Comparing Market & Customer Views Makes
                    Forecasting Better

“I don’t like forecasting, particularly when the future is involved.” -- Yogi Berra

Yogi is right once again – no one likes to forecast. During these turbulent and unpredictable times, it’s not any more fun either! But forecast we must if we are to manage our companies well. The question is, “how to do it as best we can?”

One of the keys to doing it well is to see the future through two different lenses – the customer centric view and the market centric view.
 
•    Customer Centric View – this is expressed in SKU’s (end items), by customer, by location indicating what each customer will need for the next three months or so. In some cases it’s directly the customer’s schedule (make-to-order), and in others it’s a company’s forecast (make-to-stock) of what they think their customers will need -- or some combination of the two. This information is used for short-term input to the Master Scheduling practice.

•    Market Centric View – this is expressed by market-facing families, correlated to leading market indicators through regression analysis, and indicates market trends and patterns for the next eighteen to twenty-four months. It’s looks beyond the customers to the markets they serve, and thereby is not limited by the customers’ knowledge, biases, and shortcomings. This market information is used to forecast the company’s volume. To better understand this marketing view requires a clear understanding of the term “market-facing” families.

Market-facing Families
The best and easiest way to explain this is with a real world example. This example involves a chemical company making chemicals of many types. One family of chemicals is used to retard the progress of fire. The many individual products (SKU’s) within this family are of similar chemistry and run on the same reactor train.

Their customers serve various markets using individual products in different ways. This is summarized in Table 1.

                                                Family
Product/Production                    Customer                        Market
Fire-Retardant Chemicals            Toyota                       Automotive
                                              Penna House               Furniture
                                              Sony                          Electronic  
                                              Acme Lumber              Construction
       
Many companies make the mistake of asking sales & marketing to forecast the market based on the family definition used by the production side of the business – in this case, “fire-retardant chemicals.” This is not, however, the best way to forecast because trends and patterns don’t happen by production family, but rather by market family – automotive, furniture, etc. If forecasting is done by production family, there is very little way to tie the forecast to forward-looking indictors, making modeled history the primary indicator of the future -- dangerous in these turbulent and changing times – like driving a car by looking in the rear-view mirror – it works only if the road is straight. Using market-facing families, tied to forward-looking leading indicators is the best way to forecast aggregate volume.

Reconciling the Customer and Market Views
In the Executive S&OP process, Step #2 is called Demand Planning and is where volume forecasting is done. As the final activity of this step, reconciliation of the market-centric volume forecast to the customer-centric detailed forecast (and/or customer schedules) is done for the overlapping horizon. The way this works is by aggregating (adding up) the highly granular customer-centric view by market-facing families and then comparing the two for the overlapping horizon.

This reconciliation is often called the Demand Agreement Meeting (or the DAM meeting). It is not an easy meeting because it brings the potentially divergent sales (or customer view) and marketing views into conflict. The objective of this meeting is to arrive at one set of demand numbers by which to run the business. When the two views are indeed divergent, the conclusions can be among the following:

•    Change the marketing view to conform to the customer view, or vise versa.

•    Conclude that the customer is building or depleting inventory and will reverse the trend as some point in the future, adjusting planning to reflect that conclusion.

•    Some combination of the above.

Conclusion
The best view of the future comes from blending the market-centric view with the customer-centric view into one company set of demand numbers. This happens routinely as part of the Executive S&OP process, and has become best practice.

Good luck.
Bob Stahl