Forecast Accuracy Performance Management - Supply Chain Council

Forecast Accuracy Performance

Management

© 2010 Supply Chain Council. ALL RIGHTS RESERVED. | 15 October 2010

BENCHMARK SURVEY HIGHLIGHTS

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Forecast Accuracy Performance

Management Survey

Continued

•Data for the survey was collected using an online survey

targeted at both PRTM consultants and external companies

•51 responses to the survey were received

- Responding companies:

• Consumer product companies (29%)

• Chemical companies (20%)

• Remaining companies were a mix of electronic equipment,

telecommunication equipment, automotive, industrial and medical

device firms

- 73% of respondents indicate that their products are primarily Maketo-Stock

- Forecast accuracy performance levels were “normally” dispersed

• 31% were „Above Average‟ performance levels

• 42% of respondents indicated „Average‟ levels of forecast accuracy

performance

• 27% indicated „Below Average‟ performance levels

PRTM Forecast Accuracy Survey Results | © 2010 PRTM

© 2010 Supply Chain Council. ALL RIGHTS RESERVED. | 15 October 2010

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Forecast Accuracy Performance

Management Survey

Continued

•We also evaluated “Best Performers” – top 20 th percentile

of companies - by running a „grouped correlation‟ based on

combined

› Delivery performance to customer commit (promise) date

› Fill rate (fewest stock outs)

› EBIT (Earnings Before Interest and Taxes) % Revenue

› Finished Goods inventory performance

PRTM Forecast Accuracy Survey Results | © 2010 PRTM

© 2010 Supply Chain Council. ALL RIGHTS RESERVED. | 15 October 2010

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Fill rate (%)

Fill rate (%)

Fill Rate (%)

Forecast Accuracy Matters… Fill Rate

•Higher forecast accuracy clearly correlate with higher fill rates

Fill rate vs Forecast accuracy

100

90

OFR = 0.9026FA + 4.1173

80

70

60

50

40

30

20

10

0

0 10 20 30 40 50 60 70 80 90 100

N = 21

Forecast accuracy

Correl: 0.68 P value: 0.007

Forecast accuracy vs. Fill rate using a cross industry population of 67 companies, showed similar trends and correlation = 0.4

..while production flexibility and overall inventory do not show the same relationship to fill rate

Order Fill rate vs Upside Production Flexibility

Order Fill rate vs Finished Goods Inventory Days of

Supply

100

90

80

100

70

80

60

50

60

40

30

40

20

20

10

0

0

0 50 100 150 200 250

0 20 40 60 80 100 120 140 160 180

N = 25

N = 62

Correl: -0.09 P value: 0.67

Upside Production flexibility (Days)

Correl: -0.09 P value: 0.51

Finished Goods Inventory Days of Supply

© 2010 Supply Chain Council. ALL RIGHTS RESERVED. | 15 October 2010

Cross industry population N = 104, Correl: -0.08

Cross industry population N = 160, Correl: -0.006

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Delivery Performance to Request

(%)

Delivery Performance to Commit (%)

Forecast accuracy matters… Delivery

Performance

•Forecast accuracy is also directly correlated with delivery performance….

Forecast accuracy vs Delivery Performance to Request

Forecast accuracy vs Delivery Performance to Commit

100

90

80

70

60

50

40

30

20

10

N = 67

Correl: 0.36

DPR = 0.3935FA + 48.241

0

0 P value: 10 0.0027 20 30 40 50 60 70 80 90 100

Forecast accuracy

DPC = 0.4725FA + 46.526

Cross industry population N = 203, Correl: 0.26 Cross industry population N = 218, Correl: 0.2

…And to profitability, but…

100

90

80

70

60

50

40

30

20

10

0

0 10 P value: 0.0001 20 30 40 50 60 70 80 90 100

N = 65

Forecast accuracy

Correl: 0.46

PRTM Forecast Accuracy Survey Results | © 2010 PRTM

© 2010 Supply Chain Council. ALL RIGHTS RESERVED. | 15 October 2010

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Correlation Analysis Suggests Significant Opportunity

