CONTINUOUS OPTIMIZATION OF DEMAND PLANNING IN

NWNA
Presented by Ron Levkovitz, Sid Reddy, Jon Santos
NWNA, Ogentech Ltd.
June 2012

Many demand planning solutions do not stand to their
original premise (improving accuracy)
The typical phenomenon

Good accuracy on well behaved items that are
already well predicted by planners
Low accuracy on promoted/badly
behaved/cannibalized/new items that are
complicated to forecast

Result

The introduction of statistical forecasting does not
improve forecast accuracy when compared to the
manual forecasting
The statistical forecasting fails to gain planners
trust planners revert to manual planning


Easy to
forecast
Impossible
to forecast
Easy to
forecast
Impossible
to forecast
Stats
Forecast
?
Nestl Waters North America
Overview and deployment strategy
$1,507
1976 80 82 87 89 92 93 99 00 01 02 03 04 05 06 07 08 09
$1 $50 $50 $440 $571 $613 $687 $1,673 $2,103 $2,409
Sales Revenue
$MM
$2,901 $3,388 $3,846 $2,632 $4,260
Nestl Waters North America has been
in the Bottled Water Business for Over 30 Years
$4,240
$4,080
Glacier
Pure
Cameron
Springs
Capco
Our Brand Portfolio Is a Competitive Advantage
Super Premium
Premium
Popular
Value
Regional Brands
Spring & Sparkling (Heritage, Local Values)
National Brand
Nestl Pure Life
(Family, Trust, Volume Generator)
NWNAs Supply Chain Is Best In Class
Against All Beverage Manufacturers
Production
31%
Shuttle
Transportation
1%
Warehousing
7%
Outbound
Transportation
23%
Repo WT
Returns
Deliveries
Packaging
Materials
35%
Water,
Flavors...
3%

Low Cost Manufacturing (BIC)
Environmental Leadership
Efficient Logistics
Flawless Customer Service
Fully Integrated with Sales




Dallas
Cabazon
Ontario
Hawkins
Red Boiling
Madison
Zephyrhills
Denver
Indianapolis
Allentown East & West
Mecosta
Hollis
Hope
Guelph
Livermore
Phoenix
Houston
Lorton
Chicago
Hilliard
Sacramento
Poland Spring
Kingfield
LA
28 Factories in US & Canada
19 Retail PET Factories
9 Direct Factories
100% Non-Union
NWNA Factory Structure
Pasadena
Customer Material Location Combination
Level # of Nodes # of STEADY
Nodes
Sales Organization 2 2
Business Segment 12 11
MG1 371 322
CL4 3,674 2,214
Material 6,019 3,192
Location 10,550 5,109
Planning Level
(MG1/CL4). Joint
marketing/supply chain
ODP meeting
Desired forecasting
level (material ->
location)
DPA Material Location 2009
Decision we expect the planner
to take when using SAP/APO


Relevant past length
Daily, Weekly or monthly
Algorithm strategy
Algorithm parameters
Type of outlier correction
Type of error
Hierarchy level




Things we expect the planner
to know
Judge statistical forecast
Judge marketing projections
Consolidate between supply
chain and marketing demands
and resolution (e.g. consolidate
nationwide clients and
locations)
Understand promotions
Cannibalization effects
Etc.





It is not reasonable to expect the planner to apply judgments
for all items at all levels
It is not reasonable to expect the planner to optimize the
baseline forecast via statistical means
NWNA original problem statement
Arrive at the Right Level for Statistical Forecasting
Figure out the most accurate way for Dis-aggregation
Select the Prudent Model (that suits our data) which might-
Suggest the best Level to use APO automatic algorithmic selection
Identify a potential for a Composite Forecast Algorithm.
Propose a better- fit Algorithm
Indicate a need for ABC categorization
We look to achieve a DPA (Product / Location / Week) increase without impacting
the current CDP Process. We need an empirical input for our direction forward.


Forecasting solutions approaches in demand
planning

Many demand planning solutions do not stand to their
original premise (improving accuracy)
The typical phenomenon

Good accuracy on well behaved items that are
already well predicted by planners
Low accuracy on promoted/badly
behaved/cannibalized/new items that are
complicated to forecast

Result

The introduction of statistical forecasting does not
improve forecast accuracy when compared to the
manual forecasting
The statistical forecasting fails to gain planners
trust planners revert to manual planning


Easy to
forecast
Impossible
to forecast
Easy to
forecast
Impossible
to forecast
Stats
Forecast
?

