Happy 4th of July: What demand forecasting and the land of the free have in common

The 4th of July ranks as one of my favorite US Holidays – on equal footing with Thanksgiving. Both commemorate uniquely American experiences and events and fundamentally celebrate what makes this a great country.

Coincidentally, I was reading an interesting article from Niall Ferguson, the Scottish Historian who is a professor at Harvard and fulfills fellowships at Stanford and Oxford (yes I know, you are hugely interested – here is the link): http://www.thedailybeast.com/newsweek/2013/06/26/niall-ferguson-on-the-end-of-the-american-dream.html

While there are political undertones to the article, what struck me was the importance of remembering the fundamentals; not forgetting the critical focus points and capabilities that formed the basis of success for each of you.  Mr. Ferguson was focused on the United States as a country, but I am extending the key message to apply to individuals, associations and companies.

Huh?  How is relevant to demand forecasting?  To S&OP?  To anything involved with this blog or this industry or the people who may be so wise as to associate with Demand Foresight?

Well, it is a bit round about but here is my thinking.  Back in 2010, I wrote a piece about cloud computing.  The takeaway was that cloud computing would have an impact but real competitive advantage would go to those companies that utilized the cloud within the context of how it enabled their business strategy. Even more relevant today, the benefit of the cloud emerges through its application to the specific capabilities that make your company different, special and competitive:  for example, collaborating in real time with key customers on new product introductions.  These new product introductions have traditionally presented a challenge to demand forecasting, but are also critical to being a differentiator between companies and their competition.

However, the cloud as a technology disruptor is now joined by other disruptive concepts such as big data, in memory computing and causal analytics.  On the surface, each of these technologies can seem overwhelming and something that deserves huge attention and resources.  And they do, but only within the context of your vision and strategy for your company. You want the power of these technologies for when it’s appropriate, but be sure not to limit your enterprise and its ability to compete and thrive in a wholesale chase of technology for technology’s sake. The companies that outperform the competition over time are the ones that embrace their vision and ensure that everything in the enterprise, including technology, focuses on achieving that vision. At this particular point in time, with the advent of so many new technologies, what your company needs more than ever is a clear vision of what your competitive advantage is: decide what makes your company better, and find the right mix of technology (and ongoing adaptation/evolution, culture and people) that’s going to preserve and enhance that advantage.

And, in what should be no surprise to you at all, we maintain that those companies that designate demand forecasting and S&OP as a strategic capability will outperform their competition.

All of which brings me full circle to the start of this blog.  It is remarkable that we have the environment and the setting in which our focus can be topics such as the impact of big data on our ability to gain market share or fulfill a 5 year strategy. We have the freedom and the opportunity to concentrate on marshalling resources to compete and innovate and do good.  That is fantastic and is the result of the fundamentals on which this great country was founded – the land of opportunity and the land the free.  Happy 4th of July!

Ferguson, N. (2013, June 26). General format. Retrieved from http://www.thedailybeast.com/newsweek/2013/06/26/niall-ferguson-on-the-end-of-the-american-dream.html

Using Forecasting Software to Drive Specific Business Improvements – Example One

I am going to veer off from best practices for just a blog or two – we were recently going through a couple of project review sessions with clients and it struck me that there were some good examples of how to specifically apply improvements with forecasting software.  So thought I would share them; and for a special treat, I happened to have been running through the trails by my home and for some reason the Beverly Hillbillies sprang into my mind so the opening paragraph – please read it to the opening stanza of the BH theme song:

Want to tell you a little story about some companies, looking to establish best practices in S&OP.

Then one day, as they were boarding on despair, they discovered the miracle of forecasting software.

Okay – that was lame but it made me giggle, and I have always enjoyed the incredible gift of cracking myself up.

The point here is that the specific improvement example is based on using the more accurate forecast from the forecasting software to drive performance improvements in both inventory and customer service.

Specifically, this example happened with two different companies in different types of business: one in paper and one in lawn care.  So this type of work should have broad application.

Upon applying the best practice of measurement (please see earlier blog on S&OP software investment), these companies were able to identify opportunities with their top customers.  One – they had indeed improved their forecasting in excess of 25%.  In addition, they were able to show that the forecast supplied by their customers had error in excess of 50% (don’t think I need to bring up the dart board analogy here).  Please remember that we are talking about forecast error measured at the execution level, which in one case is by SKU by customer and in the other is SKU by ship to location.  Lastly, they were able to show what the implications were in terms of product inventory that was held throughout the value chain – specifically customer stores and distribution centers as well as our clients’ warehouses.

Incidentally, I should also point out that the companies were now running their computer forecasting based on the combined input of historical internal information (shipment, inventory, etc.) along with Point of Sale data from their customers (both sales at stores and inventory at stores and DCs).

Armed with this revealing information, these companies approached their customers.  Based on the data and information that was provided (of course having gone through a verification process), the partners in the value chain were able to take specific action.

