In today’s increasingly competitive markets, one way to stay ahead of competi­tors is to launch more and more new products. According to an Institute of Business Forecasting survey, about 17% of companies’ sales revenue now comes from new products, and is growing. To be ready for new product introductions, three steps are necessary:

1. Prepare forecasts based on different scenarios,
2. Negotiate conditional contracts with suppliers, and
3. Be quick in dropping a product that no longer yields enough margin.

1. Scenario Forecasting

New products are the most difficult to forecast because there is no history to go by. Market experience tells us that, by and large, 7 out of 10 new products fail. So, the best strategy is to use scenario forecasting, where forecasts are based on what the likely minimum and maximum sales volumes. Higher volumes typically lower the cost per unit and, thus, have a positive effect on the margin per unit. But most new products are over-forecasted. So, don’t think in terms of cost; rather, think in terms of realistic numbers you can expect, and the risk you can bear.

In the absence of historical sales data, the best way to forecast for new products is to use the Delphi method, where different stakeholders submit their forecasts along with comments. By reviewing different forecasts based on different assumptions with a number of iterations, companies usually arrive at realistic numbers.

2. Negotiate Conditional Contracts With Suppliers

Because of high uncertainty in the demand for new products, it is in the best interest of a company to have flexible contracts with suppliers, which allows, to some degree, the raising or lowering of orders as needed. If you negotiate a contract based on cost, which is mostly the case, you are likely to be stuck with too much inventory of raw materials.

The supplier is willing to give a price break only if you agree to place a large order and give a longer lead time. This can be a problem because products can fail, and their forecasts turn out to be much higher than the actual demand. If, on the other hand, you try to place a minimum order, you may miss opportunity to capitalize on products that do much better than expected. With that, you will not only lose sales but also your reputation in the market. Depending on the supply chain, it may take weeks or months to fully recover. The best thing, under the circumstances, is to look for suppliers that are willing to sign a flexible contract that allows you to raise or lower the quantity by a certain percentage after a certain number of weeks following the launch.

3. Quickly Get Rid Of Poor-Performing Products

It is much easier to launch a product than to drop one. I have seen companies struggle with the idea of discontinuing a failing product. If I’m in sales, I would object too, because dropping it will hurt my revenue numbers. What should matter is not how it would impact a specific function, but how it would impact the company as a whole.

We need a certain return on investment for our new products and the issue should be whether it is generating enough profit for the company. When a product comes closer and closer to the end of its life cycle, sales starts going down, competition from low-cost players intensifies, and margin deteriorates. Because of this competition and decrease in sales, the demand pattern becomes more erratic, and the quality of the forecast deteriorates. The increasing uncertainty about forecasts causes an increase in inventory and a decline in customer service. So, what we wind up with is low margin and more inventory. Consequently, the best thing to do is to rank products in term of margin and be ruthless in dropping those that aren’t driving sufficient profit.

This article originally appeared in the Fall 207 issue of the Journal of Business Forecasting. Click here to become an IBF member and get the journal delivered to your door quarterly, as well discounted access to IBF training events and conferences, members only workshops and tutorials, access to the entire IBF knowledge library, and more.

Today’s markets have a greater number of new products than ever before. But where do the ideas for all of these new products come from? Usually from Sales, Marketing, and Product Development executives. But do these people know the impact a new product will have on the existing portfolio? Do they know if the new product will actually drive growth? Not always, because the Demand Planners who hold the relevant data are often kept outside of the new product process. Here I reveal how important they are and where exactly they should fit into the Stage Gate process.

Success Or Failure of New Products Depends On The Company’s Growth Stage

But first, we must understand the importance of the particular growth stage the company is in. If a company is the mature stage of its growth cycle, new products that find new customers are crucial to company growth. At this point, it is more crucial than ever that Demand Planners are brought into New Product Development process in order to maximize successful launches. Remember that no new product is launched in isolation and they have inevitable impact on the whole portfolio.

Demand Planners must enter the New Product development process to neutralize bias and reveal which product ideas are viable growth drivers and which are not.

Companies undergo the following phases of growth:

1. Startup: New solutions for new customers
2. Portfolio Expansion: New solutions for existing customers
3. Maturity: Existing solutions for existing customers
4. Market Expansion: Existing solutions for new customers

New Products Must Lift A Company Out Of The Maturity Phase

This is where the organization finds itself at a crossroads. By staying in the upper right quadrant, they continue to introduce new products, but rather than producing true growth, they may instead be cannibalizing existing product sales, whereby a new product eats into the demand for an existing product. In some cases, the older product may be more profitable and easier to manufacture. Not only that, companies run the risk of rapidly increasing the number of SKUs they need to manage, creating complexity whilst not actually acquiring any new customers. In this all too familiar scenario, they are only creating new ways to provide the same service to the same customers. No growth is achieved, instead, the company is wasting time and resources on making everything more complicated.

