Introduction to Forecasting

and Demand Planning

Ayman Elrafie, CPIM, CSCP
Hair & Skin Care Demand Planning Manager | Unilever Gulf

Agenda
Forecasting basics.
The demand management process.
The demand planning cycle.
Maintaining a high quality forecast.
The show stoppers.

Agenda
Forecasting basics.
The need for a forecast.
The forecast dilemma.
The principles, components, aggregation, sources of data and KPIs of a forecast.

The demand management process.

The demand planning cycle.
Maintaining a high quality forecast.
The show stoppers.

The Need for a Forecast

Forecasting in FMCGs is of a great importance to the business:
1. It gives the organization the needed visibility to future demand and
requirements, hence capacities, budgets and utilizations can be
planned.
2. Forecast is used to ensure products availability OTIF.
3. Used to estimate the financial forecast.
4. Used by business partners in both the upstream and downstream to
better plan their resources ahead.

The Vicious Circle

Senior Management disbelief

forecasts
Fail to deliver forecast

Poor Forecasts

Micro-Management

Lack of Empowerment

Do not see real gap

early on

Short term focus

TO, Margin gaps increase

Working capital increases & SLOBs are

generated

Forced to do ad-hoc
activities

P&L suffers

Trade stock > norms

Margins suffer as Supply Chain expedites

Stock Availability suffers

Forced to sell
unforecasted bread &
butter SKUs

Forecast Bias

Margins suffer as Supply Chain

expedites

Lack of Team
work

The Forecast Dilemma

Different functions have different
views of the forecast & expectations
as well!! Key stakeholders are:

Marketing
Sales
Finance
Supply Chain & Operations
Top Management

The Forecast Dilemma

Marketing:
High growth rates and sometimes
exponential especially in the long term.
Intensive promos & innovations.
High budget to make it happen.
Try to maximize the product mix to
meet all consumers needs.
I have many great ideas
that consumer will love!

The Forecast Dilemma

Sales:
Little bit conservative, and sometimes
pessimistic too.
Probably knows the markets the best.
Always pointing out to stock availability
issues and its effect on sales.
Always playing it as safe as possible.
Wishing to have the biggest product
mix to fulfill all customers needs.

This month will be a

very tough one!

The Forecast Dilemma

Finance:
Looking for a stable growth for the
P&L.
Willing to give the least possible budget
as much as possible to promote
Trying to rationalize the product mix to
minimize SLOBs.
Hoping to release the minimal possible
budget for promotions.

Were about to
consume our budget!

The Forecast Dilemma

Supply Chain & Operations:
Looking for a & growth to gain
economies of scale.
Looking for stability to better utilize
assets.
Trying to rationalize the product mix to
the minimize the changeovers.
Always emphasizing on lead times.

This is not abiding with

our lead times!

The Forecast Dilemma

Top management:
Looking for achieving the
organizations targets, which are
usually very stretched.

Have we achieved our

target?!
Target

The Forecast Dilemma

The best forecast is the one which
takes into considerations all the
different functions views, concerns
and assumptions. And here comes
the role of the.

Demand Planning

Lets develop it together

guys!!
Target

Forecasting Basics Principles

1. Forecasts are (almost) always wrong.
2. Forecasts should include an estimate of error.
3. Forecasts are more accurate for groups than for single items.
4. Forecasts of near-term demand are more accurate than long-term
forecasts.

Forecasting Basics Principles

1. Forecast Target.

Forecasting Basics Principles

1. Forecast Target.
2. Forecast is not only used to secure
stocks.

To increase the customer service level:

1. Review the stock model:

Increase coverage

Increase safety stocks

Increase safety lead-times

2. Increase supply responsiveness.
3. Insure availability of contingency plans to
cover any delays.
4. Revise your forecast.

Forecasting Basics Principles

1. Forecast Target.
2. Forecast is not only used to secure
stocks.
3. Forecasts must be timely
bounded, with specific time
buckets.

Usually a forecast is covering a long period of

time. This is primarily used for tactical -strategic
decision making purposes.
Time buckets will vary based on the product and
the companys requirements, however
commonly used time buckets are:
Weeks
Months

Forecasting Basics Principles

1. Forecast Target.
2. Forecast is not only used to secure
stocks.
3. Forecasts must be timely
bounded, with specific time
buckets.
4. Forecast must have a clear
ownership.

