“Change is the only constant in life”, said the Greek philosopher, Heraclitus. Uncertainty is a derivative of change and has been a constant ingredient of the demand planning process. Thus, uncertainty in business is not new but the pace at which uncertainty is building is unprecedented.

Uncertainty in business is increasing due to the increase in options available to consumers in terms of new products and different channels, and occasionally worsens dramatically when events like trade regulation overhauls, economic recessions, social unrest, and pandemics like we are experiencing now occur. So, whether by choice or by necessity, our product and channel mixes can become disrupted presenting major challenges for Demand Planners.

Understanding Uncertainty In Your Product Mix

The good news is that there are ways to reinsert certainty back into business planning. First we must  comprehend the uncertainty we’re dealing with and draw a perimeter around it. This can be achieved in the following ways:

1. Segment Your Products

First, understand the scope of uncertainty and drive segmentation. The Covid-19 pandemic has been the biggest driver of uncertainty in recent times. However, it has not had a uniform impact on all products and services across organizations. On one side, where products like gym equipment and frozen foods have seen sky-rocketing demand, the hospitality and tourism sectors have drowned. There have been products and categories like fresh foods, home and personal care, consumer electronics that have stabilized after an initial knee-jerk reaction.

The first thing Demand Planners should perform is segmentation of products, services and customers based on the value they contribute, i.e. revenue, profitability, stability of the segments, and by value they seek e.g., quality, innovation, cost, and agility. Segmentation will allow planners to improve focus, reduce noise from the demand signals, and drive technical improvements to predictions and drive a collaborative response in unpredictable segments.

2. Understand the Assumptions Behind Your Demand Signals

Second, drive clarity on the assumptions associated with the demand signals. Demand plans and actual sales are both outcomes of multiple factors, assumptions, and decisions. In times of uncertainty, it becomes doubly important for planners to tag the changes in their demand plan with factors like internal and external events; product, customer and supply chain related assumptions; and, strategic and operational decisions made by the organization.

Clarity on these factors allow advanced technology to apply AI/ML algorithms to generate improved forecast accuracy and allow planners to identify the impact of various factors on the demand plan.

3. Assess the Agility Of The Supply Chain

And third, assess the agility of the supply chain. While the uncertainty on consumer demand directly and adversely impacts demand planning performance, the uncertainty on the supply side – plants, suppliers, warehouses, transportation services – directly impacts the responsiveness of supply chains to react to changing demand. Like the demand side, there are segments in supply chain as well, which operate at different levels of upside and downside adaptability.

Some of your plants, production lines, and suppliers may be suitable for a continuous manufacturing operation while others might be more flexible and accommodate different products with minimal changeover cost. It is essential for Demand Planners to understand these segments in the supply chain and shape the demand plan based both on constraints and dependencies on internal and external partners.

The aforementioned activities help us comprehend the uncertainty we’re facing and allow organizations to create a value-for-the-organization vs. value-for-the-customer matrix, which will sharpen our focus on the relevant segments.

Injecting Certainty back Into The Business

Following the assessment of uncertainty, the following 4 steps can be taken to drive certainty in the demand planning process and outcomes.

1. Update Demand Plans Regularly

As the first step, Demand Planners must establish a frequent cycle of plan refinement in the short-term. This can be a combination of demand sensing based on daily order positions or POS information, and consensus planning for key segments on on a weekly basis. The key to success is understanding of the internal and external factors driving sales and the ability to incorporate the impact of external factors in the demand plan.

The goal of short-term plan refinement is to get the deployment of products in the network right. As a by-product, it may improve forecast accuracy as well. Another important thing to note is that the periodic demand planning cycle should not lose sight of the big picture of achieving the annual operating plan.

2. Document Risks & Opportunities In The Demand Plans

The second step is that the demand planning process must improve the governance around recording of risks and opportunities and their probabilities. Risks and opportunities are the most ‘certain’ aspects of uncertainty. In current times, we are seeing customer and channel stability risks, product vitality risks, fulfillment lead time variability risks, and so on. On the other hand, we are seeing innovation-driven opportunities in product channels; the eCommerce channel is enabling leaders in the CPG industry to reach consumers directly, efficiently, and profitably.

With such risks and opportunities, Demand Planners must establish risk and opportunity governance and their inclusion in the normal, aggressive, and conservative demand plans in collaboration with customer facing roles. The organization must develop a response plan in collaboration with supply chain roles for each of the three IBP-generated demand plans to ensure agility when the business situation changes from one plan to another.

3. Foster Certainty By Doubling Down On Your Cash Cows

The demand planning team can drive certainty in the demand plan by playing to their strengths. Organizations can use a growth-share matrix to identify their Cash Cow and Star products and customers, and double down on them.

