By Trevor Miles
Velocity-based competition, shortened product lifecycles, more mass customization, increased demand variability, globalization and leaner supply chains have all altered demand management requirements in fundamental ways over recent years. And if you thought that was a tough environment, add the current economic crisis to the mix and you get a sobering picture of the challenges that demand management groups are facing on a daily basis as they try to ensure the right products are in the right place at the right time.
Traditionally, most companies have relied on historical data to predict demand. However, for a forecast to be truly accurate, the market and industry cycles must remain relatively consistent. That is not a realistic assumption anymore. Even before the current recession, companies struggled with demand volatility because of increasing competition, decreasing customer loyalty and constant new product introductions, among other reasons. But in today's grave economic climate, with major demand swings and declining spending overall, predicting demand based on historical data is now virtually impossible.
It is quite clear that historical demand is, at best, just one possible indicator of future demand. Therefore, statistical forecasts that extrapolate from historical trends should be seen as just one input to the demand planning process, not the entire process itself.
With demand so variable, companies have been forced to rethink their approach to demand planning and management and are now looking at how to:
- Get closer to real demand (understand point-of-sale, or POS, data) and ensure they have the full demand and supply picture.
- Do more frequent evaluations of forecast versus actual to determine variances.
- Develop a "bridging" process among internal and external partners to foster more collaborative planning and response.
- Ensure alignment of daily actions (inside the planning cycle) to corporate objectives.
At the end of the day, while demand planning and forecasting remains a core part of any business, the faster pace of change multiplies the problems that planning can't prevent. Leading companies need to excel not just at improving their forecast accuracy but also at their ability to effectively manage demand when the forecast is not accurate — which in many businesses is a significant portion of the time. Demand volatility guarantees that even the best demand and supply plans are inevitably out-of-sync.
So if you can't prevent change, you have to respond to it.
The financial impact to a company unable to respond to demand change can be crippling. Poor response can affect both the top line (i.e., inability to win new business, loss of customers to competitors) and the bottom line (i.e., negative impact on margins, write-off of excess and obsolete inventories) of a company.
As a result, new strategies and tools for not only better forecasting but also better responding to change have quickly become imperative for today's manufacturer.
21st Century Demand Management
Here's a checklist of key steps companies can take to address today's demand management challenges.
1. Get the Right Information
Create and manage forecasts at, or as close as possible to, individual stock-keeping units (SKUs).
- If your customer distributes your product to an end user, your sales data are not equal to actual demand — they have been modified by the distributor and may differ from real demand due to inventory, shortages, policies and promotions. In times of high volatility, this disconnect is magnified and the risks associated with the inaccuracy increases.
- The closer you can get to point-of-sale data, the better your demand forecasting.
Create a consensus forecast.
- Ensure that you capture and consolidate forecast input from all the necessary disparate sources, i.e., forecasts from sales, customers and distributors across multiple distribution channels, as well as marketing forecasts and economic trends, plus actual demand history.
- Integrating this information, along with the unique considerations and insight from those involved, will help establish a consensus forecast, which will be your best starting point.
Establish supply chain visibility into your multi-enterprise, multi-tier supply chain.
- Dynamic demand management is very much a function of knowing what is where and what state your supply chain is in at any moment. Companies need easy access to real-time supply chain information in order to understand the opportunities for shaping demand and allocating (or reallocating) finished goods supply accordingly.
- Visibility means the integration of demand and supply data from multiple sources, including customer relationship management (CRM), enterprise resource planning (ERP), demand planning tools, supply chain management (SCM) tools, spreadsheets and POS data, creating a single integrated view of forecast, sales orders, inventory and supply.
2. React FasterUpdate forecasts more frequently.
- In an environment of high variability, traditional monthly planning cycles do little to provide accurate direction from a daily perspective.
- A reconciliation of supply and demand plans needs to be done on a more frequent basis. For example, with the decrease in housing starts, Hubbell Lighting faced a precipitous drop in demand that required them to complete daily supply chain runs to continually reconcile demand plans to the current reality.
- Define clear operations performance thresholds and activate an alerting process to proactively notify decision-makers of exceptions that could have a negative impact on the business.
- Automated solutions can sift through all the activities, uncovering the truly important information and understanding the domino relationships and cumulative effects of multiple events.
- Shortening the time to know about a problem drives faster response and reduces the magnitude of any impact.
