Businesses run in an environment of change and evolution that has multiple dimensions – Economic, Sociological, Political, Competitive, Regulatory, and Technological. At the very heart of the drive for business success is the customer/consumer demand for the company’s products. Indeed, a company’s revenue is a mirror reflection of said demand and all factors that affect it. Understanding consumer behavior, therefore, is of paramount importance.

Demand for a company’s products and services ebb and flow with a complex mix of seasonal, cyclical, and life cycle effects. As Forecasters and Demand Planners, how do we best structure our forecasting and planning efforts in this fluid and often volatile environment?

1. Gather Information From Market Facing Colleagues

This is to discuss ideas with those who are interacting both directly and indirectly with customers and consumers. We want to explore their experience and thinking regarding why and how purchase decisions are made, and what they think the most important considerations are in the purchase decision process. Marketing, Sales, and Product Management professionals can be especially helpful in their perspectives.

The primary purpose of this is to not only evaluate key factors that may help us to forecast, but to explain the variation in patterns of demand that have been historically experienced. Analytics methods – both qualitative and quantitative – are valuable tools that help characterize and explain purchase behaviors of both customers and consumers.

2. Review Qualitative Inputs

Review the findings from our discussion with our colleagues in Marketing, Sales, and Product Management. This can be a collaborative forum or meeting/s that happen ahead of the formal S&OP process. Organize their insight about sources of demand variation and gain consensus from the various stakeholders. This is a forum for feedback and exploration that can refine the conclusions, challenge our hypotheses, and prevent misconceptions about customer and consumer behaviors.

3. Create Scenario Models 

Once we have an understanding of the different demand drivers, we can generate scenario models that incorporate said demand variables. Scenario models help us understand how demand for our products will look in different situations that may arise in future.

For example, we could generate models with unique assumptions regarding periods of economic growth, economic recession, business cycle stages, product lifecycle stages, demographic shifts, population rates of change, product pricing, supply chain issues, business sector consolidation, and more.

Pick the assumptions that are relevant to your business and you’ll have an understanding of what could happen in different scenarios. Adaptation to rapidly changing conditions means that we should not think of purchase behavior from a steady-state or static perspective. We need to have a portfolio of explanatory and forecast models that we can access to quickly pivot and adapt.

Conclusion

It is important that we understand our customers and consumers. We should understand their motivations, needs, purchase decision process, and probable response to changing conditions affecting them. We should create scenarios of behavior under a variety of alternative assumptions.

We should be observant. We should be ready. We should be prepared. The above approach improves the performance of demand forecasts, supporting the company in its efforts to increase operational and financial performance.

2022 is beginning with substantial uncertainty and risk for businesses of all types. Much of this comes from the financial markets, and part of it relates to operating for 2 years in the pandemic. The list is long, but the main risks for demand planning and supply chain management are rising interest rates, shifting currency exchange rates, and price and cost inflation.

The interest rate risk is heightened by the planned normalization policies of central banks, including the Federal Reserve Bank of the U.S. Interest rates have been kept exceptionally low by central banks around the world, going back to the Financial Crisis more than 12 years ago. Rising inflation is forcing central banks to unwind their positions after years of accumulation and to increase their lending rates to banks.

Interest Rate Hikes Mean Changes In Demand

These will affect the cost of borrowing for businesses and consumers alike, in turn affecting the cost of inventory as well as the demand for products by businesses and consumers. For consumers who are acquiring products using debt (borrowing and leasing), the ramifications of higher interest rates can have magnified effects. Interest rates also impact currency exchange rates, adding more risk for global supply chains.

Scenario Planning To Mitigate Financial Risk

Now is the time for Demand Planners and Supply Chain Planners working within FP&A to begin developing risk scenarios for their companies, and to develop strategies to mitigate the financial effects for each. Given the number of risk elements for 2022, and the diversity of their effects by company and industry, scenario testing and planning is especially important. Contingency plans are essential in responding to changing conditions that will alter your product demand and business operations.

How Will Your Customers Respond To Interest Rate Hikes?

Consider how customers and consumers are likely to respond to interest rate changes and inflation in their budgets. For companies in your supply chain, how might they attempt to protect their margins with pricing that affects your costs of operation and your inventories? Consider how you can protect margins with price changes, and how that may affect demand for your products. Given the global nature of our businesses and the effects of currency exchange rates, how might company costs be affected by the coming changes in interest rates?

So, the scenario development and testing, and the development of contingency plans should be systematically undertaken. These should look at the effects on product demand, the effects on operational costs, the effects on inventory costs and financing, and how any ‘margin protection’ actions will impact demand.

How Will Your Responses To Risk Impact Your Trading Partners?

