As part of a recent research on demand management within consumer industries*, Aberdeen benchmarked companies on the following key metrics: gross profit margin, forecast accuracy, customer service level, order-to-delivery lead times, and days-on-hand of inventory. Forecast accuracy and customer service levels were chosen to identify best-in-class companies, because they represent the two key demand management goals: the ability to forecast demand better as well as the ability to fulfill demand better. Aberdeen defined best-in-class companies in demand management as those that have a forecast accuracy of 60 percent or above (as measured at the product family level for the next three months), and a customer service level of 90 percent or above (measured based on customer requested fulfillment dates). Overall, 17 percent of respondents met the best-in-class criteria.
Figure 1: Forecast Accuracy and Customer Service Level Ranges for Companies
Best-in-class Companies Financial Performance
Best-in-class companies have been able to obtain much greater improvements in performance from 2004 than their peers (Figure 2). This supports the conventional wisdom that better demand management directly results in better market performance.
- Best-in-class companies are more than twice as likely as their peers to have increased market share
- Best-in-class companies are 56 percent more likely to have improved gross profit margin
- Best-in-class companies are 1.5 times more likely to have improved order fulfillment
Figure 2: Performance Improvements Since 2004 of Best-in-class Companies Versus All Others
What Best-in-class Companies Do Differently
Compared to their peers, best-in-class companies:
- Are more focused on continuing to enhance their demand management technologies: 74 percent of these companies have provided recommendations to their management to improve their demand management technologies (versus 63 percent of all companies)
- Are two times more likely than all others to use a commercially available solution for demand planning/forecasting
- Best-in-class companies are 1.5 times less likely to use spreadsheets or no systems
It is clear from the above that technology plays an important role in demand management success. However, organizational strategies also drive the better performance of best-in-class companies.
Single Number Forecasts
Aberdeen research finds that best-in-class companies are 70 percent more likely than their peers to have a single demand forecast with inputs from multiple roles within organization (Figure 3). Poorer performing companies are more likely to have multiple un-integrated demand forecasts.
Best-in-class companies often have a single demand forecast, and their challenge now is gaining more granular and accurate data so they can effectively use this single forecast.
The lack of a single demand forecast is primarily an organizational challenge (and not as much a technology issue). Engaging senior management to mandate a single demand forecast is the most successful way of addressing this challenge, since resistance is almost always centered on organizational decision making power and performance metrics and reward systems. To gain this support, respondents say that it is most useful to demonstrate the negative impact on customer service, inventory levels and profitability that are the inevitable results of each functional area having its own version of demand forecast truth. Aberdeen recommends this approach as it is proving to bear positive results.
Figure 3: Usage of Single Number Forecasts
Frequency of Consensus Forecasting Process
Fully 60 percent of companies benchmarked forecast at a frequency of less than a month (Figure 4). This dynamic approach requires a rethinking of the frequency of forecasting from the static monthly forecast that is all too often the case, to one dictated by the frequency of significant changes in the marketplace – increasingly, daily or weekly. Procter & Gamble is an example of a company that performs short-term forecasting on a daily basis for the one-to-four week time period in addition to their regular monthly forecasting.
Figure 4: Frequency of Consensus Forecasting Process
Technologies like pattern recognition, and predictive analytics and simulation are emerging to support more frequent forecasting processes.
The biggest challenge in achieving faster frequencies of consensus forecasts is the number of participants involved in this activity (Figure 5). As can be seen, there is a need to incorporate the inputs from a wide variety of roles. This is the reason why interdisciplinary teams are widely regarded as the most-effective approach towards creating a consensus forecast.
Figure 5: Roles Involved in Consensus Forecasting Process
Interdisciplinary Demand Management Teams
As Table 1 indicates, only about 19 percent of consumer industry companies have interdisciplinary sales, marketing and operations teams that determine the best demand plan that synchronizes with the supply chain. Consumer packaged goods companies are most likely to have these teams while consumer durable goods are least likely.
Table 1: Interdisciplinary Teams for Demand Management (Source: AberdeenGroup, December 2006)
Aberdeen research, however, finds that simply having these interdisciplinary teams is not enough. These teams need to be supplemented with technology enablers and enhanced use of demand-related data. Best-in-class companies are winning because of their ability to leverage both process and technology to achieve the best demand management solution.
* Aberdeen's definition of consumer industries included the following: Apparel/Footwear, Consumer Durable Goods, Consumer Electronics, Consumer Packaged Goods, Distribution and Wholesale, Food/ Beverage, Health and Beauty Aides, and Pharmaceutical Manufacturing (OTC drugs).
About the Author: Nari Viswanathan is research director in Aberdeen Group's Supply Chain & Logistics Practice. Viswanathan specializes in order-to-delivery and sales and operations planning processes. For more about this report and demand management practices at enterprises, please go to ">Demand Management in Consumer Industries."