As the recovery kicks in, it is even more important to invest in the forecasting and demand planning process.

Increased competition, greater reliance on promotional strategies and shorter product life cycles are some of the reasons that have made forecasting more complex. Furthermore, the unprecedented levels of economic uncertainty in recent months affecting shopper (and retailer) behaviour, has also increased demand volatility and variability.

So how are businesses improving their forecast accuracy? What benefits are they achieving? And why are they investing in this area?

The need to improve service is driving investment

Our research shows that those companies who have adopted a formal demand planning process, have had clear benefits across four different areas:

• As well as a ‘clear impact on customer service’, a formal demand planning process has helped companies respond quicker to market-led developments
• Cost benefits such as lower waste, improved production accuracy, reduced stock holding and better capacity planning
• Revenue benefits through stronger availability on-shelf, and ‘being closer to the business plan’
• Organisational benefits such as better accountability, improved internal collaboration, control over processes and a reduced level of ambiguity

Stock inventory reduced by 22% and last year, we increased our service level with an average order-fill rate of 99.3%. We have also seen an improvement in internal collaboration.     Demand Planner, European Manufacturer, IGD Survey on Forecasting & Demand Planning, March 2010

Becoming more customer-facing

Our research indicates that a demand planner works cross functionally with supply planners, customer service colleagues, sales, marketing and key account managers, with the objective of providing a firm sales forecast to the business.

Perceived as a need ‘for constant monitoring’, our interviews highlight that demand planners play a pivotal role in ‘bringing the forecast together’. Increasingly, the demand planner’s role has become more customer-facing, and one in which they can add value.

This highlights the importance of reviewing the skill sets and competencies needed to successfully bring the forecast together.

	The demand planner's role is increasingly customer-facing

In addition to an ability to see patterns in numbers, our research also reveals that the role requires the capability to collaborate, understand commercial pressures and to engage with colleagues and customers to ‘question why a forecast is right or wrong’.

However, building an accurate forecast is not without its challenges.

Poor communication and knowledge gaps

Our research shows that there are three main types of challenges faced by the industry in further improving their forecast accuracy performance.

1. Three in five companies cite ‘poor communication’ as the biggest challenge they face in improving their forecast. Inadequate internal collaboration also adds to this.
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2. The next big issue is knowledge gaps. These are caused by issues such as “no recognised forecasting tool/process”, “seasonality of products”, “promotional complexity (multiple promo-SKUs)” and “data integrity - multiple promotional SKUs for base product”.
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3. Inadequate processes are a challenge faced by fewer companies in our survey. Although mainly internal in nature, this set of challenges does not preclude issues such as disjointed customer systems and resources needed to manage them.
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How are businesses managing these challenges?

Two-thirds (69%) of companies questioned said their focus is on improving their promotional forecasting.

Two-thirds of companies questioned said their focus is on improving their promotional forecasting.

Although companies face external challenges such as uncertainty on customer buy-in quantity, competitor activity and inadequate store-level implementation standards, the ‘best-in-class’ companies ensure that post-promotion evaluations are shared with trading partners and future improvements have been outlined.

One company we interviewed said that managing internal expectations from promotions and ensuring this does not affect the forecast, is also a challenge. In this context, the strategy they adopt is “change the assumptions not the number, as if you do, you will not be able to deliver the forecast”.

From the businesses we questioned:

• Over half (54%) said they are focusing on implementing a Sales & Operational Planning process
• 53% said they are improving internal collaboration
• Almost half (49%) are investing in ‘reviewing and actioning previous forecast accuracy’

Our research highlights that ‘best-in-class’ companies ensure a common defined process is implemented across markets, providing the framework for improvement - rather than time spent reacting to exigencies.

A Sales & Operational Planning process is particularly useful in managing this.
 

Building forecasting capability depends on several elements

What capabilities do businesses need to improve their forecasts?

Underpinning the different areas these businesses work on to continually improve their forecasting, is a focus on building capabilities in three main ‘buckets’. These are:

• Communication and collaboration – This is a set of three capabilities including the ability to collaboratively forecast with key customers, being supported by cross-functional internal alignment, and working in a culture that fosters proactive communication. Building supply chain engagement capability is essential to this, and IGD’s Six Step Model highlights that to reach the top, ‘best-in-class’ companies have a clear vision for engagement, the right attitudes and are focused on improving performance of supply chain KPIs.
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• Knowledge and resource – This includes investing in dedicated resources for managing the forecasting process, the right tools and software, gaining insight from customer data, and understanding trading partners’ supply chain KPIs and priorities. In the last 18-24 months, retail customers have been focused on cost reduction and improving efficiencies. However, understanding how supply chain goals are deployed and their impact on the forecasting process is also important.
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• Process capabilities – This is related to how the processes support the end goal, i.e. can you share data and knowledge of events that impact demand, both within the business and with customers? Is there scope for reviewing and actioning previous forecast accuracy performance? Is there a process for different business units to share best practice? Does technology support these processes?

Needless to say, senior management commitment plays a critical role to building your capability in these three ‘buckets’, and ‘best-in-class’ companies ensure they have this in place.
 

More information:

Find out how to drive improvements in your forecasting and demand planning capability at IGD Supply Chain Analysis.

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Mala Morris is a Senior Business Analyst at IGD, working in the Supply Chain team. She is the lead author of several IGD reports, including Driving Out Stock Costs, Creating a Demand Driven Supply Chain, Building Supply Chain Engagement Capability and most recently, Forecasting & Demand Planning on Supply Chain Analysis.