Category Archives: Forecasts

Infor’s Top 10 Demand Planning Strategies

The bullwhip effect is as true today as it ever was in modern, elongated global supply chains where small errors at the front are magnified throughout the process.
Andrew Kinder, Director of Product Marketing, Infor

Forecasting is tough. Really tough. Especially in today’s market where consumers are fickle, credit is an unpredictable tide, and a single competitor innovation can completely change the market landscape. You have to forecast with foresight, balance judgmental and statistical methodologies, and focus on aggregate demands while continually sensing demand. And you have to be on your toes.

So how do you get it right? Although each situation has it’s own unique qualities, and any solution you acquire will have to have its model tweaked for your reality, there are some general steps that you can take that, if performed properly, will greatly increase your chances of success. These steps were captured quite nicely in a recent Infor top 10 checklist that was published last fall in an Industry Week article.

  1. Get the Process Right
    Demand planning is a sub-process within integrated business planning, not a stand-alone activity.
  2. Select the Right Level of Aggregation
    Do you aggregate demand by product family or geographic region? Why?
  3. Collaborate
    Statistics provides a foundation to build on, but the real value comes from over-laying expert knowledge that a system cannot know and cannot infer, such as a new marketing effort or an announcement by your competitor that was taken negatively by the market.
  4. Influence Demand
    Use coordinated marketing events and promotions to swing the forecast into favorable territory.
  5. Measure
    Select the right set of linked key performance indicators and measure against them regularly. This will tip you off to demand swings and allow you to tweak the forecast before it becomes a problem.
  6. Educate
    Before allowing someone to provide input into the forecast, it is critical that they understand how their contribution will impact the forecast and the performance against the demand plan. Otherwise, they may just guess and provide bad input that instantly ruins your best efforts.
  7. Cleanse
    Good, clean, data is an absolute.
  8. Manage By Exception
    Remember that 80% of your return can be achieved by actively managing only 20% of the forecast.
  9. The Error Term is Your Safety Stock
    A good statistical forecast will have an appropriate error which drives an appropriate safety stock target.
  10. Deploy a Proven Best-of-Breed Technology Solution
    According to Aberdeen, companies that excel in demand management are two-and-a-half times as likely to have implemented a best-in-class demand planning system.

All-in-all, it’s a great demand-planning checklist.

Dealing with Demand Volatility

Demand Planning is probably at the forefront of your thoughts these days. You don’t want too much inventory, because you can’t afford to tie up working capital, but you don’t want too little inventory either, because, with sales down, you can’t afford to lose even a single sale. You need to operate lean, mean, and ready for anything at a drop of the hat. You do this by harmonizing sales, marketing, and supply management into a cross-functional team that focuses on meeting demand in the most effective and efficient way possible.

This team should start by segmenting demand by volume and variability, as per a TBM Consulting Group Graphic found in an Industry Week article from earlier this year on “demand management”. This allows the company to optimize planning, control, and manufacturing around each product depending on whether it should be pulled, made-to-stock, made-to-order, or rationalized (where it may be replaced with a similar product or discontinued altogether). Furthermore, by analyzing and understanding the demand patterns of different product families, looking at average volumes and variations in demand, managers [may] determine that their own inventory management policies are responsible for creating the sharp spikes in production and shipments that historically caused inventory shortages and liquidations in the past.

It’s important to note that demand planning is not a game of chance, but a strategy, as highlighted in this recent Industry Week article by a principal of Tompkins Associates. Done right it eliminates, or greatly reduces:

  • out-of-stock situations
  • long, unknown, or unreliable lead times
  • inventories with discontinued and obsolete SKUs
  • overstock of slow-moving SKUs
  • non-optimal inventory deployment

But done wrong, each of these problems magnify. That’s why it’s important to have a demand management plan that not only addresses each of your products, but addresses how you will “respond to demand volatility”. The reality is that the plan can never be completely accurate given the certainty of daily changes that will occur inside the planning horizon. You need to be able to rapidly sense and respond to shifts in demand that deviate from your current plan, work with your colleagues and supply chain partners to understand true demand, identify plan updates and alternatives, and use decision support tools that will help you identify profitable responses to demand changes.