With regards to the paper company, they were able to work with their client to streamline the new product introduction process.  Since they can sense the sales activity throughout the value chain, they can more specifically match the timing of introducing the new product upgrade to when the old product will sell out in the normal course of business.  For the retail customer, they were able to cut out almost $2 million in working capital carrying unneeded inventory at their DCs and stores.  Our client was able to save $1 million plus per quarter in promotion incentives used to clear out old product in anticipation of the new product intro.

Focusing on lawn care, our client’s retail partner was ordering far too much product in anticipation of the spring season, which took up space in DCs, required extra space in the stores, and far exceeded actual demand.  While I do not have the exact figures, we do have verification that this unnecessarily consumed working capital and sub-optimized the performance of many of their stores as that retail space could be used for other products with equal demand.  Our client in turn was able to avoid the inevitable return process and accompanying issue of product credits.  In addition, they were able to utilize constrained capacity for a broader array of products, some with higher profit margin.  They are estimating improved profitability of approximately 6% and counting.  The counting part stems from the application of the new practices to their remaining base of retail partners.

The most accurate forecast possible derived from your forecasting software is worthless unless you apply it to specific components of your value chain and back it up through measurement-in other words, discover your “bubbling crude” and “Texas Tea”. Hopefully these two examples will provide the basis for some creative thinking within your value chain, and some measurable benefits to your bottom line.

 

Causal factors directly impact demand forecasting and your value chain

The Wall Street Journal and Bloomberg are reporting some interesting data this morning and as such we naturally are wondering how many of you are using such data to help refine your demand forecasting.  If used correctly, these type of data inputs can serve as leading indicators of what is happening in a particular market and the potential impact on your specific value chain and therefore your bottom line i.e. EBITDA or cash flow.

Bloomberg is out with a couple of measures of inflation or in the current case disinflation.  Producer price index is down .7%, the consumer price index is down 1.4%, and a basket indicator called the JP Morgan Chase Global Inflation index (which includes the prior measures) is down 1.5%.

Separately, the Wall Street Journal is reporting that fuel prices dropped 2.5% from March 2013, and that that the cost of finished consumer goods fell 0.8%. And lastly, at least for this discussion, the housing market index came in at 44, which is 3 points higher than April 2013.

So, what does all this mean?  I don’t really know and quite honestly it doesn’t really matter what I think.  Sure there are all the high level discussions about disinflation (as opposed to deflation) potentially restricting profit growth.  However, it also works to keep the cost of money down, and with costs decreasing, consumers potentially have more money in their pocket to spend on consumable goods. This of course assumes that the extra cash is not ‘consumed’ in other ways such as higher taxes.

But while all of this is interesting in a Great Gatsby cocktail sort of way, the real issue is what does it mean specifically to you, your business, and your value chain (supply chain plus customers and vendors, etc.)?

And depending on your company and your industry, the answer will be different.  If you are in the general consumer product industry, then one interpretation is that the combination of decreasing costs means more cash to consumers and therefore that retail sales will rise, which might imply that you should be planning to increase production, and invest in increased inventories in order to meet increased demand, right?  Or perhaps more strategically, given your upmarket branding strategy – would a price increase make more sense and allow the competition to make the risk and costly investments in inventory and capacity?

The associated conversation is that assume demand does increase? Will that demand show up in 2 months?  3 months? Can you do something about it?  If your lead time is 3 months because you source from international suppliers (okay – might as well say China) then a one month lag in a causal factor might not help much.  On the other hand, if you have a rolling 13-month trend you are watching, this type of information becomes very applicable no matter what the lead time.

More specifically, say you are in the housing industry.  What is the impact of the market index climbing to 44?  More demand for say flooring product because more houses are being built and sold?  How long does it take for an increase of 3 points to impact demand?

The point here is that it is important that competitive companies have the ability to use this information; obtain it, track it, understand its impact on demand forecasting (short and long term) and to be able to do so without huge investments in man time to do the setup work.

Your planning and S&OP teams should have the data ready to go without need for setup and manipulation. Instead they should engage in the type of value-added actions such as the question and answers highlighted above, conducting  what-if scenarios and really making intelligent decisions that best position your company for success in terms of measurable criteria, i.e. market share, cash flow and EBITDA. I am extremely sure they will find that type of work much more rewarding:  who doesn’t want to be part of a team that can measure their contribution to success?

And as the great comedian Billy Connolly likes to point out – pay attention because it is all going to change tomorrow.

Stephen Covey on Trust and How Demand Foresight Sees Its Importance

We all know that there are many intangibles that influence success, but I’ve found that one of the most important is trust.