Respond immediately to reduced or cancelled demand.
- It is critical that companies react to unplanned cancelled demand with equal fervor as when trying to meet an unexpected new order.
- When the customer cancels an order or reduces forecast, many times the customer service representative (CSR) removes the order and that's the end of it. The problem is the business has already invested in the demand by building at some level to forecast, making commitments to suppliers or executing on pull-based replenishment based on now-outdated demand. The business does not feel the pain until the end of the quarter when there is excess inventory on the books (see sidebar "The Inventory Discussion" for further discussion on inventory).
3. Bridge the DivideKnock down the internal silos.
- Ensure that demand and supply are looked at together — by everyone. For years, organizations have been created with separate demand planning and supply chain planning teams, with tools designed for each of their needs. The new need is to integrate these efforts more closely together to ensure that everyone sees the immediate impact of demand on supply and vice versa.
- Individual groups need to take a more holistic and real-time view of the interdependencies. A key part of this process is the ability to simulate various demand-supply scenarios and their associated action alternatives to increase preparedness for the various possibilities that may unfold or have unexpectedly taken place.
Increase customer collaboration.
- Some companies call this "demand co-planning." The basic notion is that you need to move from a handoff process to a collaborative one, where you and your customers are collaborating more regularly on their demand requirements. This should be a core part of your demand planning process because latency and intermediaries add more risk to the process.
- Determine which customers represent the bulk of your business, which customers exhibit the largest or most frequent changes in demand, and which customers provide you with the most profit. These are the customers with which it should be your priority to collaborate.
- Co-planning and response at both ends of the supply chain help to mitigate the ripple effect of demand volatility.
4. Understand the ImpactAlign demand management decisions with the operations performance metrics of the company.
- In the midst of constant change, decisions must be made "in the trenches" quickly throughout the day, with insight into the impact of those decisions on key performance indicators (KPI).
- A comprehensive scoring mechanism is needed that can accurately predict the impact of proposed actions and that weighs the alternatives against company goals and customer requirements so the best option can be implemented.
- By understanding the impact on KPIs in advance of taking action, decision makers are empowered to manage to the plan (and its objectives) despite variability.
Adjust Processes and Adopt Tools
Despite large investments in demand planning and forecasting, and traditional sales and operations planning (S&OP) tools, more often than not demand management teams continue to rely on manual processes, complicated spreadsheets and other makeshift measures. These tend to be quite time consuming and rarely yield optimal results given the complexity of the tasks.
Those on the frontlines — the demand managers, customer service reps and sales operations staff charged with understanding true demand and aligning finished good supply accordingly across globally distributed fulfillment networks — have no easy job. Their role is an exercise in balance and compromise.
Companies need to empower their frontline staff with tools that can support the full scope of modern day demand management challenges as discussed throughout this article. This includes:
- Access to comprehensive data — work collectively from the same integrated information source;
- Increased collaboration with internal groups and customers to gain (and maintain) a consensus on true demand;
- Enhanced alerting to quickly spot misalignments; and,
- Rapid and collaborative analysis of action alternatives to drive more profitable response to changes.
Without the right tools in the hands of the right people, the type of demand volatility experienced today is difficult to manage and impossible to predict, and it can trigger a steady erosion of customer satisfaction, margins and market share.
Since it's true that you can no longer plan the customer, industry leaders are implementing processes, supported by appropriate tools, for more dynamic demand planning and management. Companies today face two acute challenges: How do you make a better demand plan, and how do you respond while knowing that the plan will always be subject to a certain degree of inaccuracy?
Gone are the days of sequential demand planning and supply chain planning processes that operated in batched silos. Today's imperative is for a collaborative and integrated demand-supply planning process supported by proactive monitoring and rapid response to change.
About the Author: Trevor Miles is director of product marketing at Kinaxis and is responsible for identifying market trends and translating these into high-level functional requirements for the company. Prior to joining Kinaxis, Miles worked for i2 Technologies, where he worked with global industry leaders such as Continental, Volkswagen, Nokia, and Thomson. Previous to i2, Miles worked for Coopers & Lybrand performing several studies in supply chain reengineering for companies such a Levi's, Burmah Oil, TNT Logistics, AGA Gas, and Schneider Electric among others. For more information on Kinaxis, go to www.kinaxis.com.