Sales forecasting development
Roughly 30 years ago I completed my Master Thesis implementing one of the first Sales and Operations Planning processes in the Netherlands. The Sales Forecast I used initially was merely a simple extrapolation of the past. I used historical data to account for the seasonal trend and applied a growth percentage based on historical growth data.
Starting my first job I supervised a student with his project on ‘focus forecasting’. This forecasting method uses historical data by sales item. It then identifies from a range of predefined models the forecasting model that most accurately predicts the recent historical demand. This model is then used to provide the forecast for the specific sales item. The iteration is performed for each of the sales items.
A few years later I attended an SAP training called SCM Demand Planning. During this training I learned all about an SAP module that manages a workflow with the Sales hierarchy. Each Sales level provides, adjusts where needed, agrees, and signs off on the Sales Forecast before it will be used in the MRP-process.
These 3 examples show that Sales Forecasting was, and often still is, a stand-alone activity. An activity managed in isolation within one department of the organisation.
Sales Forecast Accuracy versus cost
Over the 30 years Sales Forecasting has developed strongly. Methods and models have improved with the aim of improving the Sales Forecast accuracy.
A lot is at stake. If you succeed to increase the forecast accuracy, you can better predict the future. If you can better predict the future you have less risk when taking business decisions.
Usually to cover for risks – a function of probability and impact- you need to invest money. Often, looking back at the investment you made to cover the risk, you may wonder if it was needed, because the risk never materialised.
So, the more accurate you can predict your demand, the less unnecessary cost you face. Consequently the better your Profit and Loss statement is.
Of course no one has a crystal ball and can fully predict the future, not even a Sales team! That is why a Demand Plan in an S&OP-process should be established weighing off the accuracy aimed for with the effort required to achieve that accuracy.
The S&OP-process serves to take aligned business decisions for the future based on the best Demand predictions you have at a point in time. During each following round of the S&OP-process these business decisions can be revised having better information available to the organisation.
In a more mature S&OP-process organisations reach out to customers and suppliers to share and receive information on future Demand, and future bottlenecks. This information is then used to take better business decisions.
The more relevant information you can combine the better your Demand Plan will be. However your Demand Plan will never be 100% accurate.
What would happen if you would not just predict the future, but would shape it yourself? This would give you full control over the accuracy and thus reduce your unneccary cost.
There is one function in an organisation that has the levers in their hand to shape demand for an organisation: the Marketing team.
Using the 4P’s of Marketing – ‘Price’, ‘Promotion’, ‘Product’ and ‘Place’ – they can shape your future demand. Using these 4P’s in combination with the capabilities of the Supply Chain you can theoretically shape your demand according to what you as an organisation are capable of and reduce your cost for managing business risks to zero.
So much for theory because no company operates with their customers in isolation. There are competitors that use these same tools, government regulations that change, customers that change direction, technological developments, and so on. Your demand is formed by many others that compete for and influence your customers, your suppliers and your own organisation. You will therefore never be able to fully shape your own demand.
However, the 4P’s of Marketing have shown their impact over decades, for some businesses more than for others. So, you can and should use these 4P’s to shape your demand to the best of your abilities.
Putting it together
Personally, I do not see that Demand Shaping is a next evolution in Sales Forecasting.
Demand Shaping is more of a ‘tool’ that was always there, but rarely has been used to shape your demand in matching you business capabilities.
Demand Shaping has great value when included in any mature S&OP-process. A dynamic process where inputs flow openly from every relevant part of the organisation, where requirements and expectations are clear, stepping up organizational capabilities to steer results and meet the plan.