Organizations that stay in this quadrant run the risk of stagnating, and often fail to appreciate this situation because of two key biases. The individuals most responsible for developing new product strategies tend to overestimate the return on investment for new products and underestimate the sustainment costs of managing increasing numbers of SKUs. Demand Planners must enter the New Product development process to neutralize bias and reveal which product ideas are viable growth drivers and which are not.

Where Demand Planners Fit Into The Stage Gate Process

Advanced organizations that execute New Product best practices use a Stage Gate process that includes Demand Planners at each step. A key component of this process, Demand Planners assess viability from a data driven, statistical standpoint, and if done correctly, will maximize the chances of new product success. Demand Planners fit into Stage Gate Process as follows:

1. Investigation: In this initial phase of investigating potential new products, Demand Planners must help categorize poor performing SKUs or markets, develop strategic plans and identify gaps in these plans.
2. Feasibility: Secondly Demand Planners must create scenario plans to identify opportunities and risks to understand the impact the new product will have on the existing portfolio and wider business. They should also contribute qualitative assumptions underpinning the growth proposition.
3. Plan: They must then integrate these assumptions into the plan and develop the opportunities available
4. Development: In this stage, Demand Planners must fine-tune parameters and planning to ensure launch preparedness.
5. Launch: Once gone to market, Demand Planners should monitor sales and update forecasts accordingly. Here, the Demand Planner must ensure enough supply is available, or in case of poor sales must suggest ways to improve sales or decide to withdraw the product.

The Enthusiasm of Sales and Marketing Must Be Tamed By Demand Planners

Let’s consider the incentives placed on the Sales & Marketing and Product Development teams responsible for these new product decisions. Sales wants to be able to sell as many SKUs as possible, as each one presents an additional opportunity to money. Marketing wants to create the “splash” associated with promoting a new product. Product developers are incentivized for innovating and introducing new features. None of these functions feel the pain of proliferating the number of SKUs that need to be supported to the extent that the Demand Planning function does. What’s more, none of these functions understand the impact on the portfolio like the Demand Planner, and in many cases will be unaware that their innovations are actually holding the business back. Somebody has to tell them.

For these reasons, the best new product strategies break out of the upper right quadrant and refocus the organization’s energy on addressing new solutions for existing customers and finding new customers. These activities represent true growth opportunities. Often, those individuals who had a hand in creating the initial success by providing new solutions to new customers in the early, disruptive stage of growth find it hardest to get out of the box and find these true growth opportunities.

Demand Planners can exert influence to increase the probability that the energy exerted to launch new products is rewarded with growth.

Demand Planners Must Reveal The Hidden costs of SKU Proliferation

If the organization is going to incur the costs and risks associated with supplying new products, it should ensure a good portion of these products provide true opportunities for growth instead of just replacing solutions that already exist. For sure, replacement products are often critical for defending market share, but such efforts cannot consume the entire product strategy. A valuable line of inquiry from the Demand Planning perspective might look like this: “If we develop product A, we can expect to incur startup costs of B, experience cannibalization of C sales, so we’d need to acquire D sales from new customers. Is that possible, or might we better off focusing on a different product?”

New product introductions are a necessity for any organization, but they create challenges for the demand planning, supply chain, and manufacturing functions. By increasing their involvement in choosing the right new products to develop, Demand Planners can exert influence to increase the probability that the energy exerted to launch new products is rewarded with growth instead of stagnation and decline.

My message to Product Developers is this: get Demand Planners involved in your development process if you want new products to truly drive growth. My message to Demand Planners is this: get yourselves involved because nobody in the organization has the bias-free insight your function holds.

For discussion purposes, let’s view a list of potential business units that likely include; executive management, quality control, warehousing, inventory planning, logistics, marketing, sales, finance, purchasing, and manufacturing. As we know, each of these functions has different skin in the game and engages at different points in time. The timing and frequency of communication across the enterprise is critical during all stages of the product launch. If, as Michael describes the Planner is the facilitator, they must be skilled at understanding the degree of risk or uncertainly and be able to broker discussions around potential contingencies. Some of the changes that inevitability take place during the launch cycle occur when constraints are added or removed, when delay or acceleration exist, when units are increased or decreased, when the mix changes and/or the costs change. These all have a potential impact on the forecast.

A critical component of the new product launch is the need to forecast the impact to existing product. Cannibalization, in some form will occur.  In my experience there is generally always impact to existing product and this is a “must take” opportunity to generate healthy dialogue with the respective partners. For a new product launch to be successful the existing product needs attention. If changes to the existing product mix are not addressed, the consequences can hinder sales of the new product, cause product obsolescence, create margin erosion and even potentially confuse the customer. Part of our human nature is to focus on the “new”, because it is more exciting. However, in the case of inventory planning the “old” requires adequate attention for the health of the overall business.

Joy White
Supply Chain Leader
IBF Ambassador