The best way to insure that you stay on top of demand volatility is to implement a multi-tier, multi-enterprise visibility solution that allows for near real-time demand data to be shared downstream, that can alert suppliers when demand unexpectedly rises and falls, and that can allow partners to collaborate on the best way to respond to unexpected demand spikes and drops. The system should be able to tap into the relevant CRM, ERP, SCM, POS, forecasting, and demand planning tools in place and not require manual re-entry of data and should consolidate the data for easy “what-if” analysis and reporting. As the article notes, good demand planning and response management can represent the largest opportunity for companies to increase customer service, enhance margins and attain more predictable revenue across the entire value chain, and allow supply management to simultaneously increase profit as it avoids unnecessary cost.

Inventory Management Softens Tough Times

With greater supply chain instability, driven mostly by the soaring price of oil, but exacerbated by the rush to outsource manufacturing, comes a growing need for leaner, meaner, inventory management, as pointed out in a recent Supply Chain Brain / Global Logistics & Supply Chain Strategies article that was taking another look at inventory planning and optimization.

The article points out that solid inventory management strategies are an important component of your overall risk mitigation plan, which hopefully you are working on considering a recent Aberdeen survey found that 99% of companies have experienced a supply chain disruption in the last year and that over half of suffered a financial loss because of it. To that end, the article highlighted a number of strategies that you should be exploring.

The first strategy it highlighted was the practice of inventory swaps between nominal competitors who help each other out in regions where supply suddenly becomes low or demand spikes unexpectedly. Most raw materials are used for multiple purposes in multiple industries, and it shouldn’t be too hard to identify companies that are not direct competitors that you can hammer out inventory swap agreements with.

The second strategy it recommends is my personal favorite, inventory optimization. However, it’s important to note that you need to do multi-echelon inventory optimization across your supply chain, as pointed out by this Supply Chain Digest article, because you need to see the big picture. Otherwise, you’ll overstock some locations, understock others, and lose out on real cost savings opportunities.

When you have multiple locations, you have to see the big picture and remember that you do not need as much safety inventory at a set of locations that are all in the same region as you might think you need. It’s often a better decision to risk having to ship inventory between warehouses than to risk an overstock that will result in obsolescence and a material loss in addition to the losses incurred by unnecessarily tying up too much working capital.

The third strategy, brought up in both articles, is better forecasting. The best inventory plan in the world is useless if the forecasts are way off. Be sure to pull in sales data regularly and revise your forecasts at least monthly to account for unexpected demand spikes, demand reductions, competitor new product introductions, seasonal demand shifts, and other unexpected variables that can require a forecast update to prevent unexpected losses from overstocks or understocks.

The fourth strategy is to consider network re-design. If you have too many warehouses, or too few, you could be losing money on the associated warehouse overhead or on extraneous transportation costs.

A fifth strategy, if you have excess inventory, is to donate it. As per this recent S&DC Exec article, “the benefits of donating excess inventory” are fourfold. It helps you reduce taxes (under section 170 (e)(3) of the U.S. Internal Revenue Code), it frees up warehouse space to store more inventory of products that are in higher demand, it avoids liquidation problems (that will appear down the road), and it can fulfill your company’s philanthropic goals while generating goodwill.

Just remember, inventory is cash. Too much, and you’re tying up too much of your precious working capital. Too little, and you’re losing the cash that results from sales. So get your inventory in order, and in addition to reducing your risk, you’ll probably save quite a bit of cash in the process. Like Home Depot, who estimates that better inventory management could save them 1.5 Billion a year. That’s a lot of bling.

