&OP.

4-Understanding the Price index in the market.

5-Identifying all types of promotions either trade promotions or consumer promotions.

6-Having a solid promotional library based on the used forecasting unit including the discount depth and promotions intensity.

7-Baseline generation.

Those are the bottom line factors that should be identified for a successful demand planning department, a department that could fuel authentic growth.

I had always a phrase that "Demand planning is not"

(Not a Pipeline Department), where Inputs are the same as outputs from sales.

Filtration process should occur, demand planning is the gatekeeper for all the demand flows to the upstream, it's not only a pure analysis but also a lot of factors should be considered here like "Route to market and forecast build-up", for instance, the (Regulars, Promotions, and innovations) build-up.

There are 3 KPIs that are collectively used in corporate life, one of those KPIs "the Third one" is not used primarily across corporate, where I see its as a very essential KPI.

1-Forecast Accuracy.

2-Forecast Bias.

3-Forecast Variance.

Do companies forecast their sales on SKU Level?!

The answer is "Yes", but the interesting question here:

Do the discussions happen between the Demand planning and sales team take place on the SKU level?!

The answer most commonly is "No".

Why the discussion is not on the SKU level?!

Imagine a company that runs an enormous amount of products in its portfolio.

1-Time factor:

1-How long it will take to have this discussion?

for sure, a long time.

2-Human effort factor:

Does it worth it with our demand and supply uncertainty to go into those details?!

There is a quote "Forecast will never be right" due to the uncertainty in our VUCA life.

How S&OP discussion happens between the Demand Planning and Sales team?!

There are mainly two factors that should be identified for the S&OP forecast:

1-Forecasting unit.

2-Forecasting level.

Those are the fundamentals for any forecasting systems used in the S&OP.

1-Forecasting unit:

The forecasting unit is the language that takes a place between the sales team and the demand planning team in the monthly S&OP discussion.

Imagine with me that we have the below Sunsilk shampoo 400 ML ( 7 SKU's)

How we can drive the discussion in the S&OP?

Should we take it SKU by SKU, it means we will discuss the forecast of 7 products.

How can we solve this to lessen the time taken for discussion?!

This would happen by using the Forecasting unit, so what is the forecasting unit?

To understand the forecasting unit, let's have an overview of the Product Hierarchy.

Product Hierarchy:

Product Hierarchy is simply a mapping tree to all company products grouping them into higher levels, below are the levels of hierarchy:

Level 1

This is the lowest level which is the (SKU level), for instance, the 7 products of Sunsilk shampoo 400 ML are the SKUs.

Level 2

This level is named (Format or size level), those 7 SKUs got mapped under a format named Sunsilk Shampoo 400 ML, so all sales for those 7 SKU's mapped together.

Level 3

It's the (Family group Level), at this level is higher level than format, for instance, in our case will be Sunsilk Shampoo, and to make it clear on the same level could be Sunsilk conditioners, etc....

Level 4

it's the (Brand Level), and in our case will be Sunsilk.

Level 5

This level is the (Category Level), and in our case here will Hair category.

Those are the main levels for the product hierarchy, so what is the forecasting unit again?

The forecasting unit is a selected level from those 5 levels that the company agreed on.

For instance, the S&OP discussion agreed on is (Level 2) which is the (Format level), so the sales team and demand planning team will discuss Sunsilk shampoo 400 Ml mapped under it 7 Sku's, so time is saved instead of talking SKU by SKU.

2-Forecasting Level:

We identified the discussion of the products will be done on which level.

Now we know the forecasting unit, next how can we forecast on the customer level?!

Do the discussions happen between the Demand planning and sales team take place on a customer level?!

The answer is obvious "No", then how the S&OP discussion takes place.

it takes place mainly based on the sales team's structure inside the company.

There are 2 main structures :

1- Channel structure:

The channels are defined based on the company's direction, for instance, there are three main channels in FMCG which are:

A- Modern Trade Channel.

B-Traditional Trade channel.

C-Pharmacy Channel.

For each channel, there is a channel sales head who drives the sales across.

Under each channel, there is a Customer mapped under those channels which we call it (Customer Hierarchy).

2-Geographical structure:

Sales managers here are named as (Country or regional managers) based on the company's direction.

And those Country managers are in charge of all Channels in this country (Modern trade, traditional trade, and pharmacy).

let's have the final example for the same Sunsilk:

if I have 3 Channel managers (Modern trade, Traditional trade, and pharmacy).

So there will be 3 discussions on Sunsilk shampoo 400 Ml with each channel manager, and after agreeing on the Format forecast for each channel, a proportional factor will be taken based on the channel's historical sales.

Demand planning is not only about Statistical analysis and picking the best model that gives you the lowest forecast error.

Demand planning is a function that can change the company's future if there is a real business acumen got acquired in terms of understanding the demand drivers and the financials behind it.

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