Developing forecast is a cross-functional

responsibility, all participants need to agree on
the forecast and reach consensus.
Ideally, the S&OP process insures the
consensus and company-wide ownership of the
forecast, however some companies holds
functions different functions accountable on
different forecast horizons as follow:
Short term: Sales
Medium to long term: Demand planning
Promotions and advertising: Marketing

Forecasting Basics Principles

1. Forecast Target.
2. Forecast is not only used to secure
stocks.
3. Forecasts must be timely
bounded, with specific time
buckets.
4. Forecast must have a clear
ownership.
5. Forecast is based on robust and
fact-based assumptions.

Predicting the future is something that we

cannot do using quantitative inputs only due to
ambiguity, hence forecast consists of qualitative
inputs based on the best of our knowledge
Documenting the assumptions and doing our
best to quantify them is an integral part of any
forecast.

Forecasting Basics Principles

1. Forecast Target.
2. Forecast is not only used to secure
stocks.
3. Forecasts must be timely
bounded, with specific time
buckets.
4. Forecast must have a clear
ownership.
5. Forecast is based on robust and
fact-based assumptions.
6. Forecast must be an unbiased

Forecast should always be a mid-point; where

the chances of selling more are equal to the
chances of selling less.
A conservative forecast can result in out-ofstocks and missing sales opportunities, while an
optimistic forecast can result in higher stocks
level and SLOBs

Forecasting Basics Components

All forecast consists of four
components that shape it:
1. The basic value:
Which controls the vertical placement of
the forecast.

Forecasting Basics Components

All forecast consists of four
components that shape it:
1. The basic value.
2. The seasonality:
Which reflect the seasonality of the
demand. Seasonality doesn't only mean
weather seasonality, but any event
affecting the demand seasonality in
general. It usually repeats itself year on
year.
Examples include:

The back to school season.

The Dubai shopping festival season.
Christmas

Forecasting Basics Components

All forecast consists of four
components that shape it:
1. The basic value.
2. The seasonality.
3. The trend:
It controls the growth of the demand and
usually governed by the market growth
rates and the organizations market
share growth rates.

Forecasting Basics Components

All forecast consists of four
components that shape it:
1.
2.
3.
4.

The basic value.

The seasonality.
The trend.
The business cycle:
Cycle are usually long term, and are
generally very hard to predict and are
macro trends.

Forecasting Basics - Aggregation

Aggregation of forecast is very important especially since the forecasted
units are usually too many.
Aggregated products should share the common characteristics and demand
patterns.
Aggregation will not only provide more accurate forecast, but it will save lots
of time too.

Forecasting Basics Sources of Data

Obtaining data is an integral part in
building a quality forecast.
Using fact-based assumptions helps in
validating qualitative inputs and
quantifying.
Documenting assumptions is an
important task that DP must apply.
Forecasting is a mix of
science & art, where
underling assumptions
resemble the foundation

Forecasting Basics KPIs

Forecast bias
Forecast accuracy
Month-on-month forecast changes

Agenda
Forecasting basics.
The demand management process:
The four components of demand management.
The S&OP cycle.
Case study: Managing & Prioritizing demand.

The demand planning cycle.

Maintaining a high quality forecast.
The show stoppers.

The Demand Management Process

The Demand Management Process is a process
that weighs both customer and a firms output
capabilities, and tries to balance the two.
So basically, it is a process to match demand &
supply!

Planning
demand

Managing &
prioritizing
demand

Communicating
demand

Influencing
demand

The Demand Management Process

Planning Demand:
Planning demand is not only about forecasting,
but that is just the start.
It is a plan for action based on consensus over the
Demand Plan including assumptions, promotion
plans, New Product Introduction plans and pricing
plans.
A typical planning horizon is 24 rolling months,
which is regularly reviewed on a monthly basis.

Planning
demand

Managing &
prioritizing
demand

Communicating
demand

Influencing
demand

The Demand Management Process

Communicating Demand:
Communication must be as early as soon as
possible to minimize surprises.
Structure communication to ensure that they
occur.
Focus communication to fit audience.

Planning
demand

Managing &
prioritizing
demand

Communicating
demand

Influencing
demand

The Demand Management Process

Influencing demand:
Influencing demand describes the activities of the
marketing and sales to convince customers to
purchase the organization's products.
The purpose of demand-influencing activities is to
support the organizations business objective.
Examples of demand-influencing activities:
Settling on the most profitable product mix.
Strategic pricing.
Product distribution.
Promoting the product.

