Is it at SKU? Is it at Format level/Pack size? Is it at a family level? Is it at a Brand or a category segmentation?

Is it also at the Customer/store level? Or is it a Customer level? or is it a Sales sub-channel? Is it at a sales

channel level? or is it at the country/business unit level?

Then what if the company has multiple warehouses and serves multiple distributors?

Shall we forecast at the total national level? or shall we forecast it at a lower Distribution level?

There are 3 factors that determine your level of the forecast.

     The Product

Any company in this world should define the mapping of the product hierarchy tree, where the lowest level is SKU and the highest level is the Category segmentation.

Product hierarchy is a mapping tree, any new or old SKU should be mapped under this hierarchy.

There are multiple levels inside the product hierarchy., names could vary from company to company or industry to industry, but the concept is the same.

Product Hierarchy Example for Evian water:

Why the product hierarchy is very important to any company?

1-Reporting purpose "The Past"

Can you imagine with me a company that has a huge portfolio of products with 1000+ SKUs, it doesn't make sense to go SKU by SKU or product by product to see the performance at a lower level and take an action on each product especially when it comes to strategical decisions by the leadership of the company.

That's why product hierarchy can play this mapping role between the lower level in the hierarchy "SKU" to the highest level "Business Unit/Company", this mapping can easily map the historical sales of the SKUs to any desired level in the product hierarchy and build the needed Internal and external strategies, which by default will act as a compass inside S&OP.

2-Forecasting Purpose "The Future"

When we map the history at the SKU level, then it will be easier to aggregate this history again at the desired level inside the product hierarchy, lets say for example that we will plan our forecast inside the S&OP at "Format/Size", then the discussion between sales and supply chain will not be on SKU level, it will be on Format/size level.

If the 1-liter format/ size, has 3 SKUs under it, then the discussion between the supply chain and sales will happen on 1 liter by aggregating all the history for the 3 SKUs and checking the historical trends and any drivers that influenced the historical demand "Activity, promotions, innovations or customer rebates".

After tracking the history, then it comes the time for building the forecast at format/size for the 1 liter by generating all the building blocks for the demand, after building the demand at the format level.

How can we pick the best level in the "product hierarchy" to forecast our S&OP on?

There is no one size fits all solution, one of the biggest mistakes that most companies do, is picking one level inside the product hierarchy and using it for all portfolios, but the truth is that not all Products have the same behaviors, some products are heavily promoted and some are sold as a regular without any promotions.

but I will share with you the 2 steps and concepts that most companies and consultants focus on to pick the best level inside the product hierarchy.

Stable Demand 

The more the demand is stable at the SKU level, the easy you can go up to a higher level inside the product hierarchy   Format level;  as the coefficient of variation is low, so building the volumes at a higher level inside the S&OP will be easy, as you will not be worried when you disaggregate the forecast from FOrmat level to SKU level as the volatility is very low.

You can even move further from Format to Family as long as the demand is stable and the discussion inside S&OP should be at this level, as the disaggregation from Family to SKU will be easy and at the same time.

One of the biggest benefits of this approach are two things:

A) Relying on satirical models to forecast this family and disaggregate it, so no need to discuss these families inside S&OP between Supply chain and sales.

B) Saving time for this family discussion and focusing on the more volatile families could bring more errors in the forecast if there are no clear building blocks for the demand.

Volatile Demand 

The more the demand is volatile at the SKU level, the harder it is to go up further inside the product hierarchy, definitely, you will not forecast at the SKU level, especially for companies that have a massive portfolio of SKUs, but you can move up little for a format level and stop here.

You need to track the reason for the volatility of this format, it could be:

1- Heavily promoted.

2-Seaonlity trends.

3-NPI (New product introduction).

4-Transitions Mapping SKUs.

5-Listing/delisting SKUs.

For those Formats that are volatile, the forecasting level should be at format and not at a higher level, this will allow the supply chain and Sales team inside the S&OP to have a quality discussion on these volatile formats and build the demand driver correctly for the future.

If a format is heavily promoted, then all the laser focus should be on the passing of those activities or promotions in the future, because any incorrect phasing of activity based on the company budget will cost the company a lot from a service level inventory health.

Summary:

Keep the laser focus inside the S&OP meetings on those formats that are volatile, and build all the building blocks of the demand carefully with the right phasing inside those meetings between the Supply chain and Sales.

And for the Stable demand families, you can use the best statistical models to build the best forecast accuracy and bias with minimal error, hence saving the time you spend on these stable families for the volatiles demand formats to improve accuracy.

This is from a product forecast level, what about the Sales channel and Location level, what is the best level of forecast inside S&OP?

to be continued in the coming articles.

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