Whatever your industry, the global market is becoming increasingly competitive and the technological advancement that has made manufacturing products easier and more cost effective is breaking many long-standing monopolies. In response, promotions and new products are critical to surviving in this hyper-competitive environment. And for us as demand planners, that presents new challenges. So, what do we need to do to effectively forecast promotional sales?

An example of this increased competition is the mobile phone market which, some decades ago, was led by just a few companies but is now a highly competitive space with multiple players. Social media also plays an important role in bringing awareness through commercials for existing products and new innovations or initiatives developing a sizable customer base. As competition keeps amplifying, it is essential that new product development keeps pace to maintain market share. When such market forces are fighting with each other, organizations come up with different ways to compete and the most common is promotions. Clearly, promotions dilute profit margins but help companies maintain or gain market share.

Black Friday has forced companies— mainly FMCGs—to participate, irrespective of the impact on their P&L

Offering Promotions That Don’t Erode Profit Margins & Brand Value

One of the very good examples which is especially relevant these days is ‘Black Friday’ which has become massively popular in recent years. Such an event has forced companies— mainly FMCGs—to participate, irrespective of the impact on their P&L. Therefore, promotions planning should be designed in a way that is attractive to consumers whilst maintaining the value of the portfolio and protects profit margins. I have spoken to companies that have over-planned their promotions to the extent that consumers now only buy the product when it is promoted. Many companies tend to over-promote products for short term gains which later backfires. So how we do we find the right balance of remaining competitive without debasing our brands and eroding profit margins?

50% off? Be careful, many of your customers will expect this price all year round.

Tracking Demand For Promotions

First of all, we need to keep in mind that promotional activities are a variable factor on top of your base demand. Base demand is simply the organic run-rate excluding any activities. In this base demand, promotional activities that ran in the past are stripped out from the actual historical data. So, can the difference between base demand and activities give the right signal of promotional demand? The answer is NO because the behavior suggests that consumers nowadays are adapting what is called ‘Smart Buying’ where they look into many factors to decide on their purchase. That could be price, product differentiation, shelf life, health factors etc.

Calculating Difference Between Baseline & Activity Doesn’t Work For Promotions

Let me give you a personal example from a few days back when I was at Hyper Market and I picked up a renowned brand’s washing powder. After just a few steps, I found another renowned brand offering a 20% lower price so I put the first one back in the shelf and picked up the second one. This was not the end because when I walked to end of the aisle, the store staff walked in the aisle with a pallet of another popular brand and just out of curiosity when I asked him for the price, it was actually 50% less than the first one. He told me this promo is for a very limited time so I decided to pick more than one pack of the third brand which means I have enough stock for next 3 months.

Calculating the promo hike only by taking the difference between base and activity performance can be misleading

Taking my example as a regular consumer, the indication the third washing powder company will get is that sales during promotions rise but it’s actually not the right demand indicator as I had decided to stock the product. So the demand uplift is not a shift of consumer from another brand but rather an incremental demand for the period. This is usually true for products that are fast moving consumer goods with considerable shelf life. Hence it is a complicated job for companies to plan promotions. Calculating the promo hike only by taking the difference between base and activity performance can be misleading and there should be further granular analysis done to understand the number of assumptions behind actual demand increase.

You Need Sales & Marketing Involved For Promotions Planning

It is very important to involve both the sales and marketing teams when planning promotions. Forecasting promotional demand is not something that can be done by just the demand planning function using statistical models. Here comes the importance of Demand Sensing which involves key factors like market shifts, weather changes, natural disasters, consumer buying behavior etc. In this example, it is the consumer buying behavior that plays an important role in deriving the promotional demand which needs to be understood in depth through various analyses. Companies need to have market data of competitors that have run similar promotions and acquire the point of sales data to serve as a point of reference along with providing understanding of future sales after the promo is off the shelf so production and stocks can be well managed. The last thing a company would want to face is out of stocks before the promotion period is over. Remember that stock management should take into consideration a substantial dip after the promotion is over.

