Demand Planning and Forecasting

The most important thing that a leader of a business can do is to decide what to work on. Demand Planning and Forecasting is one of the most important tools we have to make those decisions.

This is sometimes referred to as an Operating Model, other times as Sales and Operations Planning (S&OP). But at its most basic, Demand Planning is a diagnostic tool to compare projected numbers vs actual numbers in order to realign forecasting.

S&OP is a process that helps a company align its various functions while balancing supply and demand.

As explained by

SmartSheet.com⁠

At its best, S&OP offers distinct benefits that old-school business plans can’t achieve:

Better data and collaboration between departments allow for frequent adjustments in the supply chain, which better balances supply and demand.

Companies can better optimize resources, which reduces waste and increases efficiency.

In turn, this newfound efficiency enables companies to maximize their profitability continuously.

Improved inventory and backlog management allows for more timely customer service.

As companies stagnate, S&OP can fuel a resurgence by finding ways to adjust to changing internal or external conditions.

Unbiased, more actionable data can lead to better Key Performance Indicators (KPIs) for each department, tying in directly with the company’s KPIs.

As data flows more seamlessly between departments, it is more timely and accurate - this allows the company to operate off one set of numbers rather than siloed, disputable data. You may hear people in the field refer to “one set of numbers to run the business.”

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How It Works

Let’s imagine an HVAC company. In the HVAC industry, an important indicator of demand is sales. In order for the forecast to be effective, it needs to be tied to reality. So in order to create an adequate forecast of sales, you must first look at opportunity.

This HVAC company we’re imagining decides that it wants to get more residential clients. The company would begin by looking at the Total Addressable Market (TAM) to determine how many opportunities exist. For example, how many homes are there within 50 miles of the company?

In the residential HVAC business there are a number of revenue streams:

Changeouts - Each house needs a new furnace/AC unit every 12 years, on average.

Service Contracts - Can be sold to 100% of houses.

Air Purification

Duct Cleaning

But first we need to turn our attention to the top of the sales funnel: The marketing department. That means investing in the online presence like Yelp or GMB. It likely also means investing in SEO and PPC. Fortunately, each of those have tools to estimate the market share as long as you're funnel is profitable enough to pay for them.

That means they need to figure out how many people are necessary to make phone calls.

Secondarily, they need to define the supply to meet that demand. This is an important factor in any services industry because you need to ensure that you have qualified and talented technicians to complete the jobs as they come in.

Based on market experience, it’s generally accepted that one HVAC tech can complete four jobs per day. Every HVAC installer needs an assistant. However, the hiring process for a new technician is around 60 days and the onboarding process takes a further 90 days.

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Using The Information

The trick here is taking this information and creating a tool that we can look at to create goals and measure success.

One of the first things that an Integrator will do when they arrive is look at how revenue comes in to the business.

In order to evaluate an opportunity, they will look at the sales funnel from a top-down perspective and calculate each conversion point in the business. They will begin with the following steps:

Identify the current revenue sources. List each of them as well as the average amount of revenue and gross profit for each successful sale.

Identify the marketing channels for each source, and each of the sales conversions within the funnel.

Example: First the click of an ad on Google after searching “Air Conditioning Repair” (100% of total). Then they phone us (15% of total). Then our CSR gets them to pay $89 for a dispatch fee (10% of total and $89 revenue). Then the tech goes to the house and looks at the problem. The repair is $350 on average which is 9% of the total take, and the changeout is $9000 on average, which is 1% of the total take.

Include the cost of traffic (the clicks to generate a sale), and the gross profit to see if this will be a profitable tactic at scale.

The integrator will use the information gleaned from this process to create a sales funnel. Each aspect of the funnel will become a row on a sheet that is tracked over time. Through tracking these aspects, the company is able to create goals and expectations.

These goals and expectations serve as the operating model. An effective operating model allows you to hold people accountable.

With that information, a person is put in charge of each number. The information is then used to create an effective Dashboard. For example, the changeout conversion might be an important KPI for the sales manager, the booking rate might be a KPI for the Customer Service Representative (CSR), and the traffic staying under a certain cost is a key metric for marketing.

An effective operating model not only allows you to create a roadmap for how you want to change a business, but allows you to measure the effectiveness of your methods. As mentioned, those numbers are tracked through the

Dashboard⁠

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