•Forecast accuracy is an important element of supply chain

performance

› Overall “Best Performers” have over 20% higher forecast accuracy than

average

› Companies with higher forecast accuracy also achieve better fill rates and

delivery performance

- Order Fill Rate (OFR) increased 4.5% for each 5% increase in forecast accuracy

- Delivery performance to request date (DPR) increased 2% for each 5% increase

in forecast accuracy

- Delivery performance to commit date (DPC) increased 2.5% for each 5%

increase in forecast accuracy

•However the analysis also shows that supply chain performance is not

improved by higher forecast accuracy alone

› The linear correlation between Forecast Accuracy and many supply chain

and business KPIs is not that strong

•Correlation analysis will NOT tell us HOW greater forecast accuracy is

achieved

PRTM Forecast Accuracy Survey Results | © 2010 PRTM

© 2010 Supply Chain Council. ALL RIGHTS RESERVED. | 15 October 2010

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Above Average Performing Company’s Forecasting

Practices

Category

Organizational

Structure

Statistical Tools

Forecast

Assumptions

Forecast Bias

Multi-version

Accuracy Tracking

Best Practice

„Above average‟ performers tend to rely on a balanced combination

of Sales and specialized forecasting groups for forecast generation

„Above average‟ performers align responsibility and accountability for

forecasts by tying forecast accuracy to job performance objectives

and evaluation (including variable compensation in many cases)

„Above average‟ performers were more likely to create statistically

generated forecasts, which are modified by only 10–25% for most

units forecasted

„Above average‟ performers were more likely to document forecast

assumptions and measure accuracy of these assumptions

„Above average‟ performers were more likely to develop an unbiased

unit level forecast that reflects a true independent view of demand

and is not biased towards a management expectation or target

„Above average‟ performers were more likely to measure forecast

accuracy against each successive version of the forecast

PRTM Forecast Accuracy Survey Results | © 2010 PRTM

© 2010 Supply Chain Council. ALL RIGHTS RESERVED. | 15 October 2010

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Today’s Agenda

8:45 AM -

9:45 AM

The Role of

Procurement in the

Energy Sector, One

Perspective

Stephen Hester, Vice

President and Chief

Procurement Officer

Smith International, Inc.

9:45 AM -

10:30 AM

Outcome-Driven

Supply Chains

Dr. Steven A. Melnyk,

Professor, Supply Chain

Management, Eli Broad

Graduate School of

Management

Michigan State University

10:30 AM –

11:00 AM

Networking Break

11:00 AM -

12:00 PM

Analyst Panel

Status on Emerging

Markets – How Are We

Doing?

Paul Lord, Research Director

Supply Chain, Process

Industries

Nari Viswanathan, Vice

President of Research

AMR Research/Gartner

Aberdeen Group

PRTM Forecast Accuracy Survey Results | © 2010 PRTM

© 2010 Supply Chain Council. ALL RIGHTS RESERVED. | 15 October 2010

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Today’s First Speaker

• Stephen Hester, VP and Chief Procurement Officer

• Smith International, Inc.

• Stephen joined Smith in 2010 to startup and lead the company's enterprise-wide

strategic sourcing group, SmartSource

• As the company's top sourcing and procurement executive, he is responsible for

managing all raw material and indirect material spend globally

• His Houston-based team drives sourcing strategies, material standardization,

and supplier management for the company globally. In addition, the team works

upstream with product management and engineering to develop cost-optimized

new products that strengthen Smith's reputation for innovation and quality

• Prior to Smith, Stephen held various leadership positions with ConocoPhillips

Drilling & Completions and as a Senior Manager with Accenture Energy Strategy

Group

• The role of procurement in the energy sector, one

perspective

PRTM Forecast Accuracy Survey Results | © 2010 PRTM

© 2010 Supply Chain Council. ALL RIGHTS RESERVED. | 15 October 2010