Stephen Covey, Jr. just started his nationwide tour this week here in Denver. He’s the son of Stephen Covey of “The Seven Habits of Highly Effective People” fame, and is headed toward the same success. The speaking tour is built around his book “The Speed of Trust”. As I listened to a promotional radio interview this morning, there were some key elements that I was reminded of that are so important in everyday life, and more specifically in how to build successful business relationships. Some of the high points from the interview:

  • Earning the trust of your client comes from offering value, keeping your word, and being responsive.
  • Lack of trust is like a ‘tax’ on the business relationship. Speed decreases and cost increases due to the additional justification and due diligence that is required to compensate for the lack of trust.
  • Everything is easier with trust – this is why testimonials are so important to get your foot in the door.
  • Long-term clients are created when you build and maintain that trust.

A personal example that I immediately thought of is something that I am still amazed by today. It has to do with a FedEx package and their promise to deliver when they committed. Last Christmas I procrastinated and ordered the perfect gift for my daughter online. Although I was cutting it close, FedEx promised it would be delivered by Christmas Eve. That’s all I needed! Well, the day came, all the other packages were under the tree, and the one key present still had not arrived by noon, 3:00 pm, then 6:00 pm. As you can imagine, I pretty much gave up. We went on with our family’s traditional celebration. But to my complete surprise, the FedEx truck pulled up at 9:00 pm with the package! Now I know the landslide of deliveries that FedEx has during the holidays, so I was willing to cut them some slack. However, I’m now an even bigger fan. This epitomizes how long-term customer loyalty often is won in the save-the-day moments like these, where our trust is rewarded with action.

Now something more relevant. In recent blog posts in both January and February we talked about the importance of choosing the right partner. This of course is closely tied to a foundation of trust. One of our key partners had a big problem in which our trusted partnership successfully enabled us to help them in a big way. On the night of February 7, 2008, an explosion and fire completely destroyed Imperial Sugar’s Savannah packaging facility, taking 14 lives and 60% of Imperial’s production capacity with it. The facility was offline for nearly 18 months.

Imperial needed immediate insight into how many customers it could serve with its available inventory. We worked hand-in-hand with them to ensure that the forecasting software and data were properly configured so that they had an accurate overview by product line.  This allowed them to uphold their “availability to promise” because everyone from production to sales could see, in real time, what could be delivered. Speed was required, and an established, trusted partnership was a critical component to their success, as they later stated in CIO Magazine, “Supply Chain Management to the Rescue”.

I can’t finish a post on trust without referencing the person we learned about in grade school who knows a little bit about honesty–Abraham Lincoln. One of my favorite quotes of his is, “The truth is your best friend”. How true and how important it is in successful business relationships.

Do You Minimize Supply Chain Risk With Demand Forecasting?

Supply chain management, like life, is a game of preparation for, protection against, and recovery from risk…

Risk is everywhere.  Our reactions to it, however, are what separate the good, the bad, and the ugly, and can align the future playing field.  In other words, it’s how proactive you are in risk aversion and even on capitalizing on risk, that defines your company.  Deloitte’s recent report:  “The ripple effect:  How manufacturers and retail executives view the growing challenge of supply chain risk” can give insight to how your company lines up.  The report showed results of a survey taken by 600 executives at large and small businesses alike regarding their supply chain risk concerns, along with some words of advice from Deloitte.

One interesting result was the opinions of the most costly outcomes of the supply chain risk.  The top two most costly outcomes were said to be margin erosion and physical product flow disruption.  Talk about risk!  According to the report, “Executives considered margin erosion to be more costly than other types of supply chain risk events, with 54 percent of respondents citing it as one of their top two issues. This may be because margin erosion is a relatively high-profile, easy-to-measure problem, and executives are thus well aware of it.  ” It’s even personal, since it often affects their own compensation.

Compounding the bottom line impacts of supply chain risks are the growth of risk events themselves.  “Such disruptions are not only more frequent, they are also having a larger impact. Fifty three percent of executives said that these events have become more costly over the last three years, including 13 percent who said they had become much more costly. Studies have found that natural disasters are occurring more frequently, and the economic impact of each event is usually greater than before. For example, five of the 10 most expensive natural disasters have taken place just within the past four years.”

With all of the above cited concerns, let’s go back to the matter of proactive risk aversion and whether or not the concerns are a call to action for these executives. 71% of the executives claim that supply chain risk is an important factor in their companies’ strategic decision making, and 63% say that their company has a risk management program focused specifically on the supply chain.  But there are obstacles, and there seems to be a gap between concern and action.  A tool that Deloitte says may help avert supply chain risks is predictive modeling. A surprising survey result is that only 36% of the executives use this technology. By investing in this and other technology, companies go beyond traditional understanding of risk to building resiliency against risk, and safeguarding against the dangers of margin erosion and physical product flow disruption.  The bottom line.

Our clients have recognized the importance of technology to identify, address, and manage their risks across their value chains.  They need to bring causal factors in to the forecast to reflect macroenvironmental pressures on the supply chain.  They want to minimize their investment by having a tool that can be designed to their processes, not vice versa.  They are interested in a best-of-breed tool that  provides the best demand forecasting available to minimize their risk.

As pointed out in our video, in life, if you know there are risks, you avoid them.  Why wouldn’t you do the same in your business?