Academic journal article The Journal of Business Forecasting

A New Approach to Effective Demand Planning

Academic journal article The Journal of Business Forecasting

A New Approach to Effective Demand Planning

Article excerpt

EXECUTIVE SUMMARY | Global companies are changing their operating models to meet increasingly complex demands on their businesses. Too often companies struggle with how to effectively adapt their demand planning operations as these models evolve. If not done right, it can lead to unclear and inaccurate forecasting, ultimately putting the long-term viability of the business at risk.

The fundamental approach to demand planning needs to change. There is no "one-sizefits-all" approach. Different operating models require different processes. Whether it's a global operating model leading by regions or a country-led model, both are favored by a number of major consumer goods companies. A "hybrid" model of demand planning is required to achieve the most effective process and desired outcome. Some industries, such as consumer goods, are recognizing the importance of such a model and are beginning to adapt it, while others want to take the leap now.

THE EVOLVING LANDSCAPE

Consumer products businesses have initiated their demand and supply planning from the country of operations for many years. This worked well because local insight into immediate competitors' behavior, customers' needs, and consumer preferences sharpened planning. With brands becoming regional, supply chains were quick to follow. However, demand planning was still typically a local process controlled by the local general managers. It was common for the local leadership team to manipulate the forecast, and then submit it to regional management, which would also manipulate the numbers. Therefore, forecasts would be manipulated multiple times before the global business leaders first saw them. As a result, the demand planning process became flawed, and required a complete overhaul across the industry.

Adding to the complexity of this transition is the increase in regional diversity witnessed over the last 10 years, where a wide divergence in growth and prosperity has prompted the division of regions. This is well demonstrated in Europe in the last five years or so. Once viewed as homogeneous, there are now at least two tiers with differing products required, for example, in Spain versus the United Kingdom. "Poverty is returning to Europe. If a consumer in Spain only spends euro17 when they go shopping,then I'm notgoingto beable to sell them washing powder for half of their budget," says Jan Zijderveld, Head European Business at Unilever.

IMPORTANCE OF DEMAND PLANNING

Demand planning is an essential process in determining how much product a business will sell to satisfy all customer demands. It typically involves completing eight steps in a monthly cycle. (See Figure 1 )

The process begins with a review of the recent customer sales performance compared with earlier expectations and assumptions, and a cleanup of any data issues or outliers that are believed to be one-off events. These data are used to generate a baseline statistical forecast. Planners will discuss, with Marketing and Sales, and incorporate the latest market intelligence gained from five Cs:

1. Customers

2. Consumers

3. Competition

4. Consumption

5. Cannibalization

Planners also consider changes in company plans, such as promotions, advertising, sampling, new products, or pricing. They determine with the help of statistical tools if any of these will impact the forecast of future demand.

Once they make a forecast, they review it in light of known category trends, run rates, and competitor information among other measures. Then they work with the finance team to value the forecast. The resulting unbiased forecast is presented in the Demand Review meeting. In this meeting, cross-functional S&OP members challenge the forecast with intelligence on the trends, assumptions, key indicators (accuracy and bias), and the potential upand downside risks. The goal is to arrive at a consensus forecast. This number may require some post-meeting reconciliations by the demand planning team before the final agreement is made. …

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