Dimensions of Market Intelligence

Market Intelligence … is there any term commonly used in business more elusive than this? Generically defined by Wikipedia as the information relevant to a company’s markets, gathered and analyzed specifically for the purpose of accurate and confident decision-making in determining market opportunity, market penetration strategy, and market development metrics, it is often used as a catch-all phrase these days for conducting various types of market research, justifying various half-cocked go-to-market strategies, and ramrodding “best-practices” down the throats of an unsuspecting workforce.

Generating about 2.75M hits from a Google search, we see that it is supposed to lead to “insight”, “strategy”, “competitive domination”, “better business decisions”, and a “trip to Britain“. Some firms (predominantly dominated by stats wonks) seem to define it as metric-driven benchmarking while others (predominantly dominated by industrially-focussed behavioral psychologists) define it as customer-driven case-studies. Some benchmark using production data while others use sales data, some benchmark using forecast data while others follow the whim of the stock market. Which leads me to conclude that no one really has a good handle on what market intelligence is, yet alone how to go about it.

Thus, even though I defined it as the information you need to make the right buy from the right supplier at the right time, which I still maintain to be the best definition you’re going to find anywhere, and even though I gave you some great questions to ask when seeking out a firm to undertake market intelligence research on your behalf (in my X-emplification series), I think we need to step back and try to figure out what the informational components of market intelligence are, so that you will, upon completion of your project, be in position to make the right buy from the right supplier at the right time.

Although it’s hard to come up with a complete list, since the requirements seem to change by the day, the market, and the whim of the economists trying to steer the market (in utter futility, I may add), I really liked Robert Hanfield’s starting checklist, which, amaziningly enough, I found on the ISM Site. Robert Handfield is the Bank of America Distinguished University Professor of Supply Chain Management at NCSU and Director of the Supply Chain Resource Cooperative, which, if you undertake your own “market research”, you will discover to be one of the few academic-driven sites that actually has meaningful materials in its resource center from an industrial perspective.

Rob’s list is the following:

  • Forecasts and Price History
    You can’t negotiate a good deal without good insight into the size of the buy, the price history, and the relationship of the price to market conditions. For insight into good forecasting methodology, check out the posts in the Forecasting category.
  • Supply Base Market Share
    How much of the market does your supply base command. If they are power players, they are in a position to negotiate good prices on their raw materials and their costs may be less than market average. If they are minor players, their costs are probably higher and to get value from the buy you’ll likely have to focus on value-add.
  • Specific Supplier Analyses
    Focus on the suppliers you will be inviting to the bid and suppliers who dominate the market. What are they producing, where are their inputs coming from, where are they going (market-wise), and how are they doing financially?
  • Capacity
    Do they have excess capacity or are they almost at their capacity? Can they grow with you, or will you have to look elsewhere?
  • Buyers
    Who else is buying in your industry, and, more importantly, who’s buying outside of your industry? The appearance of a new market or player can often drain excess capacity rapidly, which could quickly shift the balance of power from the buyer to the supplier.
  • M&A Activity
    What’s happening, why, and will it affect your supply base?
  • Value Chain Analysis
    What are the key cost drivers in the lower tiers of the supply chain, and, just as important, what are the value adds that you can provide to increase the price you can ultimately charge?
  • Cost-Drivers and Should-Cost Driver Identification
    What’s driving your cost – and what should your cost be. Before you source a part, know if the starting point of the negotiation should be $5 or $1. For example, in a recent project for a large customer, Apriori determined that if a different fabrication process were used, the cost for a very simple part could be reduced 80%!
  • Emerging Technologies
    Are any new technologies on the horizon which could reshape the market and your potential place in it?
  • Porter’s Five Forces Analysis
    It’s important to understand the power balance, or inbalance, that exists between your company and its competitors, and this is what Porter’s Five Forces, done properly, will capture. (For my high-level analysis of what the forces were going to mean, in general, for Supply Chains in 2008, see this post.
  • Ultra-In-Depth Risk Analysis
    What could stop you dead in your tracks? If you don’t know, you haven’t even begun a thorough market intelligence research project. Identifying risks, and then the precautions you can take to prevent them, or at least minimize their impact, is a fundamental key to success.
  • Currency Projections
    What happens if the US Dollar sinks again? Or the Yen goes on the rise? Don’t know? Then you shouldn’t be negotiating that contract yet!
  • Government, Regulatory, & Socioeconomic forecasts
    Is the country you are thinking of doing business in run by a Hugh Chavez in training? If so, better think twice before investing hundreds of millions into setting up a new operation there (unless, of course, you like having your assets seized by the state).

