Relax; It’s Just a Plan (2)

In my years as Research Director at SCC it was pointed out many times to me that we (accidentally?) omitted “one of the most important metrics in supply chain: Forecast Accuracy”. Many people believe this “It’s all about forecast accuracy” to be true. In practice it is not however.

I agree that garbage-in, garbage-out does apply to S&OP just like every other process. Therefore some level of accuracy is required for S&OP to be effective. Forecast accuracy is an enabler to a reliable S&OP process, just like reliable suppliers are. The key question is: what is the right level to measure forecast accuracy? Is overall revenue the right level? Unlikely, most industries I looked at have constraints between supply chains and/or products that would prevent effective and reliable use of resources if overall revenue was the only level at which accuracy is achieved. Item number by ship-to customer? Also unlikely, this is where the law of diminishing value definitely applies for most companies.

” Forecast Accuracy is not the ultimate goal, it’s an enabler “

Somewhere between these two is the correct level. What is more important, however, is whether or not you achieved your cost, asset, reliability and responsiveness targets. This requires something more than forecast accuracy – the S&OP plan review.

The S&OP plan review is a process where the S&OP plan is compared to the actual figures for the past period. Compare all actual figures to the planned ones: Total Cost to Serve, Order Fulfillment Cycle-time, Perfect Order Fulfillment, Cash-to-Cash Cycle-time. For those products/orders where you under-performed (or over-performed) identify why this happened and find a way to improve your S&OP plan next time. The outcome maybe a demand forecasting process correction or a supply related correction. Business outcomes drive the importance of accuracy rather than a single metric.

Just to drive the point home one last time.. Forecast accuracy -often measured using MAPE- can be less than 100%, yet you may still have met all your supply chain or company targets. The flexibility of your supply chains would enable this. Improving the forecast accuracy in this case will not result in an improvement to the bottom-line – it will add the cost of the effort to ‘improve’ it. The S&OP plan review acts as a self-balancing (optimizing) process to improve the S&OP process and thus supply chain performance.