Forecasting solutions approaches in demand planning
Automatic systems - produce full forecast using a complete
model (including all relevant information).
Semi automatic systems produce mostly baselines. Human
interventions are required to complement the forecast with
promotions, cannibalizations, etc.
Toolbox system provide planners tools to produce statistical
forecasts if they wish to do so

The challenge
Moving from the old fashioned planner based forecasting to an
automated process where the planner intervenes only in places they
can provide real benefits.

How to improve results? The positive planning cycle summary

Define the needs and the proper objective functions to reflect
them
Produce fully automatic highest accuracy rich forecasts
define cleansing, event handling and forecasting strategies
Use segmentation tools to distinguish between excellent,
good and bad forecasts
Insure acceptance of the better forecasts, limit the influence
of bad forecasts
Avoid deterioration by making the inspection loop an integral
part of the operational process and by re-optimizing the
results
DP system (SAP APO) design and maintenance
Optimization involvement points -Planners
Intervention
points
Creation
Methodology
The optimization system: ForecastPlanner by Ogentech
Run Full Simulation and compute
optimal forecasting policy

Get Data

Forecast result
Reconciliation tools
Acceptance tools
BI and predictive analytics
Mode 1: Forecasting Service
Configuration and
Forecast Policies
DP optimization







Run simulation limited to
Hosting DP abilities
SAP-APO
JDA Manugistics
Oracle Demantra
.
.






Forecast Planner Generic Technology
Algorithmic pool forecasting core.
Time series analysis,
explanatory analysis, risk engines,
correlation analysis, clustering and
hierarchical analysis
Exception mgnt.
Reconciliation tools
Acceptance tools
Bi and predictive analytics
Exception mgnt.
Mode 2:
Mode 1:
Use all available attributes to create cross
hierarchies trees and combinations.
Model information
Desired periodicity & horizon
Levels of Interest and multiple time bases
KPIs
Available data
Attribute hierarchies (item catalog, locations,
sales outlets, )
Operations (events, lifecycles, promotions,
holidays, )
Collections/BOMs (cross-hierarchy groups)
Historical data (with all known attributes)
Trade partners data
Supporting data
POS data
Item attributes (master data)
Sales and marketing atributes
Time bucket attributes

Model creation analysis of the data exploit available data
Item attributes (master data)
Sales and marketing atributes
Time bucket attributes

Model creation judging forecasts
Bias: coverage of sales - required for inventory
and capacity management
Distance: lower the error for (?) periods using
some sort of error function
Structure: look right, behave the same way that
past data behave ( different from distance
because measured in the future and not on the
past.
Stability: should not change much from period
to period unless something really changes
(otherwise disturbers enrichments)
Find the best model for forecasting
Find the best model for cleansing
In NWNA should I forecast

Combines knowledge from different levels
of the hierarchy tree
Determines the best forecasting strategies,
past length and the associated algorithm
parameters for different futures
Adapts methods to the appropriate time
base and reconcile results (weekly,
monthly, quarterly)

Model creation: best model approach (and not best fit approach)
23


Mapping ForecastPlanner to SAP APO
Define attributes for selections (e.g. Forecast Strategy and
segmentation)
For each selection:
Define proper forecasting hierarchies
Define hierarchy disaggregation methods
Define time base disaggregation method
Define cleansing methods and cleansing scope (time base and
hierarchy)
Define forecasting profiles and master profiles
Algorithms
Algorithmic parameters
Outlier correction algorithms
Create separate process chain


24


Continuous result monitoring
Capture the entire process in the reporting
From statistical forecast to unconstrained final forecast
Add the forecasting hierarchy into the reports
Segmentation of products
Close inspection of performance and exceptions
Addition of results to the feedback loop
Success of approach
New forecasting method installed
during June 2010
New forecasting helped improve
forecast accuracy
Improvement in baseline forecast
accuracy 2010. Error drops from
average of
H1 2010: 45%
H2 2010: 35%




0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Baseline Error 2010
Baseline Error
Before After
Promotions have huge effect on summer sales
Baseline and actual sales
26

A large promotion of US43/0702/0WK(07 NPL Purif DC PET 20X0.5L) in the
summer of 2009
Forecast at Multiple Levels (MG1-CL4-M-L)
Overall very high stability of the results
27
Effect of a weak summer
0
20,000,000
40,000,000
60,000,000
80,000,000
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Turns rate
Avg. Inventory
Very good results from August 2010 till February 2011
Significant stock build up from March May
Build up to match the strong 2010 results due to a very hot
summer
Cold summer resulted in accumulation of inventory
From June onwards - performance is still better than 2009 and is
almost equal to 2010
Success of approach is also evident in Q4 2010
Reduction is uniform and not due to the hot 2010 summer
Q42009 Q42010
Average case cost $5 $5
Sales (weekly average) 10,252,875 11,307,089
Inventory (weekly average) 19,010,466 18,098,250
In Months 0.44 0.38
Yearly turns 27.18 31.49
Improvement 13.67%
Avg Inv using 2009 performance 20,965,146
Difference 2,866,896
Difference in $$$ $14,334,479

