Why should your CEO care about Demand Plan Bias?

By: Greg Spira

There are many ways to measure the characteristics of a Demand Plan. Its accuracy can be calculated in aggregate, in detail and mix. Accuracy measures can be computed at a variety of different offsets, and at various levels of detail. Demand Plan accuracy can also be compared against the accuracy of a purely statistical forecast to understand how much value is being added through adjustments.

Some of these measures are important in making the appropriate trade-off decision between holding inventory, investing in manufacturing flexibility, and deciding how customers will be served. Most of those measures, however, are not directly relevant to the executives of an organization. Most executives couldn’t care less what MAPE, MAE, MAD, SMAPE, MSE, RMSE, and WMAPE are.

Executives shouldn’t be mired in the data and calculations of safety stock or the assessment of where statistical algorithms are best applied. The role of the executive team is to be looking out over the longer-term horizon, planning for the future. Executives set the strategies and plans for the organization, and then empower their teams to execute them.

There is one measure, however, that is relevant all the way up to the CEO: Demand Plan Bias.  Bias measures the trustworthiness of the Demand Plan. Bias tells us whether a reasonable person would rely on the Demand Plan, prima facie. When provided with a biased input, explicit or implicit, we will naturally “do the right thing” and compensate for it.

It is this point alone that makes Demand Plan Bias relevant to the executive team and the CEO. For an executive team to work together, participants must be able to share and trust each others functional plans. Trust is a feeling. Just as we can’t instruct someone to feel happy, we can’t instruct someone to trust. Trust must be earned. The Demand Plan must first be trustworthy for it to be trusted.

When the Demand Plan isn’t trusted, each function will take matters into their own hands and will create their own views (either forecasting independently, or by overriding the Demand Plan). Take, for example, an organization where the sales, marketing, finance, and demand planning functions create their own separate views of demand. Imagine business leaders trying to decide whether to approve a significant customer promotion. The leaders will not understand whether the promotion is incremental to, or already included in, any of the different forecasts. They will not understand which demand forecast the supply chain used to develop its production plan. It becomes very difficult to make the investment decision, let alone predict the outcome of the promotion.

Coordinating and synchronizing plans across functions enables coordinated responses to changes – both problems and opportunities. Doing so creates agility. When business leaders play their positions and trust their teammates to do what they say they are going to do in their plans, the effect is that responding to change becomes much simpler.  In some cases, effortless.

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