Demand forecasting and planning (also referred to as demand management) is a critical function that drives out inefficiencies in the supply chain and affects all facets of a company across the enterprise.
We have examined the significant improvement in short-term tactical demand forecast accuracy using demand-sensing. Demand sensing is the translation of downstream data with minimal latency to understand what is being sold, who is buying the product (attributes), and how it is affecting demand. Companies like P&G and Kimberly-Clark are able to further improve forecast accuracy when using downstream data as part of their short-term statistical forecast. The business benefits have been compelling.
In addition to improving operational efficiency, companies have found downstream data useful to flag operational issues that would otherwise affect revenue and service levels. For example, downstream data alerted one company to an unusually high bias toward a large customer at a high-volume distribution center. As it turned out, there was a problem with the ordering system, and orders had not been placed for several days. The advance warning by downstream data gave the company the visibility to resolve the issues before out-of-stocks became a problem.
Critical Success Factors
Companies like P&G and Kimberly-Clark work hard to build a joint value equation with their customers. Because of this approach, customers can share their downstream data because they can articulate how the data can be used and, how it will drive business results and build value for both the CPG manufacturer and the retailer.
Customer support is critical to CPG companies. Customers will share downstream data if CPG companies can demonstrate their maturity in using downstream data and articulate how the data will be used to create value. Having a clear supply chain vision also is critical. Knowing where demand sensing fits within your supply chain processes is important, and believing in the short-term statistical forecast is essential.
P&G and Kimberly-Clark continue to add customers to improve demand-sensing capabilities, and both companies continue to expand their downstream data capabilities to more business units. These CPG companies will improve their transportation planning and enhance customer collaboration using downstream data. Integrating their suppliers to a demand signal brings interesting challenges and opportunities for future success.
Knowing what products to make when needed is a competitive advantage for CPG companies. Leaders in the CPG industry use demand-sensing capabilities to delight customers, improve supply chain performance and create value with trading partners. P&G and Kimberly-Clarks sense demand work helps them make what they hoped would sell. In an age where demand volatility remains high and companies struggle to predict demand during economic uncertainty, the larger risk may be the inability to sense an upturn. Companies with the ability to sense and respond to demand using downstream data are best suited to meet the inevitable surge and capture upside revenue while maintaining high customer service levels and lowering inventories, waste, and working capital.
Demand shaping is the ability to increase or decrease the future volume and profits of goods sold by orchestrating a series of marketing, sales and product tactics and strategies in the marketplace. There are several key levers that can be used in the development of demand-shaping strategies.
These levers are:
- New product launch (including the management of categories)
- Price management (optimization)
- Marketing and advertising
- Sales incentives, promotions, trade policies/deals
- Product life cycle management strategies
True demand shaping involves using a "what if" analysis to influence unconstrained future demand and matching that demand with an efficient supply response. Based on recent industry research, demand shaping, just like demand sensing, includes three key elements:
1. Ability to increase or decrease volume and profit of goods sold by changing sales, product and marketing tactics and strategies: This can be achieved by enabling companies to perform what if analysis so they can understand the impact of changing price, sales promotions, marketing events, advertising and product mix on demand lift and profitability to make optimal future demand shaping decisions. This usually refers to the shaping of unconstrained demand (i.e. demand shaping independent of supply constraints).
2. Supply plan/supply supportability analysis: This refers to how much can be made based on existing capacity, where, when and how fast can it be delivered.
3. Demand shifting (steering): This refers to the ability to promote another product as a substitute if the product originally demanded was not available, and/or move a sales and marketing tactic from one period to another to accommodate supply constraints. It is especially useful if demand patterns or supply capacity changes suddenly to steer customers from product A to product B, or shift demand to a later time period.
There are two types of demand shifting.
- Demand shifting at the point of sale occurs when a company influences a customer to purchase an alternative product using sales and marketing incentives when a product is out-of-stock, or back-logged.
- Demand shifting at the point of supply is when the operations planning and manufacturing teams negotiate with the sales and marketing teams during the sales & operations planning (S&OP) process to shift unconstrained demand into the future due to supply capacity constraints.
Many executives said their companies are beginning to invest in demand sensing and shaping processes along with enabling technology. However, in almost every case they described demand shifting rather than true demand shaping.
Dell is a good example of a company that leverages the concept of demand shifting. Dell packages to order and uses a demand forecast to determine the quantity of the components that make up a wide variety of laptop configurations to allow them to accept customer orders through their website and assemble the laptop within three to five working days. By using demand shifting at the point of sale, Dell can shift demand away from laptop A to laptop B due to a shortage of components that make-up laptop A.
For example, let's say you decided to go online to the Dell website and purchase a Dell Inspiron 15 laptop. You may find a sales promotion pop up saying for today only you can purchase a Dell Inspiron 17 laptop with a bigger screen, more processing capacity and a bigger hard drive with expanded memory plus additional software for a reduced price. What may have happened is someone under forecasted demand for the components that make up the Dell Inspiron 15 laptop. Dell inserted a sales promotion in an attempt to shift demand away from the Inspiron 15 laptop to the Inspiron 17 laptop to keep a key customer until the components for the Inspiron 15 become available.
In contrast, demand shaping happens when companies use sales and marketing tactics like price, promotion, a new product launch, sales incentives or marketing programs that orchestrate demand to increase market share or share of wallet. The use of these tactics increase demand elasticity. Many times, companies believe they are shaping demand, but find that they are really just shifting demand (moving demand from one period to another).
Moving demand from one period to another and selling at a lower margin without improving market share and revenue growth creates supply chain waste. The first step in the market-driven demand management process is sensing market conditions based on demand signals, then shaping demand using programing like price optimization, trade promotion planning, new product launch plan alignment, and social/digital/mobile convergence. Demand sensing reduces the latency of the demand signal by 70%- 80% to understand and see true channel demand. Demand shaping, in contrast, combines the tactics of price, promotion, sales and marketing incentives and new product launch to increase profitable demand lift, which increases profit margins, market share and revenue.
Charles Chase is principal solutions architect at SAS and Michael Newkirk is product marketing director, Supply Chain Solutions at SAS.