{"id":6765,"date":"2018-04-25T12:04:52","date_gmt":"2018-04-25T16:04:52","guid":{"rendered":"https:\/\/demand-planning.com\/?p=6765"},"modified":"2018-04-25T12:04:52","modified_gmt":"2018-04-25T16:04:52","slug":"second-opinion-forecasting-the-next-big-thing","status":"publish","type":"post","link":"https:\/\/demand-planning.com\/2018\/04\/25\/second-opinion-forecasting-the-next-big-thing\/","title":{"rendered":"Second Opinion Forecasting, The Next Big Thing?"},"content":{"rendered":"

Attention Demand Planners, wouldn\u2019t you AND your CFO both like to know how much profit your current forecast is leaving on his table? Turns out you can; all that\u2019s required is getting a second opinion of your current forecast just like you would if you had an important medical condition. Or, another way to think about it might be as an analytic consultation of your forecast.\u00a0<\/strong><\/p>\n

How Does The Second Opinion Forecast Work?<\/h2>\n

First, a bit of background is in order. As is well understood, the most important element in developing next year\u2019s plan is the forecast. This forecast is \u201ctranslated\u201d into next year\u2019s profit by subtracting the income statements\u2019 various costs from the forecast\u2019s revenue; specifically, cost of goods sold and sales & marketing, general and administrative costs. These costs come from the budget. Thus, the forecast in concert with the budget determines for the CFO next year\u2019s planned profit.<\/p>\n

The Second Opinion Forecast has no dependence on next year\u2019s budget.<\/p><\/blockquote>\n

The Second Opinion Forecast (SOF) is developed entirely differently; it has NO dependence on next year\u2019s budget. This fact should\u00a0 please your CFO given the current budget\u2019s widely recognized limitations, including short life-span, how time-consuming it is, and how rapidly its assumptions are outdated.<\/p>\n

Rather, SOF accomplishes this independence from the budget by building a model of the income statement, an Operational Income Statement (OIS).\u00a0 This model integrates two analytic techniques in widespread use today.\u00a0 The first is Supply Chain network design and the second is demand-sensing modeling<\/a> (often referred to as marketing-mix modeling).<\/p>\n

How To Create An SOF Model<\/strong><\/h2>\n

There are three steps involved in creating an SOF model:<\/p>\n

Step 1:<\/strong> Working closely with the CFO\u2019s management accountants within FP&A,<\/a> a model is built from last year\u2019s income statement (i.e. profit and loss) in Supply Chain network design software. This model, the baseline<\/a>, ensures the model has structural integrity, typically modeling last year\u2019s results to within 1-2%. However, this model differs from network design efforts because its planning horizon is only a year and it includes SG&A costs.<\/p>\n

Step 2:\u00a0<\/strong>This model is then updated with next year\u2019s planning data including:<\/p>\n