Approaches Toward Managing Demand Risk

1. Approaches Toward Managing Demand Risk Jay HopmanIT Research – Business Agility

2. Agenda • “Demand-side” supply network research? Research history Objectives in the solution space Potential solutions and research findings • Market assessment • Demand modeling and forecasting • Probabilistic forecasting • Coordinated strategy and tactics Approaches Toward Managing Demand Risk

3. Birds-eye View of Planning Demand Anticipated Market Supply Product Design Anticipated Technology Volume Forecast Floor Space Mix Forecast Development Capacity Pricing Production Inventory Sales Approaches Toward Managing Demand Risk

4. Sample Oscillation: Delayed Demand Inventory Surplus Reconfiguration Cost Inventory Surplus Production Capacity (New Product) Inventory Shortage Unexpected Market Response Unexpected Market Response Strategy Change Time Approaches Toward Managing Demand Risk

5. Framing Demand-side SN Research Interest Approaches Toward Managing Demand Risk

6. Research History • Five years of case studies and experiments in partnership with Intel teams in supply network, business planning, forecasting, marketing, and sales • Academic partners from Caltech, U. of Miami, MIT, and Stanford have provided research, analysis, and great ideas • Initial studies focused on product transitions; subsequent studies have tested and piloted new forecasting and planning methodologies • Research has been quantitative and qualitative • Tracking product releases and forecast evolutions via their data trails • Comprehending the policies and decisions that drive forecasting and planning through interviews and partnership Approaches Toward Managing Demand Risk

7. Demand-side Research Objectives • In the context of demand forecasting and supply network planning: • Increase accuracy throughout product lifecycles • Increase stability, providing signals with minimal noise and nervousness • Increase timeliness, providing rapid indications of real market dynamics • Convey uncertainty to guide strategic decisions, enable planners to test scenarios across ranges of potential outcomes, and enable more advanced planning in inventory, WIP, and materials management Approaches Toward Managing Demand Risk

8. Guiding Principles Forecasts should convey a contextual layer above the numbers • Each forecast handoff subjects data to loss of context and a new round of judgment • Processes that short-circuit layers of data aggregation and judgment help reduce bias and gaming while retaining context (strategy and uncertainty) Processes should be designed to identify and attenuate noise • “Over-nervous” planning reacts too strongly to short-term trends and aggressively closes gaps, sometimes leading to oscillation and amplification • Processes should balance real-time data with historical data and trends. Organizational processes should systematically manage uncertainty • Contingency planning, scenario planning, and range forecasting improve positioning and reaction speed • Market assessment and response (strategic and tactical) should be as systematic and repeatable as possible • Codify tribal knowledge and enable new types of analysis • Capture the past and present sufficiently well to help predict and manage the future • Sales targets and customer-generated data like bookings should be factored into forecasting processes, but not at the exclusion of historical data or realistic market assessment Approaches Toward Managing Demand Risk

9. Hierarchy of Forecasting and Planning Tactical Plans Operational Plans/Tactics Demand Forecast Strategic Plans Business Strategies Market Objectives Sources of Noise Market Assessment Foundational knowledge Current Data Historical Data Approaches Toward Managing Demand Risk

10. Product Transition Index • A model that combines knowledge from various functional teams to predict the speed and success of a product transition based on benchmarking new products against similar historical products • Should be recalculated for important changes during the product transition to guide primary and contingency strategies • Working version of our model includes 60+ factors in the categories of product capability, product/platform pricing, introduction timing, marketing indicators, environment, competition, value chain alignment, and internal execution • Scores on the following scale: Strong Inhibitor Neutral Strong Catalyst Approaches Toward Managing Demand Risk

11. Transition Playbook Transition Playbook Primary Transition Strategy Market Objectives Supply/Demand Dashboard Transition Risks Product Transition Index Contingency Transition Strategies • More important risks identified in the Product Transition Index process make up the core of the playbook • Contingency strategies are planned in advance and invoked when the dashboard reveals risks are impacting the transition Approaches Toward Managing Demand Risk

12. Internal Markets: Key Points • Background: • Markets are useful aggregation mechanisms when knowledge is distributed broadly among a pool of experts • Past research has demonstrated the strong capabilities of prediction markets compared to other forecasting and polling systems • Mechanism: • Participants are incentivized to predict accurately by offering anonymity and rewarding strong forecasting performance • Unlike survey or polling-based mechanisms, markets enable dynamic interaction among participants; each trader’s beliefs are tested against the beliefs of the whole body of traders • Outcomes: • Individual and group performance can easily be assessed over time • Markets convey uncertainty by producing probability curves • Ideally, biases we have seen impact forecasts in case studies are eliminated or at least partially checked by market mechanisms Approaches Toward Managing Demand Risk

13. Internal Markets: Research Findings • We have experimented with using markets in conjunction with traditional methods to help forecast sales or downstream sales • Good results: • Anecdotally, accuracy and stability have been good in early experiments • Participants have found the competitive aspect fun and compelling, perhaps more valuable than the financial incentives • Challenges: • Culture plays an important role in evaluating and developing a radical process • We have had cases of resistance to the ideas of anonymity and incentives • Some have expressed concerns about the validity of the mechanism or possibility of “groupthink” Sample Results Sales Time Approaches Toward Managing Demand Risk

14. How to Learn from the Market Performanceby function Performanceby geo • Forecasters are using market results to learn more about factors that drive our traditional forecasts • Forecasters are becoming more cognizant of serial forecasts communicating valid change versus noise – each forecast is not a standalone event FormalResults Tradingbehaviors Tradingstrategies and… Market andtrader evolution Approaches Toward Managing Demand Risk

15. Research Direction • Productivity is one common thread to this research. The critical question is, how should our product experts be spending their time? • Today’s forecasters and planners are mired in data and stay “busy” running the business day to day. • We are striving over the long term to enable experts to spend more time and more effective time on strategic planning and decision making. • Demand planning and forecasting systems will evolve to combine highly automated analysis of historical and real-time data with human-in-the-loop computing Approaches Toward Managing Demand Risk

16. Questions / Discussion Approaches Toward Managing Demand Risk