Sales and Operations Planning Part One: Identifying and Forecasting Demand

A firm's sales and operations planning (S&OP) process starts with the definition of all demands for the firm's goods and services. It formulates game plans that drive supply chain activities to meet those demands. Hence, an effective S&OP game plan requires consideration of both demands and supplies. The nature of each product's game plan depends on the environment. The game plan may focus on stocked end-items in distribution and make-to-stock manufacturing environments. The game plan for a make-to-order manufactured product depends on the level of stocked components and the need for direct linkage between production orders and sales orders. The game plan for a multisite environment may require consideration of inventory replenishment across a distribution network. Variations in production capabilities such as lean manufacturing also affect the game plan. The saleable products for many firms represent a mixture of environments.

Independent demands provide the logical starting point for formulating an S&OP game plan. The logic underlying planning calculations and demand-pull philosophies is built on chasing demands. Independent demands consist of sales orders or forecasts or a combination of both.

Since the nature of an item's S&OP game plan depends on the environment, several common scenarios are used to illustrate considerations about demand and how to formulate a game plan. The scenarios included here represent single-site environments involved in distribution and manufacturing; Chapter 10 provides additional scenarios involving multisite operations.

This is Part One of a three-part article reprinted from Managing Your Supply Chain Using Microsoft Navision by Dr. Scott Hamilton.

The book provides a simple yet comprehensive explanation of how to use Microsoft Navision in small-to-midsize firms involved in manufacturing and distribution. Describing usage in a wide variety of environments and illustrated with more than fifty case studies, it covers how the entire system fits together to coordinate supply chain activities within the company and with business partners. It explains the integration with e-commerce capabilities and with relationship management, service management, business analytics, and accounting applications. Written for those individuals that are considering or currently using Microsoft Navision, it enables readers to focus on distribution or manufacturing environments (or both) and on single-site or multisite operations.

For those involved in system selection, the book provides a vision of an integrated system and helps evaluate system fit and needed customizations. For those involved in system implementation, it can help accelerate and broaden the learning process, suggest changes to improve system usage, reduce resistance to change, and reduce implementation costs and time.

This excerpt on "Sales and Operations Planning," one chapter in the book, is presented in three parts. The book can be ordered on amazon.com or books.mcgraw-hill.com.

Identifying Demands

Sales orders identify actual demands. Actual demands may drive all supply chain activities when the visibility of future sales orders exceeds the cumulative lead-time to obtain and ship a product. However, actual demands must be anticipated when selling a product from inventory. One approach to stocking products in advance of sales orders involves a sales forecast, and the combination of sales forecast and sales orders defines demand for the saleable item. A second approach involves an order-point replenishment method, where the reorder point represents forecasted demand over the item's lead-time.

A make-to-order manufactured item may be built from stocked components. One approach to stocking components in advance of sales orders involves a component forecast, and the combination of component forecast and dependent demand defines demand for the component. A second approach involves an order-point replenishment method.


Sales Order Demand

A sales order line defines an actual demand for an item, expressed as a quantity, date, and ship-from location. A blanket sales order line also defines an actual demand for an item and location. Sales orders linked to the blanket order line consume the blanket order quantity. In this sense, a blanket sales order represents a forecast by a customer.


Sales Forecast Demand

A sales forecast defines an estimated demand for a stocked item, expressed as a quantity, date, and ship-from location. Each sales forecast represents the desired inventory level on the specified date. Planning logic considers the combination of sales orders and forecasts in calculating requirements. Sales orders consume the sales forecast to avoid doubled-up requirements. This is termed forecast consumption logic. Forecast consumption logic reflects an implied forecast period defined by the sales forecast dates. An item's sales forecasts are defined on the first of each month; for example, a sales order consumes forecast within a given month based on the ship date. Unconsumed forecast rolls forward throughout the implied forecast period of a month, and gets ignored when the system work date matches or exceeds the next forecast date. The same logic applies to other implied forecast periods, such as sales forecasts entered with weekly or intermittent dates.

Multiple sets of sales forecast data can be defined, where each set is uniquely identified by a user-defined name. Each set may contain sales forecast data and component forecast data (described below) by location, so that each set is termed a production forecast. Planning calculations only use the set of forecast data identified on the manufacturing setup screen. Multiple sets of forecast data often reflect various scenarios for simulation purposes, or forecast revisions based on changing market conditions. A set of forecast data can be copied to a new set and subsequently revised. This approach supports comparison of actual demand to a selected set of forecasted demand.

source:http://www.technologyevaluation.com/research/articles/sales-and-operations-planning-part-one-identifying-and-forecasting-demand-17131/