Planning
demand

Managing &
prioritizing
demand

4 Ps

Communicating
demand

Influencing
demand

The Demand Management Process

Managing and prioritizing demand:

It is optimizing demand across the system as

measured by optimum organizational profit,
demand volumes, sales revenue and customer
service (including customer retention).
Managing and prioritizing demand must be
restricted to appropriate management levels.
Examples of managing and prioritizing demand
are:

Rationing supply to warehouses or retailers in case

of shortage so that each receive a portion of their
full demand.
Prioritizing and changing production schedule to
cater for shortage in A class items.
Fulfilling a large, one-time order that would impact
regular orders.

Planning
demand

Managing &
prioritizing
demand

Communicating
demand

Influencing
demand

Sales & Operations Planning

Sales & Operations Planning (S&OP) is a
decision-making process involving the
business leaders and a number of middle
managers and specialties.
S&OP Mission is to:
Balancing supply & demand at an
aggregate level.
Aligning operational planning with
financial planning.
Linking strategic planning with day-today
sales and operational activities.

Product Review Meeting:

Attendees: R&D & Marketing.

Demand Planning Meeting

Attendees: DP, Marketing & Sales.

Supply Planning Meeting

Attendees: SP & Operations

Financial Review Meeting

Attendees: Finance

Reconciliation Meeting
Attendees: All

Executive Meeting
Attendees: Board & All.

Plans Information Flow

Demand
Plan

Sales plan

Gap closure
plan

Production
Plan

Constrained
supply plan

S&OP Plans
1

Product Review Meeting:

Attendees: R&D & Marketing.

Demand Planning Meeting

Attendees: DP, Marketing & Sales.

Supply Planning Meeting

Attendees: SP & Operations

Financial Review Meeting

Attendees: Finance

Reconciliation Meeting
Attendees: All

Executive Meeting
Attendees: Board & All.

S&OP is a robust process,

however its success is mainly
dependant on having the
right behaviours

Demand Plan

Constrained Plan

Gap closure plan

Final Sales plan

Case Study Managing & Prioritizing

Demand
Lack of team work
and a blame game!!

The outlook:
Home care business in Africa
Rapid Market growth.
Capacity is constraining the demand.

- Margins are too low to invest in

further capacity in the region.
- Allocated budgets for promotions
are not used efficiently due to supply
shortage & constraints.

- We can actually sell everything we

make, but we are constrained by the
factory capacity.
- Whenever we push sales we always
have customer service problems

Marketing & Sales

- We keep changing the production

plan which affects our reliability.
- We are always chasing our tails to
meet demand
- They keep cancelling our
maintenance plans which affects our
machines efficiency.

Target

Finance

Operations

- We are losing
shares and we are
not meeting our
financial targets
Top Management

Case Study Managing & Prioritizing

Demand
The action plan:

Form a cross-functional team, who are

empowered to take tough decisions.
Meet every week to make sure that
everyone is aligned on the updates.
Constrain the demand to demonstrated
capacity
Increase the price since demand is
constrained.
Priority was given to key customers.
Reduce the promotions drastically, and
increase the lead time for approving them.
Exceptions and late changes are no more
accepted.
Put the factorys maintenance plan back in
place.
Look for an opportunity to source from
different business unit.

The results:
Margins

Demonstrated
Capacity

Fire-fighting
mode

Sales
(value)
Customer
service level

Agenda
Forecasting basics.
The demand management process.
The demand planning cycle:
The eight steps process.
The Bulls-Eye, baseline and building blocks.
The demand variability sources.

Maintaining a high quality forecast.

The show stoppers.

The Demand Planning Cycle

The demand planning cycle is an eight-steps
approach.
In this process, forecast is developed by using
the baseline forecasting and the forecast
building blocks.
The demand planner is also responsible to
communicate the company-wide agreed sales
plan.

Analyze sales
data
Communicate
sales plan

Clean sales
data

Constraint
demand

Generate
baseline

Communicate
demand

Develop
forecast
Reach demand
consensus

The Demand Planning Cycle

Analyze sales
data
Communicate
sales plan

Clean sales
data

Constraint
demand

If I had eight hours to chop down a tree, I'd spend

six hours sharpening my axe
- Abraham Lincoln

Generate
baseline

Communicate
demand

Develop
forecast
Reach demand
consensus

The Demand Planning Cycle

This is the step where you are should sharpen your
axe, by interpreting the sales history carefully.
Compare actual sales data with the old forecast
along with its underling assumptions to identifying
what went wrong and what went well.
Analyze year VS year, month VS month, and
channel by channel.