Yearly Cost of Inventory Holding (industry figure) 15%
COI Per Month 0.0125
Savings, dollar per months $179,181
Savings, annual $2,150,172
DPA Material Location 2009
DPA Material/Location 2010-11


Working with planners
The Challenge
1. Combine statistical forecasts and planners work
2. Make planners understand the automatic results
3. Help planners accept the statistical results and understand their
usefulness
4. Define clear separation between work to be done by the
system and work to be done by planners

33
Methodology
1. Create an optimized baseline for all levels
2. Use statistical proportional factors to define relations inside the
hierarchy trees
3. Isolate areas where statistical forecast is better
4. Use statistical forecast proportional factors to drive planning
decisions to distribution decisions
1. from planning level (Material group @ trade partner) to distribution
level (material @ location)
5. Measure success of statistical forecast and compare to final
forecast
6. Measure acceptance and confidence in statistics and share
with planners



34
Acceptance of statistics report
35
Depth 5 - Material
Horizon 1
Gap Percentile All
Manager Id Mario
Values
Baseline
err%
Consensus
Error % Classification Month Baseline Baseline Abs Diff Forecast Forecast Abs Diff Actual
Consensus 2011-12 4,975,989 2,102,211 5,257,459 1,185,745 5,503,908 38% 22%
2012-01 5,459,062 2,561,699 5,469,104 1,605,679 6,009,137 43% 27%
2012-02 5,259,690 2,188,371 5,596,351 1,564,030 5,994,157 37% 26%
2012-03 6,699,328 2,665,815 6,726,029 1,700,798 7,774,651 34% 22%
2012-04 6,576,861 2,660,083 7,042,688 1,550,274 7,575,720 35% 20%
Consensus Total 28,970,930 12,178,179 30,091,631 7,606,526 32,857,573 37% 23%
Other 2011-12 1,687,316 3,145,847 2,853,712 3,586,383 2,550,769 123% 141%
2012-01 2,067,467 4,632,853 3,585,201 2,959,051 4,182,610 111% 71%
2012-02 2,407,944 3,859,930 1,725,492 2,541,900 2,430,284 159% 105%
2012-03 2,296,818 4,325,411 3,461,703 4,328,084 3,514,351 123% 123%
2012-04 2,230,654 3,370,623 2,668,465 3,621,072 3,196,589 105% 113%
Other Total 10,690,199 19,334,664 14,294,573 17,036,490 15,874,603 122% 107%
Statistical 2011-12 6,497,845 1,858,156 7,103,055 2,761,754 6,880,187 27% 40%
2012-01 6,791,865 2,261,315 6,880,736 2,903,362 7,851,276 29% 37%
2012-02 5,749,458 1,541,138 6,245,709 2,103,615 6,611,012 23% 32%
2012-03 7,757,924 1,991,521 7,397,768 3,136,437 8,600,087 23% 36%
2012-04 7,281,780 2,295,005 8,323,506 2,424,529 8,911,947 26% 27%
Statistical Total 34,078,872 9,947,135 35,950,774 13,329,697 38,854,509 26% 34%
Grand Total 73,740,001 41,459,978 80,336,978 37,972,713 87,586,685 47% 43%
Planning manager
Consensus is better during last 6 months
Stats is better during last 6 months
Forecasting level
Both are bad
Growing levels of acceptance for stats
Impact of forecast improvement in client
Executive Summary
A new forecasting methodology and procedure was deployed by during summer 2010
The procedure improved forecast accuracy at location level by an estimated 15%
The rate of inventory turns grew and money tied up in inventory was reduced from an average of
21M to around 18M.
A nominal annual cost saving of $2-3 million was realized.
Successful forecasting was instrumental in quickly adjusting inventory levels to the colder
summer of 2011.
An upgrade, introduced in July 2011 (Ogentech 1.5), improves Canada accuracy results by
around 10%
Constant maintenance, monthly exceptions detection, and re-optimization of the paradigm
periodically insures maintaining these results.
The maintenance adapts the statistical tools to the changing dynamics of trade partners, trends
and weather effects this prevents the familiar phenomenon of deterioration in statistical
forecasting that eliminates the benefits after few months.
The correctness of statistics allows planners to concentrate on changes and react better to
market demands
The current service level by Ogentech is expected to continue to deliver cost savings of around
3-4M per year
Thank you