You Must Track Sales Of Promotional V.S Non-Promotional Products

A rule of thumb for the team involved in the promotions planning is ‘promotions are time and quantity bound’ which means that the promotional calendar established by the marketing department goes through a financial sign-off. The aim of the promotional calendar is to support the product category for a limited time with limited quantity to gain a certain percentage of sales and create momentum for products that are newly introduced, slow moving or that have strong competition. Consequently, these activities require micro management. What some organizations face is that the moment promotions are announced, the sales force is completely dependent on promotions to boost sales and are unable to maintain a balance, over-looking the promotion intensities, i.e. the percentage of promotion over non-promotion for a particular product or category. And when this indicator is overlooked, it has a direct impact on the bottom-line so there are some key control points that needs to be in place; a close monitoring of the promotional quantities vs. the non-promotion and any deviation to the agreed plan should immediately be flagged to take necessary action on the order supply for the next period. This will also keep our commitment to retailers and consumers as per the promo period timeline. If stocks run-out half way through, it can result in penalties which of course we need to avoid.

Don’t Forget To Give Promotional Products A Unique SKU

A unique stock keeping unit item code is necessary to track the performance and should be activated every time the promotion kicks in. Having a single code will make it difficult or impossible to know the actual promotional consumer uptake beside the promotion itself; other factors like seasonality could also be the reason for a change in demand. The monitoring should be in daily (or maximum, weekly) buckets in comparison to the forecast so there is enough reaction time.

Lastly, I will conclude by saying that promotions are something that should not be planned to fill the gap for the growth percentage that the shareholders want to see or that you have agreed with management, rather it should be an activity fed into your plan to bring incremental growth on top of organic growth. That’s how we avoid a race to the bottom, and protect your profit margins and your brand value.

Innovation, or new product development, is an integral part of any organization that wants to grow and compete for market share. This doesn’t just involve brand new inventions, but also new models and updated versions. Whatever the new product or model is, it has the potential to revitalize a flagging company or, on the other hand, be the worst decision the company has ever made. The difference between the success and failure of a new release is effective New Product Forecasting and demand planning.

You Must Mitigate Risks of New Products and Stack The Odds in Your Favor

The negative implications are not only loss of market share or brand equity, but also the cash flow risks associated with holding dead stock – the main reason companies have high stock days is due to launching a new product that was unsuccessful. Besides having finished goods sitting in a warehouse taking up valuable space, unused raw materials and packaging are an additional drain on resources. A few basic but powerful methods help mitigate these risks. Here are the core methods we use to create new product forecasts at Castrol:

The reason for anticipating soft demand is because you are still trying to figure out how consumers will respond.

1. The Zero-Based Forecast

Since the new product has no historical sales, the forecast must be built from scratch, which means there is no baseline for it. The Sales & Marketing teams need to put forward convincing contextual assumptions to build the new product forecast. For example, there may be a similar product already available in the company’s portfolio that can be a good reference point to project the new product’s demand. Further information about similar products by other companies already available can be obtained from market research companies.

Remember that it is not only about using market data to construct the forecast; you must temper this data with qualitative insight and risk management. You may wish to err on the side of caution because you are still trying to figure out how consumers will respond – you don’t want to overproduce and end up having to develop liquidation plans for unsold stock. These forecasted volumes should be validated by Finance to ensure they are financially feasible. What’s more, the figure should meet the minimum batch/ order quantity to ensure appropriate supply planning ahead of time.

Cannibalization may sound negative but if it happens, it will have a positive net effect.

2. Understanding Cannibalization To Improve Demand Plan

Now that volumes are constructed, the next step is to gauge the new product’s cannibalization effect, which simply means how much volume share it will take from the existing portfolio of similar product/s. This may sound negative but if cannibalization happens, it will have a positive net effect. In some cases, the top line drops but profit margins increase. In many cases, the reason for new product development is to produce higher margin products to replace lower margin products.

If successful, this positively influences the bottom line. For example, a change in the size of the product can cut production costs, increasing bottom line revenue. Sometimes the cannibalization is ignored, resulting in overstated top line numbers which don’t correlate with actual performance. This lack of planning creates a surplus of inventory – you’ll subsequently be sitting on wasted packaging material, an invalidated production plan, and finished goods you can’t sell.

A performance matrix allows you to compare the actual volume versus agreed demand

3. Performance Matrix To Track Actual Demand

I have an activity planning manager in my team at Castrol who delivers excellent execution of new products. He ensures all relevant parties are involved in the new launches, he delivers on time, and he has a weekly projects tracker that shares all useful information to keep management in the loop. In my first few days in the job I noticed that all these remarkable efforts put into execution are limited unless we use a tool to measure the actual performance.