Analyze sales
data
Communicate
sales plan

Clean sales
data

Constraint
demand

Generate
baseline

Understand the factors that supported sales, and

make sure to update your assumptions accordingly.
Look for up-normal demand patterns, and try to
understand the root cause jointly with the team.

Communicate
demand

Develop
forecast
Reach demand
consensus

The Bulls-Eye Concept

Outliers, such as out of stocks or stock-ups due
to price changes
Big events, unlikely to be repeated
exactly the same way and worth
planning

Normal or routine promo

events, likely to be repeated, but not
always worth planning

Pure baseline sales excluding all

activities

The Bulls-Eye

The Bulls-Eye

Baseline is the amount of

sales with minimal or almost
no support

The Bulls-Eye

Examples can be:

- All-year-round promotions
- All-year-round TV ads
- All-year-round in-store visibility

The Bulls-Eye

These events must be execluded since

they dont happen all-year, and when
they happen supporting assumptions
change

The Bulls-Eye

Including such events will lead to a

wrong forecast, since these data points
are outliers

The Demand Planning Cycle

This is the part where correcting the history takes
place.
From analyzing sales data, outliers and events
uplifts are identified.
The most common way to identify outliers is using
upper and lower limits (25% of average sales), or
by using standard deviation ()
Common root causes of outliers can be:

Out of stocks
Competitors out of stocks
Sales prior to price increase rumors
Channel stuffing

Correct the previous data jointly with the team.

Analyze sales
data
Communicate
sales plan

Clean sales
data

Constraint
demand

Generate
baseline

Communicate
demand

Develop
forecast
Reach demand
consensus

Sources of Demand Variability

Competition
Seasonal
effects

Distance

Economic
and other
external
trends

Demand
Variability

Disasters

PLC trends
and
customers
expectations

Promotions
Bullwhip
effect

The Demand Planning Cycle

Baseline generation is usually done using
statistical forecasting.
Most common statistical modes used to
generate baselines are:

Moving average & weighted moving average

Seasonal liner regression
Exponential smoothing
Holt-winter exponential model

Validate your baseline with the updated

assumptions.

Take into account the seasonality patterns.

Analyze sales
data
Communicate
sales plan

Clean sales
data

Constraint
demand

Generate
baseline

Communicate
demand

Develop
forecast
Reach demand
consensus

The Demand Planning Cycle

After the baseline is generated, events and
forecast building blocks should be included.
Each event should have an uplift (or a downlift) that affects the forecast.
The challenging part is to determine the
incremental volume.

Analyze sales
data
Communicate
sales plan

Clean sales
data

Constraint
demand

Generate
baseline

Communicate
demand

Develop
forecast
Reach demand
consensus

Demand Building Blocks

Total Forecast

Event
Event

Baseline

Event

Events

Distribution
drives

Customer
promotions

Consumer
promotions

Increased instore visibility

New Product
introduction

Advertisement

Price plans

The Big Picture - Cannibalization

A promotion or innovation success standalone can make a perfect sense,
however there are many external factors that will affect the success of that
and an internal one; which is cannibalization.
An innovation and promotional grid must be always in place to insure that
the big picture is there, and in order to be able to asses cannibalization effect
properly.

The Demand Planning Cycle

Forecast is a cross-functional responsibility,
hence final demand plans must be aligned
with the team.
Demand consensus is an integral part for a
successful S&OP process.

Analyze sales
data
Communicate
sales plan

Clean sales
data

Constraint
demand

Generate
baseline

Communicate
demand

Develop
forecast
Reach demand
consensus

The Demand Planning Cycle

Communicate the demand to the supply side
of the organization as an unconstrained
demand plan.

