Use of Statistical

Forecasting Methods to
Support the Demand
Planning Processes at
Nestl


Predictive Analytics Konferenz, Wien
September 2012
marcel.baumgartner@nestle.com
Agenda
Nestl
Supply Chain Management
Planning and Forecasting
Applying Statistical Forecasting
Experiences with SAS
Demand Analysts and Competence
Centers
2 June 2012
Nestl at a Glance
3
CHF 83.6 billion in sales in 2011
328,000 employees
461 factories
10,000 brands
1 billion Nestl products sold every day
4
Nestl vs. our Competitors
Top Food & Beverage Companies in 2011
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The Nestl Story
Nestl requires a flexible
organisation to fulfill
business needs effectively
Zone Asia, Oceania, Africa
Zone Americas
Zone Europe
Geography
Zones, Regions
Products
Strategic Business Units
Supply Chain & Procurement
Finance
Market ing & Sales
Technical
R&D
Human Resources
Functions
Etc
Supply Chain Management
7
Customers
Suppliers
(Raw and
Packaging
Materials)
Nestl
Supply Chain
Marketing
Finance
Sales
Manu-
facturing
Physical Objects
Information
June 2012
The Supply Chain Solves Trade-Offs
Two main Key Performance Indicators:

Customer Service Level (% of orders completely delivered)
Holding Inventory

To improve Customer Service, you can hold more inventory.
But inventory costs money: cash is blocked, physical storage, risk of
ageing products.

The overall goal of Supply Chain Management is to improve Customer
Service whilst optimizing the costs, by solving this trade-off.
8 June 2012
The engine of Supply Chain: Planning
Forecast:
A description of where we think we are
heading, based on current assumptions. The
reason to forecast is to make informed
decisons.

Plan:
A set of related future actions designed to
reach an objective.

Planning:
The process of defining a set of future
actions with the aim of achieving an
objective.



9 June 2012
The Need for Forecasting
At Nestl, most of our production is driven by "Make to
Stock", and not "Make to Order".

We often have to produce large batches, both for cost (larger
batches = smaller costs per unit) and sometimes quality
reasons.

Therefore, we need to forecast the future orders of our clients
to have the right volumes of the right product, at the right
location, at the right moment in time.
June 2012 10
Balance Demand and Supply
Sales and Operations Planning (S&OP)

Align demand with supply and financial
plans (budgets, targets, )
Integrate operational plans with strategic
plans
Align product mix with total volume
Ability to act pro-actively


At Nestl, this is a combination of Demand &
Supply Planning and Monthly Business
Planning at Nestl.
June 2012 11
Available through
www.ibf.org
Forecasting: Judgmental vs. Statistical
There are basically two ways to make forecasts about future
volumes of our products:
Judgmentally (manually, subjectively, )
Statistically
Research shows that statistical forecasts, based on adequate
historical data, can perform better. Particularly for low volatile
products.
Judgment will always be necessary, but it needs to be used
wisely. See this research from Robert Fildes et al.
June 2012 12
Six Truths about Forecasting
1. The future is never exactly like the past.
2. "Complex" statistical models fit past data well but don't
necessarily predict the future.
3. "Simple" models don't necessarily fit past data well but
predict the future better than complex models.
4. Both statistical models and people have been unable to
capture the full extent of future uncertainty and been
surprised by large forecasting errors and events they
did not consider.
5. Expert judgment is typically inferior to simple statistical
models.
6. Averaging (whether of models or expert opinions)
usually improves forecasting accuracy.

June 2012 13
Volatility is driving Forecasting Performance
June 2012 14
F
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Volatility of Demand
SAS told us this: the COMET plot !
June 2012 15
Mike Gilliland
The Animal Farm: Driving Behavior !
June 2012 16
Originally published by Whirlpool in a SAP conference in 2009.
Forecast Value Added (Mike Gilliland)
We have very good methodology to measure the
forecast performance.

