External Data – The Next Frontier

 Considering External Data in Demand Planning

When you make business decisions, you are almost always looking forward. You’re thinking about the future. This means you’re thinking about forecasting and planning. And what this really all means, is that you are thinking about demand.

When you make critical decisions around demand, you need information from disparate data sources about your market, your customers, the economy, the weather, your costs, your profit margins, what your competitors are doing, your ability to stimulate demand, your company’s capacity to meet the expected demand, among other things.

When thinking about all these factors, and when looking into the future to make these decisions and achieve the desired outcomes, it seems obvious that we have a problem. The data that has historically fed the forecast (past orders, past shipments, last month’s prices) is going to be less than adequate.

The fact of the matter is that the most important business decisions, and the fundamental practice of forecasting itself, are based primarily on backward-looking, after-the-fact, inward-looking data. This is why it’s no mystery that a majority of companies are dealing with 50% or greater error at the execution level of forecasting measured on an absolute basis. With this in mind, can you think of a better way to control business costs than to reduce forecasting error?

Besides improving the forecast platform, improved information would be the single most important tool for reducing forecasting error. If you could obtain more direct feedback from your customers (what they’re selling, what they have in inventory, how their latest promotion was performing) would that help your forecasting and planning? If your business is seasonal, would more accurate weather information help in your decision-making? If you supplied the residential construction market, would daily updates on housing starts have an impact? Does unemployment impact the consumption of high-end craft beers, and does this vary by region? Does overcapacity in the market among your competitors impact your profit margins? Do more than two or three external factors impact demand for your product at the same time?

Yup – we are going to have to talk more about this one. External data quality and timeliness, and then managing that information to optimize your decisions, will be the next frontier in business management. The good news is that Demand Foresight believes we have the platform, and there is now a great proliferation of more accurate information and competitive data markets available for more industries. Any input, experiences, examples, questions and critiques will be welcome.

What our forecasting and planning software can do.

Put up or shut up: The corporate guarantee

By Gene Tanski, CEO, Demand Foresight

Things were getting heated at the sales meeting. The cause of my anger was an old theme: Industry-wide, client expectations for business software were so low that stories about the failure of big enterprise projects had practically become wallpaper.

Where were the repercussions for the business performance that never materialized? The big systems failed to deliver what they were supposed to over 70 percent of the time and the big checks just kept getting cut with no accountability. The whole dynamic needed to be nuked.

In the heat of our discussion about the institutionalized negligence of our gigantic competitors and how we could exploit it, a 25-year-old, Xbox-playing member of our team, said: “Dude, if we’re that bitchin’, why don’t we guarantee it?”

“What?” I asked him.  “Are you nuts?  Do you have any idea how software works?”

“No, not really. But I hear you guys constantly complaining about how everyone else over-promises and under-delivers. Why not do something about it?”

That simple dare became our biggest differentiator – and, more surprisingly, revolutionized the way we run our company.

During the dot-com boom, new businesses were founded on completely new thinking by young professionals, unencumbered by any notion of what was or wasn’t possible. Most of that potential was never realized, though – at least not in the first wave, since the young visionaries had no grounding in the disciplines that would sustain their visions over time.

However, we wondered, could our team fuse the experience of the old hands with the “anything is possible” optimism of our young teammate?

Once we got our minds around the concept, the experienced guys on the team were able to adjust some long-held assumptions and work through how to handle the risk, build the pricing and generally operationalize the concept.

It was a little bit like learning how to fly, as characterized by Douglas Adams in his “Hitchhiker’s Guide to the Galaxy” books: the key to flying was to throw yourself at the ground really hard, and miss.

It was exhilarating. I felt like we had just missed the ground by a huge margin, and instead were flying straight to a business model that embodied the exact opposite of everything we hated about the IT and consulting world.

The guarantee was an explicit one – with no wiggle room. Clients would measurably improve their business performance — in our instance, a 25 percent minimum reduction in absolute forecast error — or we wouldn’t get paid. Not a dime.

It could have been a disaster, but taking this leap of faith actually did incredible things for our organizational focus – and ultimately helped cement our culture and internally align all divisions of the company.

The developers know that the software has to work and be relevant to specific job responsibilities or they don’t get paid. Implementation and technical support? They better get it right or they don’t get paid. Sales people? They had better understand the client problem and know exactly how to solve it, or … well, you know…

Another benefit of this ‘put up or shut up’ philosophy was the elimination of the need to micromanage. Once everybody understood that the promise would not bend, I found I could trust everyone to solve problems the way they thought best.