Demand Plan

Analyze sales
data
Communicate
sales plan

Clean sales
data

Constraint
demand

Generate
baseline

Constrained
Plan
Gap closure
plan
Final Sales
plan

Communicate
demand

Develop
forecast
Reach demand
consensus

The Demand Planning Cycle

Include the supply constraints to reflect reality
to your Constrained demand plan

Analyze sales
data
Communicate
sales plan

Demand Plan

Clean sales
data

Constraint
demand

Generate
baseline

Constrained
Plan
Gap closure
plan
Final Sales
plan

Communicate
demand

Develop
forecast
Reach demand
consensus

The Demand Planning Cycle

Now as the plans are agreed, communicate to
the sales team the companys agreed plan

Analyze sales
data
Communicate
sales plan

Demand Plan

Clean sales
data

Constraint
demand

Generate
baseline

Constrained
Plan
Gap closure
plan
Final Sales
plan

Communicate
demand

Develop
forecast
Reach demand
consensus

Agenda
Forecasting basics.
The demand management process.
The demand planning cycle.
Maintaining a high quality forecast:
10 steps for improved bias & accuracy
Classification of the losses

The show stoppers.

Maintaining a Quality Forecast

Maintaining a quality forecast is an endless journey:

Validate your baselines statistical model using historical data.

Validate the assumptions related to your events building blocks.
Validate the assumptions related to market & economic insights.
Regularly update and correct your forecast.
Work on improving your FA & FB.

How to Minimize Bias?

Start by analyzing your data along with the assumptions.
1. Investigate top-down VS bottom-up.
2. Investigate VS previous periods and growth rates.
3. Insure sustainable supply for products with bad stock-out history.

Common sources of forecast bias

Regulars

Promotions

Innovations

Wrong
assumptions

Stock outs and

supply issues

Growth rates

How to Minimize Forecast Error?

1. Eliminate sources of bias.
2. Start a housekeeping cleaning activity.

Quick
win

3. Investigate at a brand level looking for cross-cannibalization.

4. Review your products proportional factors.
5. Analyze your time buckets sales.

Quick
win

6. Post analyze your promotions and innovations.

7. Rationalize your product mix portfolio.

Classify the Losses

Forecasting is a journey and forecasting quality improvement is a continuous
improvement process. Hence prioritizing your effort is so important, and this
can be done through:
Sales variation & forecast accuracy matrix
ABC classification for FUs (by forecast error, volume, value, etc..)
Ad-hoc requests

The most sophisticated

forecast & the one in its
simplest form will both fail to
reflect reality, if they are not
updated and validated
periodically

Classify the Losses - The Sales Variation &

Forecast Accuracy Matrix
Identify what is the average sales
variation.
Identify the coefficient of variation
using sales variation divided by
average sales of product.
Plot a scatter diagram between the
forecast accuracy & the coefficient of
variation.
Divide your graph to four zones

Classify the Losses - The Sales Variation &

Forecast Accuracy Matrix
Zone A: Well done! Keep up the good
job.
Zone B: Try different mathematical
model.
Zone C: Collaborate with sales and
start digging further as there is a big
room for improvements.
Zone D: Try to minimize the sales
variation.

Zone A

Zone D

Zone B

Zone C
Quick
win

Classify the Losses - ABC

Work smart by classifying your
forecast errors based on ABC
classification, as the As will result in
a significant improvement to the
forecast quality
On the average the A
items represents 70% of
the issues and are less
than 20% of the total
count

Quick
win

Classify the Losses Ad-hoc Requests

FMCG business is a very dynamic business, where consumers, customers and
competition are always changing the rules of the game.
Examples of ad-hoc requests might be :
Unplanned customer order
Counter promotion
Welcome plan for a competitors launch

Document
assumptions &
late change &
exceptions

Agenda
Forecasting basics.
The demand management process.
The demand planning cycle.
Maintaining a high quality forecast.
The show stoppers.

The Show Stoppers

1. Shortage of talent and high employee turnover.
2. Data quality & availability.
3. Complex portfolio.
4. Team discipline.
5. Too many meetings.
6. Corporate politics.
7. Inefficient use of the systems.

Summing-up
DP is not only about SC.. It is somehow a position taking into
account all different functions views and reflecting reality to
the forecast.
Forecast is crucial for success in the FMCG business.
Always stick to the forecast basics and principles.
Forecast is a mix of science and art, but always do your best
to validate and quantify the assumptions
Tailor youre the forecast quality KPIs to better fit your needs.
Behaviors are the key of the success of the demand
management and the S&OP processes.

Show stoppers
are always there,
it is up to you to
make it happen.

Email: ayman_elrafie@hotmail.com
LinkedIn Profile: Ayman Elrafie