These issues you are facing are shared across all companies in the industry, and across all companies in your supply chain. The responses of each can be additive or multiplicative so Demand Planners need to create scenarios that fully incorporate the risk factors and understand the impacts of any resulting actions on our trade partners, as well as the effects of any actions taken by our suppliers and customers and consumers. Such scenario planning requires cross-functional participation to capture the many possible outcomes and risk factors. FP&A is essential to dollarizing each scenario and each course of action.

FP&A Must Dollarize Each Scenario & Response

Set-up a working group on a cross-functional basis with FP&A taking the lead in putting a dollar value on each scenario and response. This is not an operations forecasting process, but a scenario and contingency planning process. It is important for all members of the working group to realize this. Identifying the interacting elements and their effects on one another is essential. The process and the considerations are dynamic in nature, and will require iterations to test and evaluate the resulting scenarios.

Review these as a group on a regular basis to ensure prompt implementation of contingency plans and action. It is important to be prepared and it is essential to respond to the changing conditions on the ground in a proper and prompt manner.

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SPECIAL REPORT: Coronavirus disruption to sales forecasting has made an already complex process seemingly impossible. Until a vaccine is widely available to the public and infection rates are under control globally, businesses face many confusing demand signals from their own data and a barrage of ever-changing news updates. Navigating supply chain disruption amidst a pandemic is confusing everybody, including the experts.

This article offers guidance on S&OP process management to help your teams make clearer business forecasting decisions during the current Coronavirus pandemic. For small businesses and international corporations alike, this article offers examples and demonstrates the value of integrating new data and gaining new insights for optimal strategic and operational decisions to survive the Covid-19 pandemic.

Sophisticated tracking devices to monitor different aspects of your operations offer real time data, illustrating moment to moment changes. Shortcomings in supply chains can be explored, and scenarios split tested against each other for comparison for flexible, speedy decisions. Over the course of the pandemic, tracking evolving consumer behavior and changing supply chain capabilities help build the new baseline forecasting assumptions we need.

Incorporating Changing Assumptions Is A Must

Patrick Bower, Senior Director, Global Supply Chain Planning and Customer Service at a multinational consumer goods company, believes that scenario planning depends upon the specific needs of each business. He uses tools to help balance emerging changes in supply and demand. For example, if a 20 percent increase in demand occurs, capacity impacts are investigated immediately and resources are planned accordingly.

For some businesses, capacity in terms of available personnel as well as supply chain disruptions inject unanticipated consequences into planning, at least until the pandemic is under control. While tracking a fall or lift in demand or supply will already be a familiar continual assessment for many, forecasting now demands integration of government policy on social distancing and availability of a vaccine into analyses. Covid-19 related events represent new indicators to build into time-series forecasting. Incorporating new assumptions is critical and simply looking at the past no longer works. 

The point is to “get comfortable” in knowing you may be wrong

The point, says Bower, is to “get comfortable” in knowing you may be wrong in scenario planning under the present circumstances. Nevertheless, he acknowledges that being data focused offers the best insurance against error. Interpretations of recent data may suggest “what if” questions and testing scenarios, highlighting the gaps that a collaborative S&OP process can fill. 

As there is a great degree of uncertainty given a lack of data and rapidly evolving events, he suggests collaboration with external stakeholders wherever possible to gather (and share) as much information as possible. Supply chain partners need to be supported. An example is sharing POS data with them which helps improve their planning which, in turn, helps secure the supply you need. For consumer goods companies, there is value in contracting market research partners to guide your risk management. Insight into consumer behavior at a time like this is King.  

His team reviews potential “weak links” in supply chain data projections. During a pandemic, where government policy surrounding lock-down is unclear, some companies may not define themselves as an “essential business”. Suppliers that have identified themselves as non-essential businesses and have shut down are a serious problem for many companies. Depending upon the Covid-19 trajectory, more “weak links” like this in the supply chain could unfold.

Collaboration and Communication Key As Judgement Comes To The Fore

Collating and interpreting novel internal data, flagged by colleagues, particularly those on the front line, as well as supply chain partners, could be essential to enhanced and agile decision making. Crises offer opportunities for staff contributions to identify new performance markers and future indicators during disruption. For Andrew Schneider (ACPF), Manager of Corporate Quality at Medtronic, transparency is key, and new internal and external relationships must quickly be forged to ensure timely production and delivery of products.

Where machine learning does not suggest appropriate substitutes, companies have to use their best judgement, unless alternative suppliers can be mobilized rapidly.

