As our small company has grown, my team has repeatedly asked the question, “Who owns the forecast?” When we were smaller, with just a handful of products and employees, that question didn’t matter much. We all agreed together on what we hoped to sell, and then we bought inventory in anticipation of that growth. Since we only had a few items, the decisions weren’t complicated. Purchasing too much wasn’t a problem either. We’d have overstocks, but it was only a few thousand dollars, which we could easily liquidate.
Today we face a much different situation – one in which we’re fighting hard to figure out the forecasting process. Compared to our beginnings, our customer base, order quantities, and SKU count have all increased exponentially. We’ve long passed the point at which our one purchaser could keep track of everything in her head. More precarious, however, is that overbuying has gone from a few thousand dollars of overstock to millions.
We also began experiencing company misalignment as each departments moved forward with its own projection. Our salespeople set revenue goals, our controller had a year-over-year budget, and Operations had its excel sheets and run rates. All three pseudo-forecasts were vastly different. What resulted were overstocks, stock-outs, and unrealistic budgeting. We needed someone to take ownership of the forecast – but who?
Should Sales Own the Forecast?
Being in operations, my natural instinct was that Sales should own the forecast. After all, they interacted most with the customer, so they were obviously the best at translating those insights into numbers. However, the job of our small sales team was to build relationships with customers that brought in revenue. This required almost all of their time and effort; understandably, they wanted to focus on selling instead of forecasting. Sales agreed to give as much input as possible, but they needed someone else to own the forecast.
Should Operations Own the Forecast?
Our company looked to Supply Chain and Operations to own the forecast, but we hadn’t been doing a great job so far. We had workbooks upon workbooks of Excel forecasts, but it was only as good as past data could predict. Our limited MRP tool wasn’t robust enough to meet our products’ erratic patterns, so we had to manually calculate and guess every order. Because excess inventory was piling up, we tried to scale back our purchasing to preserve cash. However, this often forced us to use expensive airfreight to keep items in stock. We quickly realized that our current processes and tools wouldn’t suffice. While we could play a leading role, we couldn’t own the forecast. We could lend our analytical skills and champion the process, but without help from other departments, the forecast would continue to be unacceptably poor.
Should Finance Own the Forecast?
Even though our controller (our head accountant) wasn’t involved with purchasing or selling our product, she had to present budgets and revenue forecasts to our CEO and Board of Directors. Most of this forecasting was similar to the following:
Controller: “How do you feel about next year?”
Executive: “I see big things coming; I think we’ll grow by 25%”
Controller: “Ok, how about we budget conservatively at 15%”
Now to be fair, quite a bit more went into this analysis, but we never approached the level of detail that would make the forecast useful to Operations.
Recognizing this misalignment, our company met together to address the problem. Sales, Operations, and Finance all agreed that we needed one forecast the entire company could rely on. It needed to be as detailed as stating that, “we will sell Walmart $1.64 Million of Item X next year, and here is the week by week breakdown.” In fact, we needed that same level of detail for every item going to each significant customer. However, without structured collaboration, this level of specificity would be impossible to achieve.
The S&OP Process Owns the Forecast
Recognizing the need for collaborative ownership of the forecast, we began consulting other companies our size and researching best practices. Specifically, we learned that we must create a robust Sales and Operations (S&OP) planning process. S&OP is something that most companies are still learning, but the ones who figure it out seem to thrive. S&OP calls for structured and disciplined sharing of information to build a forecast that unites the company. Thus, everyone involved in the S&OP process becomes the owner of the forecast.
My great fear, however, was the business proverb that that reads, “When an issue becomes everyone’s responsibility, the issue becomes nobody’s responsibility.” In order to avoid the “nobody’s responsibility” syndrome that often plagues forecasting, we all sat down together to define the role each department would play in our S&OP process. Sales would provide customer insight and commitments, Operations would provide historical analytics, and Finance would ensure cash and budgets were in line with the company’s strategy. Most importantly, the CEO would make S&OP a top priority, hold each department accountable to the process, and offer support as needed.
