Forecasting is the process of statistical forecasting whereas Demand Planning is the process of overriding the statistical forecasts and reviewing results. This article covers the forecasting process in Advanced Demand Planning.
The Forecasting Hierarchy
Every product based company has the same basic selling structure. It sells many items that are sold to many customers typically out of many locations. For some companies, it is quite OK to forecast an item based on its total sales. However, if you are a company that sells to retail, manages promotions, or is one to two tiers away from an OEM customer, you should consider forecasting by the context of your key customer, channel, product category, location, or other demand definition in order to improve the accuracy of your forecasts. Without context, going to sales and asking how a specific item or product family is going to sell guarantees a non committal response.
The planning hierarchy helps establish the context to which item forecasts are generated and managed. It is made up of two (3 if DRP is enabled) independent yet related components which for simplicity sake we will call the Product, Customer, and Location (PCL). This is the who, the what, and the where of sales. The table that ties these elements together is the sales register in your ERP - the record of who bought what when, how much, and from where.
Without a proper hierarchy, the ability to roll up data to any hierarchical level becomes more complex. Once the hierarchy is built, it is significantly easier to pivot, present, and edit data. With the ability to add hierarchical levels allows for an infinite number of pivot combinations.
In DemandCaster, the Customer Hierarchy typically defines the who. This is who the items are sold to and is commonly composed of elements such as the end customer, ship from location, market, channel, region, or other top down one to many definition. The key comes to sales marketing and in turn how you sell and promote. This is something that the front end of your company understands and responds to.
For companies that sell to thousands of one off customers such as those in brick and mortar retail or internet retail, the definition of customer is singular i.e. there is one customer and it is their direct internet and retail channel..
Ask sales or marketing how they define and plan their customers. This will help define the customer for demand planning
When building the forecast hierarchy, consider what grouping will provide the clearest picture of market behavior and will be able to be easily reviewed by persons that have accountability. For simplicity sake, we recommend a minimum of two forecasting levels and a maximum of four.
The top aggregate level sets the context to which forecasts will be calculated, and the bottom level where the forecast will be statistically calculated when middle-out approach is applied. The objective is to set the levels where the grouping is significant enough to generate a meaningful statistical forecast at an aggregate level i.e. defines seasonality and trend.
To view the hierarchy, click on the hierarchy button. In the example below, the context is item by customer.
The term customer is used to describe who creates demand. This could be a channel, discrete customers, or group of customers. The term location is typically used to describe a ship from location but it could also be a geography market location.
Once the forecast hierarchy is created, we recommend not changing it to ensure there is consistency from plan to plan.