Supply Chain Digest’s Eight Step Forecasting Process Using Demand Planning Software

Every now and again I like to address the forecasting process because, as a sourcing and procurement professional, you are often negotiating contracts against a perceived volume leverage based as much off of a forecast as it is based on historical data. In Part I we reviewed judgmental and statistical forecasts and explained why you need to balance both methodologies when generating your forecast, in Part II we addressed commodities forecasting and how you need to base it on the right data and the right factors, and in Part III I directed you to “Forecast Less and Get Better Results” on SupplyChain.com that demonstrated that the conventional wisdom that companies need to project forecasts and plans far into the future at a highly granular level is not necessarily right. Then, in Forecast with Foresight, I pointed you to a Supply & Demand Chain Executive article on a study about “re-thinking demand management” that noted that active/predictive demand management is necessary for good forecasting.

Part of active/predictive demand management is good demand planning. Good demand planning involves good demand planning software, so it was nice to see the Supply Chain Digest editorial staff print a short guide on how to attack the process, even if the first two steps didn’t fully address the problem.

The process, which was still quite good, that they presented was:

  1. Load Historical Data and Create Master Data
    Identify the key data elements that need to be considered and load them.
  2. Clean the Historical Data
    There are almost always problems with the quality and completeness of the data loaded into the system. E.g. “demand” may not be true demand, because it is taken from “sales” data, and will not include “stock-outs”.
  3. Generate a Statistical Forecast for Existing Products
    Use demand planning software with built in statistical models to find a “best fit” that will give you a starting forecast.
  4. Prepare Forecasts for New Product Introductions (NPI)
    Use the demand planning software to identify products with similar sales trajectories which will be used as the starting forecasts for the NPIs.
  5. Override Statistical Forecasts with Judgmental Input
    Use data from sales channels, knowledge about changes in market conditions, and expert insight to smooth the forecasts into the most realistic forecasts possible.
  6. Adjust the Baseline Forecasts for Promotions
    In certain industries, like consumer goods, promotions can have a huge impact on sales volume and need to be factored into the baseline forecasts.
  7. Manage Vendor Managed Inventory (VMI) and Collaborative Planning, Forecasting and Replenishment (CPFR) Processes
    Be sure to communicate data to both customers and internal managers responsible for these programs.
  8. Generate a “One Number” Forecast
    Integrate forecasting into a Sales and Operations Planning (S&OP) that brings together executives from key areas of the company to ultimately agree on a single forecast number and execution plan that will drive both the demand and supply sides of the enterprise.

The one change I’d make would be to replace the first two steps with the following:

  1. Do a Spend Analysis
    A spend analysis project, performed by a spend analysis expert that uses a real spend analysis tool, will load all of your relevant data, cleanse it, normalize it, and properly classify it in multiple spend cubes. The resulting cubes will allow you to perform the analyses necessary to identify which data is relevant, which data is statistically significant, and, more importantly, which products require significant forecasting efforts and which products are relatively stable year after year. Products with relatively stable sales do not need significant forecasting efforts, because expected demand can be easily determined from the spend analysis. On the other hand, products with variable sales, especially those products with a seasonal demand that are heavily influenced both by manufacturer promotions and competitor’s promotions for similar products, require detailed forecasting efforts.
  2. Load the Relevant Data
    Once you have identified those products that require forecasting efforts, you can load the associated data that is needed to run the statistical models, to determine the effects of planned promotions, and determine the appropriate demand forecasts.