Demand planning software systems must facilitate integration of up to date information from upstream, where products may be drying up, as customers switch lines. Where machine learning does not suggest appropriate substitutes, companies have to use their best judgement, unless alternative suppliers can be mobilized rapidly. Weighing risk and acting accordingly should involve continual monitoring of implications of changes made.

Regular Monitoring & Tracking Of  Data Is Critical

Any tweaks to procedure need to be systematized for close monitoring within key S&OP cycles, which vary between businesses. Small adaptations can be tested against emerging data to review impacts. This necessarily involves open communication with relevant stakeholders for the benefit of all moving forward, including end users.

Holding onto life-saving products is not only immoral but can damage business reputation.

Dramatic operational changes may also be entirely appropriate. However businesses choose to adapt, close observation and consistent, regular tracking of results is essential. Comparisons against data from economists and epidemiologists as well as against data from previous disruptions are recommended. Cross-functional teams need to support interpretation of forecasting results, facilitating rapid decision making.

For retailers panicking about lack of inventory, it is also worth bearing in mind that it may be entirely justified to run out of stock, such as face masks, or bleach. During this catastrophe, say Patrick Bower, holding onto life-saving products is not only immoral but can damage a business’s reputation.

Now’s The Time To Use Wider Indicators

Individual companies will have individual balancing acts and assumptions to include in their forecasts, focusing on a wider variety of key indicators than usual. If cash flow, as opposed to inventory or service levels, is the main priority, then demand planning managers will benefit from integrating wider indicators, such as the shape of a forthcoming recession/recovery, for instance. Segmenting historical data sets according to test scenarios around a ‘V’, ‘U’ or ‘W’ shaped recovery will reveal implications for S&OP and cash-flow. 

However, given that time series forecasting cannot predict unprecedented events, disruptions like staff absenteeism, supplier or line loss, and even switching to producing a new product, requires using cleansed historical data. Data can be split tested in forecasts allowing implications to be explored before decision are made.

Jonathan Schwartz (CPF) is a Supply Chain Analysis Manager at WD-40. He remarks that the baseline ‘steady state’ looks different depending upon a company’s fiscal year – forecasts for April-end could look good, but not so if your year end is December. He adds that fast production and distribution is essential before absenteeism from sickness or changes in business partner behavior disrupts either business function.

While we wait for a vaccine, confidence and behavior will continue to shift, changing consumer, supply chain and staff priorities.

While we wait for a vaccine, confidence and behavior will continue to shift, changing consumer, supply chain and staff priorities. This requires daily, weekly and monthly reviews of demand variables, KPIs, macro-economic indicators, and the spread of Covid19.

Matt Hoffman at John Galt Solutions believes 12 month planning to be a key timeframe as companies must be must be positioned appropriately when things return to normal. During these initial stages in the pandemic, where social distancing is the norm, there will be pent up demand. As businesses ‘return to business as usual’ environments, regular re-assessments of assumptions will be necessary before forward planning. It is recommended that companies understand in detail their inventory carrying plan for this next year (during which time there may yet be a second wave in the pandemic) as lock-down restrictions are lifted.

Make no mistake, Coronavirus has changed consumer behavior and some of those changes are here to stay.

When combining data sets in scenario planning, John Galt Solutions observe income and consumer confidence, deploying regression modelling for understanding consumer impacts during these times of social change. He cites health and beauty product consumption shifting from salons to home application under lock down. Thus price points and or marketing messages need recalibrating. Make no mistake, Coronavirus has changed consumer behavior and some of those changes are here to stay.

Forecasts Will Be Wrong & That’s OK

Industries and businesses are at risk during the current unprecedented circumstances. However Coronavirus and the responding policies develop, and whatever the impact on the economy, experts are consistent in their message: Closely monitor the data and compare against historical data from previous disruptions and downturns. Furthermore, collaboration and communication in demand planning have also never been more necessary. If S&OP as a collaborative, cross-functional forum was important before this crisis, it is a life saver now. 

Forecasting models will not be “correct” in the near term.

During a potentially dangerous new phase as world leaders to seek to balance public safety with a return to work, the coming weeks will provide yet more tests of companies’ forecasting and planning abilities. As Eric Wilson, Director of Thought Leadership at the Institute of Business Forecasting, notes, the concern of many of the businesses contacting him is the duration of disruption. This shines a spotlight on the importance of looking beyond sales data and integrating economic and epidemiological data into forecasting.

He adds that while forecasting models will not be “correct” in the near term, it is times like these that reveal how critical forecasting and planning are to a company’s survival.

Useful Articles:

Demand Planning During A Recession

Planning During A black Swan Event

Supply Chain Planning During Covid-19

3 Veterans Give Advice On How To Plan For Coronavirus

The Impact Of Coronavirus On Your Forecasts