The supply planning team must ensure that the warehouses, plants, and suppliers that cater to demand for such products and customers are resilient, responsive and generate positive financial value for the organization. Together, the demand-supply and the value equation should drive the supply chain capacity decisions and subsequent constrained demand plan.

4. Engage with Suppliers

Finally, in the fourth step, the demand planning team and associated functions in the organization must collaborate with the broader supply ecosystem to gain clarity. The information coming from upstream and downstream ecosystem partners under the CPFR framework brings early insight into demand changes and supply risks across all nodes of the supply network. It provides additional lead time to collaborate and respond to uncertain situations.

In conclusion, while change may be the only constant in life, understanding the reasons driving change go a long way to driving certainty in demand planning.

This article first appeared in the summer 2019 issue of the Journal of Business Forecasting. It didn’t anticipate a global pandemic but did anticipate a slowdown in a global economy approaching the end of an expansion cycle. It provides an excellent blueprint for effective planning during an economic recession, written by a veteran Demand Planning Director who has planned for 3 of them. – Ed.

When I wrote this article at the end of 2018, the equity markets were plummeting, threatening to enter a bear market. We’ve since bounced back but that dramatic drop serves as a warning shot, letting us know we’re approaching the end of the current economic cycle.  With economic expansion cresting, unemployment at historically low levels, and with the Federal Reserve considering interest rate adjustments to extend the span of this historic GDP growth, it is only a matter of time before the economy cools off.

And with two-thirds of the US economy based on consumerism, the impact of any economic decline will disproportionately impact consumer products and brands. I have worked three recessions during my career in demand planning, so I know a little about what to expect. I also know that each recession is unique. The recession of 2008 was different from 2001, and both were different from 1991.

Some are bubble-influenced, like the housing bust of ’08, while others are simply soft-landing hangovers from rapid expansion like in 2001. Despite differences in the underlying causes, there are common recessionary themes that impact the demand curves of most companies. Knowing these commonalities may help you prepare for the next downturn.

We’ve Been Here Before

There are some common themes and generalizations about the way products, consumers and retailers interact during a recession. One way or another, a recession will alter your demand curve. Your customers—whether large retailers or OEM parts suppliers—will cut their forecasts, reduce their inventory, and become more pessimistic in their forecasting of the future. Like you, they will not get the timing right, and the result will be fits and starts in their ordering patterns.

And if you use point-of-sale data (POS) to help you forecast demand or estimate trade inventory, you will start to see a disconnect or a divergence between POS trends and orders from your customers. There will be a lot more “noise” in the data and a true demand signal will be harder to discern.

So why the noise? Well, to start, if history is a guide, activity relating to discounting and other retail trade will increase, and customers will offer more frequent pricing reductions, or other ways to stimulate demand on either the virtual or physical shelf for the value conscious consumer. Of course, your competitors will do the same, and the result will be a much more volatile demand pattern, which will make planning for both supply and demand more suspect. As you try to navigate these rough waters, it will be helpful to openly discuss the potential impact of scenarios such as these. This will allow for at least some understanding of shifts in key performance indicators (KPIs), such as buffer inventories increasing to handle the greater demand volatility and forecast error.

During a recession, value becomes a dominant consumer theme. Cash stressed consumers will seek the best price. Generally, this results in both private and store brands, as well as off-brand or commodity products, picking up market share as consumers and customers move towards value. From a planning and S&OP perspective, your units might stay the same, but your revenue may decline due to a shift toward lower-priced goods.And with a mix shift in the products consumed towards value, strategies for competing or participating with products offering better value to the end consumer should be part of your S&OP decision-making process.

Managing new products will present a challenge as consumers are less likely to expose limited financial resources to try a new product. When my employer launched a new hair coloring product in 2008, it began to founder. Our initial demand sensing of POS results reflected a serious gap to expectations. We realized we had to take drastic measures, so we gave away free product—offering “free-bates” to help stimulate trial activity among our consumers. It worked.

Noting the economic downturn with historically high unemployment, we also focused our advertising creative on how this product might help in a job interview, to directly appeal to the unemployed segment. This too also helped drive trials and interest in the product. The key learning is that in anticipation of a sure-to-come downturn, it is reasonable to expect your customers or consumers to be hesitant to shift to—or even buy—new products without some compelling reason to do so. And to the extent possible, it would be wise to anticipate this type of dynamic throughout all your new product planning processes.

It is not just the consumers that are averse to new products—traditional brick and mortar retailer acceptance of new products will also be a challenge. These retailers tend to “batten down the hatches”, preferring to lean into known brands and products and lower-priced store-brand or private-label offerings during recessionary times. Not only will this make obtaining new product distribution more difficult, but it is likely to result in some marginal items being delisted. Such activity indicates why examining risk in your product portfolio is central to planning before and during a recession.

