Does Your Demand Planning Process Include a “Quantitative Sanity Range Evaluation”?

There is a process that should be part of both your demand planning and your sales and operations planning.  The concept is simple – how do you find the critical few forecasts that require attention, so that planner brainpower is expended on making a difference and not hunting for a place to make a difference?  I have heard this process called a “Forecast Reality Check” and a “Forecast Reasonability Check”.  Just to be difficult, I’ll call it a Quantitative Sanity Range Evaluation (I have my own reasons.)  It may be similar in some ways to analyzing “forecastability” or a “demand curve analysis”, but different in at least one important aspect – the “sanity range” is calculated through bootstrapping (technically, you would be bootstrapping a confidence interval, but please allow me the liberty of a less technical name – “sanity range”).  A QSRE can be applied across industries, but it’s particularly relevant in consumer products, where I have seen a version of this implemented first hand by Allan Gray, a really smart gentleman – back when I worked with him for End-to-End Analytics – just so you know I didn’t think this all up on my own!

At a minimum, QSRE must consider the following components:

  1. Every level and combination of the product and geographical hierarchies
  2. A quality quantitative forecast
  3. A sanity range out through time
  4. Metrics for measuring how well a point forecast fits within the sanity range
  5. Tabular and graphical displays that are interactive, intuitive, always available, and current.

If you are going to attempt to establish a QSRE, then I would suggest five best practices:

1.  Eliminate duplication.  When designing a QSRE process (and supporting tools), it is instructive to consider the principles of Occam’s razor as a guide:

– The principle of plurality – Plurality should not be used without necessity

– The principle of parsimony – It is pointless to do with more what can be done with less

These two principles of Occam’s razor are useful because the goal is simply to flag unreasonable forecasts that do not pass a QSRE, so that planners can focus their energy on asking critical questions only about those cases.

2. Minimize human time and effort by maximizing the power of cloud computing.  Leverage the fast, ubiquitous computing power of the cloud to deliver results that are self-explanatory and always available everywhere, providing an immediately understood context that identifies invalid forecasts. 

3. Eliminate inconsistent judgments By following #1 and #2 above, you avoid inconsistent judgments that vary from planner to planner, from product family to product family, or from region to region.

4. Reflect reality.  Calculations of upper and lower bounds of the sanity range should reflect the fact that uncertainty grows with each extension of a forecast into a future time period.  For example, the upper and lower limits of the sanity range for one period into the future should usually be narrower than the limits for two or three periods into the future.  These, in turn, should be narrower than the limits calculated for more distant future periods.  Respecting reality also means capturing seasonality and cyclical demand in addition to month-to-month variations.  A crucial aspect of respecting reality involves calculating the sanity range for future demand from what actually happened in the past so that you do not force assumptions of normality onto the sanity range (this is why bootstrapping is essential).  Among other things, this will allow you to predict the likelihood of over- and under-shipment.

5. Illustrate business performance, not just forecasting performance with sanity ranges.  The range should be applied, not only from time-period to time period, but also cumulatively across periods such as months or quarters in the fiscal year.

If you are engaged in demand planning or sales and operations planning, I welcome to know your thoughts on performing a QSRE.

Thanks again for stopping by Supply Chain Action.  As we leave the work week and recharge for the next, I leave you with the words of John Ruskin:

“When skill and love work together, expect a masterpiece.”

Have a wonderful weekend!

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About Arnold Mark Wells
Industry, software, and consulting background. I help companies do the things about which I write. If you think it might make sense to explore one of these topics for your organization, I would be delighted to hear from you. I am currently employed by AVATA, but I am solely responsible for the content in Supply Chain Action.

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