FVA = The change in a forecasting performance metric
that can be attributed to a particular step or participant
in the forecast process.

June 2012 17
Demand
History
Nave
Forecast
Statistical
Forecast
Demand
Planner
Generic FVA Report
June 2012 18
Process
Step
Error
FVA vs.
Nave
FVA vs.
Statistical
Forecast
Nave
Forecast
25%
Statistical
Forecast
20% 5%
Demand
Planner
30% -5% -10%
Applying Statistical Forecasting @ Nestl
Started early 2000, we are at stage 4
June 2012 19
Explain Demand
Planners how
the methods
available in SAP
APO DP work
Give Demand
Planners clear
guidelines to
apply, without
explanations
Provide fully
automatic
method
available in R,
based on the
'forecast' library of
Prof. Rob J.
Hyndman
Create a new
role of a
Demand
Analyst, fully
dedicated to
statistical
forecasting
The Expert in Exponential Smoothing
June 2012 20
In R, check out the
package 'fpp' and
the function ets().

Simply brilliant !
otexts.com/fpp/
www.exponentialsmoothing.net
SAS Forecast Server and Forecast Studio
June 2012 21
SAS Forecast Server Highlights
Highly Scalable
Highly Automatic
Hierarchial and Temporal Reconciliation
Event Handling Included
Contains Causal Time Series Forecasting Methods

June 2012 22
A Strong Feature: Choosing the Appropriate
Reconciliation Strategy
June 2012 23
Bottom-up
Top-down
Results from One of Our Markets
Context:
We ran the HPF (High-Performance Forecasting)
procedures of SAS Forecast Server on their defaults.
We used original order history, no cleaning, 3 years of
monthly data.
These are back-tested results, covering a period of 10
months.
We measure performance for 3 months lag forecast.
These results therefore show what can be achieved
with very little effort, and they have a clear potential
for improvements.
June 2012 24
Results from One of Our Markets
June 2012 25
DPA
Demand Plan Accuracy

MFR
The performance of the
existing planning
process, mostly
judgmental

SAS
The performance of the
SAS engine with very
little changes to the
defaults.
and only for "Long History" Products
June 2012 26
Another Market:
Weekly Forecasts
June 2012 27
70,6%
69,9%
69,6%
69,1%
71,2%
70,7%
70,5%
69,6%
68,0%
68,5%
69,0%
69,5%
70,0%
70,5%
71,0%
71,5%
W-1 W-2 W-3 W-4
Nestl
SAS Forecast Server
Back-test period is 11 weeks
Minimum adjustments to SAS
procedures
The Nestl forecasts are
statistical, but using multiple
regression and not time series
methods
SAS Forecast Studio Ease of Use
Pros Cons
Intuitive navigation
New models more complicated
(training)
Point/click between series, tables,
etc.
No way to truncate history in tool
Reasonable initial forecasts
Events difficult to create and
maintain
All-in-one: connect disjointed
processes
Handling Promotions: Need for Causal
Methods
June 2012 28
Step 1: Forecast Scan Data using causal
time series methods (e.g. Unobserved
Components UCM in SAS Forecast
Server) and explanatory variables like the
retail price
Step 2: Translate these forecasts into ex-
factory orders, using ad-hoc phasing rules.
Demand Analysts support Demand Planners
June 2012 29
Demand Analyst
provides statistical
forecast services
and FVA insight,
using best-of-breed
software
Demand Planner
owns plans, focus is on
Mad Bulls and
integration with the
Business
Customer
Historical Data
Sales and Marketing
Finance
Works in Analytical
Competence Center
Fully integrated in the
Nestl Business
The Competition for Data Scientists has
Started !
June 2012 30
Statistical Modeling /
Forecasting (what
statistics can and
cannot achieve), no real
need for Ph.Ds
Business Understanding
Data Management and
Programming

Statistics
Forecasting
Business
Understanding
Data
Management
Thank You !
June 2012 31