Many articles and publications suggest S&OP process timelines, but below is what our monthly S&OP process currently looks like. We do our best to improve and tweak the process each month.
Week 1: Review and Fine-tune
At the beginning of the month, Operations reviews the accuracy of the previous month’s forecast against actual sales. Using every bit of data available, we analyze and fine-tune a rolling 12 month-forecast. For example, in May, we forecast the next month, June, through May of following year. We re-forecast every month because accuracy improves as we move closer to each month. The team does its best to serve up the recommended forecast “on a silver platter” to Sales. The goal is for the forecast deliverable to be so easy to understand and tweak that Sales can’t help but give their input.
Week 1 Deliverable: A complete 12-month rolling forecast based on history and known data points for Sales to evaluate, review, and tweak. Currently, this takes the form of a formatted spreadsheet generated by our forecasting software.
Week 2: Sales Input
During the second week of the month, Sales reviews the forecast. Specifically, they review and add customer commitments of new items going in and old items coming out of each channel. Sales incorporates upcoming events, customer feedback, and promotions to help modify what the historical data predicts. If possible, week two also includes a deep dive into our customer’s systems to review their sales and inventory levels.
Week 2 Deliverables: A completely reviewed and approved forecast from Sales, which incorporates as much customer knowledge as possible. Sales also shares feedback on how to improve the Week 1 deliverable.
Week 3: Supply Planning and Vendor Communication
Based on the Week 2 Deliverable, Operations then builds a supply plan to support the demand forecast. Operations meets with Sales about potential stock outs and capacity issues. Sales, Operations, and our CEO approve any significant issues, such as large stock outs or airfreight expense. After signing off on the significant issues, the CEO also signs off on the entire forecast. Operations locks and archives the forecast, which means everyone can now rely on the forecast to remain unchanged (except in extreme circumstances) until next month. With a locked forecast, Operations can now move forward with building a purchase order plan. From that plan, Operations sends purchase orders and forecasts to key vendors. They also schedule conference calls with those vendors to discuss and plan for the new forecast.
Week 3 Deliverables: An approved and locked demand plan, approved purchase orders, and vendor forecasts for key vendors.
Week 4: Meet, Plan, Reflect, and Improve
During week 4, we round out the process with vendor meetings and continued data analysis. We also hold a reflection meeting to review that month’s S&OP process. We ask, “What went well, what went poorly, and what can we do better?” We then make assignments that incorporate the feedback into changes for the following month. During this week, we also format the forecast and purchasing plan so that Finance can incorporate them into cash planning and budgeting.
Week 4 Deliverables: Assignments to improve next month’s S&OP process and a forecast formatted to Finance’s needs.
Results of the S&OP Process Owning the Forecast
We still have a long way to go before our S&OP process and forecasts are world-class. However, we’ve already seen fantastic results from our collaboration. Our controller absolutely loves the level of detail in the forecast, which helps her finance the rest of the company in realistic ways. Our executive team can now see their corporate strategy rolled out in a week-by-week plan. Sales is able to focus on selling, but they’re now armed with detailed analytics of each customer’s performance. This helps them sell even more. Not least of all, Operations has been able to better support customer demand while also reducing inventory. Being on the same page with the rest of the company ensures that we order what we need, and avoid ordering what we don’t need. Additionally, Operations now has a forecast for our vendors. We are now working on reducing vendor lead times with the forecast as a tool. Shorter lead times will let us hold less safety stock inventory, which will help free up even more cash.
Perhaps the best result from our S&OP process is the structured collaboration between departments. The discipline and teamwork required to build a single, detailed forecast has helped us unite and become a stronger company. We all are tied into the decision making process so there is less blame when a problem occurs. Roles are more clearly defined so we are able to work on what is expected rather than guessing what we should be doing. Best of all, we’re reducing errors and inventory, which helps us continue our growth and success.
What have you do at your company to build your S&OP process? Please share your thoughts and advice in how we can improve.