We use a matrix tool that can be customized to the needs of the business. A performance matrix allows you to compare the actual volume versus agreed demand and the volume intensity of the existing/ similar product related to the new product (in other words, cannibalization). In companies that manufacture fresh food products, the returns and wastages need to be closely monitored. Using this tool, I am able to monitor the new product’s actual demand. If orders are placed which deviate heavily from the forecast, they are flagged and amendments to the plan are made. In some severe cases, there is an agreed tolerance percentage which helps in establishing accountability of forecast.

The above are a few valuable techniques to take into consideration when building new product forecasts. But these are not exhaustive. There are more market dynamics to consider that derive demand, sales activities, distribution, routes, new customers and much more.

Mustafa Siddiqui spoke at IBF’s Amsterdam Conference in November 2017. See details of IBF’s upcoming conferences in 2018.

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Ouch. OTIF regulations, decreasing product life cycles, shorter-lead times, price slashing, and increased volatility – the last couple of years have been a kick in the teeth if you’re in Fast-moving Consumer Goods (unless you’re Amazon or Walmart). Against this backdrop, it is tough to for FMCG firms to manage cash flow and increase revenue. At Castrol, we know that implementing the fundamentals in S&OP is key to navigating current market conditions.

What exactly can you do navigate these challenging times? Enter the Demand Planner as The Cost-Saving Savior.

Do You understand The Best-In-Class Practices?

It is very important to understand the best in class practices and apply them in the business effectively. For example, some companies believe in reducing overhead expenses by moving production to countries with lower cost of labor. However, they ignore the risk of longer lead-times which can wreak havoc in the supply chain. The ‘why’ factor is key to deciding the right process to be integrated.

To effectively manage the business, i.e. increasing cash flow, savings, ensuring stock availability and meeting demand, the following best practices must be well-integrated into the business:

Balancing Demand & Supply

The basics of any business is to ensure product availability whist always ensuring no over-stocking, to avoid running out of product and losing market share. One of the practices to overcome this challenge is to build forecasts at the most granular level. This means breaking down the business into channels, into distribution networks, into regions, into categories, and into stock keeping units.

Once that input is taken from the sales force and reviewed against the historical trend, marketing activities and organic growth can be plugged in to finalize the most accurate outlook. Similarly, based on the outcome of demand, supply requirements will be generated which will also be accurate. Thus, the company will have the right balance of demand and supply which has a positive impact on cashflow as the company will be optimizing the inventory which, of course, is the objective.

Remember the famous quote “you can’t control what you can’t measure”. The process doesn’t stop at balancing demand and supply – you must continuously monitor the results and fix the variances (if any). Do this after consulting the sales and marketing teams as they have the best insights into the market.
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Successfully Managing Launch of New Products

The launch of any new product is again a tricky decision to make as it is totally dependent on the market reaction. Although research into new launches is sometimes done through surveys of similar products from competitors, it is an investment that the company is making, sometimes even arranging expensive launch events. Marketing plays an important role but when it comes to sourcing or production, supply chain needs to be less optimistic to avoid any impact on the inventory. This is especially true with limitations of short shelf life products. Here, the zero-based forecast is usually applied where there is no historical data available. Following the reaction to marketing efforts, decisions can be taken quickly as to whether further supply is required or not. This will save unnecessary inventory costs.

Shifting Slow-Moving Or Obsolete Inventory

Many of you will have joined companies and inherited high inventory of stocks which have been sitting in your warehouses for a long time, and now you are being measured on days or weeks of supply DOS). To mitigate this risk, an initiation of slow moving obsolete inventory (SLOB) meeting is required, which must be on-going. After reviewing the complete portfolio, a list of products that have not been moving for at least six months should be marked as SLOB to be reviewed with Sales and Marketing to come up with action plans. It can then be shared with Finance to approve some of the suggestions. It is fine to eliminate the excess non-performing inventory even if it is to be offered at cost, as liquidation will result in improving the cash flow.

These 3 areas of focus will result positively on revenue, margin, and working capital – and this can be attained with a strong process in place. S&OP is a powerful tool, but it must be integrated into the business where all cross-functional teams come together to make the best decisions.

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