How better demand forecasting could have saved Dean Foods a lot of spilt milk

With demand forecasting,

it’s easy to get carried away with the technical, the theoretical, or just plain get lost in the weeds. I often see practitioners who zero in on specific facets of forecasting and demand planning, and in so doing, lose the complete and holistic approach that can deliver measurable business improvements.

In thinking about the big picture, I believe we all need to keep in mind that there are real and significant consequences to getting demand planning and forecasting right or getting them wrong. This story in the WSJ was a critical reminder. Dean Foods announced that first quarter earnings are down 43%. The CEO said that they are facing increased pressure from private label products, which might handicap growth and profitability into the future. The most troubling aspect to me? No real numbers regarding how much of a handicap, nor any clues as to a competitive response – in other words no substantiated forecast detailing the competitive response and supporting the credibility of Dean’s future value.

Dean Foods Co.’s first-quarter earnings fell 43%, and the company’s chief executive warned Monday that some business may not bounce back as retailers use private-label products to lure customers.

Chairman and Chief Executive Gregg Engles said gains by private-label producers are accelerating, noting that in some regions, a half-gallon of Dean Foods milk costs more than a gallon of an unbranded product. Retailers routinely use discounted milk and bread to drive foot traffic, and private-label food products gained share as consumers traded down during the recession.

I’m bringing this up not to kick dirt on Engles and his team, but to highlight some very specific implications of forecasting. A more comprehensive approach to a forecast would have revealed these icebergs much earlier and given them the insight to effectively react.

Better data, process, and technology
I posit that there are three things that could have kept them out of this stew: appropriately use of data (Comprehensive point of sale from retailers, demographics etc.), a better process (having sales people and account managers contributing market intelligence) and an appropriate technical platform. (My advice on the technology is obvious, but it looks like they’re stuck with a big German solution.)

More time to control expectations
Earlier detection would have allowed Dean’s to alert analysts and investors to the trend and the potential hit to their earnings. It also would have prepared them for a competitive response — critical to maintaining credibility with the investor community.

Did I mention better technology?
Appropriate software would have alerted Dean’s to the trend and allowed for comprehensive “what-if” analysis of plausible responses — as well the margin impact of each potential response — so that the company could have quickly coalesced around a competitive strategic response.

Dean’s is struggling, and I would argue a large portion of it is due to lack of a sufficiently robust capability around demand planning and forecasting which as we know is really the tactics behind understanding the market and your customers. The impact is real: their stock lost 25% of its value in the early hours of trading today.  More importantly, what is their response?  What are the options?  Will they be profitable?  Will the retail customers respond? Critical questions for the Dean Foods team in the days to come…

Around the supply chain and demand planning blogosphere

Combing through my RSS feeds, I found some SCM and demand planning-related blog posts from the last few months that got my wheels turning…

HP Supply Chain Management Blog: “Closing the Loop: Optimizing the Supply Chain”

In his “Closing the Loop” series on an HP Community blog, Christian Verstraete cites a resigned attitude toward forecasting error that drives me crazy and costs companies a lot of money:

Yesterday I was at a conference titled “Achieving Excellence in Capacity Planning”, and pointed out one of my favourites. “Forecasts are always wrong” and that is what we are starting from to manage our Supply Chain with the hope to have neither stock-outs nor excess stock.

He discusses how we can be sensitive to changes in the supply chain, all of which is just purely reactive if you’ve resigned yourself to getting the forecast wrong every time.

In all fairness, Mr. Verstraete penned a subsequent post in the same series that touches on proactive thinking. Yet his example showed that his conference presenter — and a lot of people in the space — begins by assuming that nobody should be on the hook for getting a forecast right. Whence comes this assumption? Why take that capability off the table at the outset? What would happen if you could reduce error by 25%?

Forecasting software has become way too good. Don’t handicap your company — and force you and everybody in your value chain into a reactive position — by not looking at new approaches to your forecast.

21st Century Supply Chain: “Three SCM table stake capabilities for the twenty-tens
Luc Vezina of Kinaxis takes a poke at three big capabilities that will be critical for supply chain performance, and how ERP SCM has missed the mark. I don’t disagree, but this gave me some pause:

1. SPEED.  When a customer calls you with a potential order, how long does it take you to get back to them with a promise date?  Increasingly, customers will want feedback in a matter of minutes – not hours or days. If you’re saying to yourself “That’s impossible.” Well, it is possible.

I would say that it needs to be a matter of seconds, not minutes. I would also offer the perspective that Mr. Vezina’s three capabilities — speed, accountability and view — are not ERP modules. They’re the very definition of the things that drive good demand planning. A company that’s serious about demand planning will have groups that focus on it intensely, and be fanatical about supporting them. We just happen to know of a wonderful solution that supports the discrete and vital functions of demand planning, demand forecasting, and demand management.

CIO: “Can SAP get its supply chain mojo back?
This headline implies that they had some to begin with. I kid, kind of. Thomas Wailgum of CIO writes about how SCM capability has suffered over at SAP. The Tohamy being quoted below is Noha Tohamy, vice president of supply chain research over at AMR:

Yet SAP has long relegated SCM to the status of RHSC (red-haired step-child), and the company has stumbled articulating its SCM and supply chain planning roadmaps, according to Tohamy.

“Overall,” she writes, “the software giant has been sluggish in bringing to market an SCM offering that makes SAP not just the largest SCM vendor in revenue, but an innovator and leader in meeting increasingly complex supply chain needs.”

To me, the true thrust of Mr. Wailgum’s piece is that the software business model is essentially broken: it’s OK to put junk out there; over-promise and under-deliver on functionality and ROI; and tie people to big contracts that make them commit to an under-performing supply chain.

In pursuit of a one-vendor, one-platform world, corporate officers are abrogating the responsibility to make sure that every one of their teams has the best possible tools they need to compete. I covered the competitive dangers of IT standardization in my open letter to the C-suite.