Vacation policy? Didn’t need it. Our team was entrusted to take the time off that they knew they could afford to take. Office? Wherever they could open a laptop and do their best work. This culture tells us a lot about the kind of people we should hire — can they stay motivated and productive in our unique environment?

So an energetic, passionate clash of skilled professionals turned out to be lightning in a bottle. It let us fuse the brashness of youth with organizational know-how.

We still argue in meetings, of course. But these days I enjoy it. You never know what sorts of benefits it can produce.

This post first appeared on Venture Beat: Entrepreneur Corner on October 26, 2010

Demand Planning blogosphere: Yokohama and BusinessWeek’s “Plan V”

“Yokohama Tire Canada: Forecast Accuracy and the Cost of Being Right

Offering some comment and reaction to supply chain, forecasting and demand planning blog posts that caught my eye in recent months. In April, Jonathon Karelse, marketing manager of Yokohama Tire, teased a then-upcoming presentation he was giving at an Institute of Business Forecasting event.

While I did not have the opportunity to see Jonathan’s presentation, one claim he makes in his preview post did catch my eye. I bring it up because I often find myself in some version of this discussion when I’m talking with companies that want to attack their supply chain management issues and become more profitable.

Consider that the result of demand planning is only profitable to the extent that it is actionable – that is, if links above or below in the participant’s supply chain are unable to respond to the data, it might be a purely academic exercise.

I contend that it is not academic at all — even if your supply chain can’t react — because the issue isn’t forecast, the issue is timing. If the forecast identifies a demand signal that a company can’t or won’t respond to, it’s still good to know in the first place. Secondly, perhaps next time the company can learn and adjust for the opportunity by adding extra capacity or additional storage in a more favorable location or what have you; again, tough to say without seeing the speech. Last, you can calculate the opportunity cost of not having acted.

Karelse correctly points out the importance of keeping cost and benefits in mind — no argument from me — but the business Intelligence that he mentions should be integrated into a company’s demand planning, S&OP and forecasting processes with the software being used — not as a parallel process. Upper management is absolutely correct to drive for utmost accuracy, because even if the company decides not to act on a forecast (e.g., someone is optimally supplied), at least they are able to measure the difference and understand the opportunity cost.

“Why Every Business Needs a ‘Plan V’”

A BusinessWeek guest blog from Harold L. Sirkin used the recent volcanic eruptions in Iceland as a jumping-off point for musings on modern-day continuity planningn for business in the global age:

We may or may not see more such disruptions; who knows? What we do know is that any disruption that does occur will have far more serious ripple effects than anything seen in the past. That’s what happens when companies from everywhere are competing for everything with companies from everyplace else.

Wouldn’t debate this any more than I would over apple pie being good; however, how do you move from the theoretical stance below to the potentially unsustainable practice of simultaneously being ready for everything from global warming to Godzilla? For manufacturers, he recommends strategic inventory reserves, redundant manufacturing locations and alternative distribution networks. I don’t know many mid-sized manufacturers who can afford such preparedness.

It is extremely hard to run a profitable business focused on the .1% scenario and still make enough money to be alive when the .1% scenario comes to pass. This isn’t to say that you shouldn’t do the planning. This is something that can be helped by a process (and supporting technology) that combines comprehensive short- and long-term (high-level and execution-level detail, as well) forecasting and planning scenarios, taking into account the day-to-day business and what is most profitable right now.

From this assumption, you can then allow management to consider some strategic options. For example, “It may cost us a bit more to have an extra DC in South Africa, but the sales forecast shows growth that would support that DC in about three years. Why don’t we accelerate that investment to provide more fleixibility now and provide competitive insurance in case the .1% scenario happens.” That may be a more practical and sustainable approach.

Gene Tanski, Demand Foresight featured on Bold Ventures Radio

Jean Creech of Bold Ventures RadioI’d like to thank Jean Creech of Bold Ventures Radio for including me on her Wed., April 28 broadcast. Jean’s show airs in north Atlanta at 1620 AM and around the country at www.americaswebradio.com.

Bold Ventures Radio focuses on entrepreneurs, and it was my honor to be included as we discussed demand planning, forecasting, technology and business trends — as well as the genesis of Demand Foresight and our supply chain management software. I found this to be a stimulating experience and look forward to the chance to chat with Jean again.

You can listen to the whole episode here. I come on after the first few minutes.