Similarly, you are likely to notice a shift in your product mix. While lower priced offerings might sell better, so too will larger-size/better-value offerings. Bonus packs, upsized offerings, on-pack couponing, multipacks, and similar strategies will prove themselves to be smart, tactical alternatives for increasing consumer interest at shelf, and for holding ground against private-label offerings. Being prepared for this potential mix of shifts—if only on paper—will help you improve your reaction time if and when response tactics are called for.

And finally, trade inventory will drop – if only because your customers will lower their forecasts. For example, if your customer keeps four weeks of supply based on weekly demand of 100 units, then normal inventory would hold 400 units. If the forecast is cut to 90 units per week, however, the inventory target will drop to 360 units. In short, you should be prepared to address unexplainable drops in your customer’s inventory that are not aligned with historical trends.

Channels Will Shift

In what is probably the most obvious of statements, sales volume levels with mass discounters, club stores, and dollar outlets tend to swell during a recession, while specialty outlets will see a decline. Estimating and improving relationships in recession-friendly channels—prior to a downturn—may help you weather the economic storm. Consumers have always been less willing to pay a convenience-level premium during tough times. When I worked with Snapple during the 2001 recession, fewer people made street-level lunch time purchases, preferring instead to buy multipack offerings of our product in grocery stores as they “brown-bagged” their lunches as a way to reduce day-to-day expenses. Interestingly, these multi-pack products were very sensitive to price-based promotions and sold tremendously well in discount grocer and big boxes outlets when on deal, a huge channel shift away from convenience stores and local delis. As we were constantly digging deep into our point of sale and shipment data, we were able to react and alter our sales and promotional strategy during that particular recession. And while we are discussing channels it remains to be seen the impact a recession will have on the emerging e-commerce channels. These have vastly expanded since the last downturn and the impacts are hard to anticipate. Because of this unknown impact, more so than ever it is imperative for consumer goods companies to sense any shift in channels with consumers.

6 Rules When Planning For a Recession

While some of these recessionary effects may seem like broad generalizations, they are merely the most common impacts. The reality is that recession hits each business in unique ways. So where can you find guidance to determine how to plan better? What can you do before a recession? Here are some action items to consider.

Dig into your own data: Burrow deeply into all institutional data retained from prior recessions and try to curate the facts into an economic narrative of sorts. Find old S&OP content, consensus reporting, or ask veterans of the business their opinions on the subject. These will all offer some guidance for the future. But make sure your analysis is not simply “What happened?” Try to incorporate all the dynamics of your firm’s reaction—an assessment of what worked (and didn’t), an assessment of competitor activities and reactions, and maybe even a snapshot of economic indicators before, during, and after the recessionary period. If you don’t expand your analysis to paint a complete picture, you will be short-changing your own research. Wade neck-deep into your own data lake and immerse yourself fully into the past.

Reset your thinking: While most forecasters have a tendency toward a positive bias, force the stakeholders of your operational processes such as S&OP and financial planning and analysis (FP&A) to look at most plans with greater levels of scrutiny and skepticism. Use the results of your own historical data dig to enlighten the discussion. Make upside forecast moves based only on hard facts, not conjecture or opinion. Expect mix shifts in products. Use shorter trending metrics to forecast forward. Work on building different demand scenarios to estimate impact on the business, both top-line and bottom-line.

Examine your product portfolio: Are you thinking of launching a high-priced premium offering sometime within the next year? How will you propose to punch through the economic noise and gain acceptance of your product when consumer dissonance for anything “new” and expensive may be heightened during a recession? Do you have products already at risk that may go under during a recession, or is there some way to make such items more desirable to retailers or resellers from a margin perspective? Ask yourself tougher and harder questions about your product portfolio to prepare for the inevitable downturn. Prepare your commercial innovation backlog with tactical options such as bonus or instant redeemable coupons, so you can be agile in the wake of declining economic results.

Use predictive analytics (PA) tools to see how your demand curve reacts to differing economic stimuli: Some of the PA products leverage large econometric databases. Prepare to align emerging economic factors against your own POS or shipment histories and look for correlations, latency, and inflection points. Look for products or product families that are counter–cyclical and may see an uptick and plan to leverage this dynamic. Understanding the leading economic indicators and their latency on your business will help you plan better in good times and in recessionary times.

Monitor key indicators of economic activity: During both the 2001 and 2008 recessions, my planning group provided an informal analysis of 25 or so key economic indicators—from housing starts to unemployment to consumer confidence. We looked for the aforementioned correlation and latency impacts to determine what items were impacted by specific economic indicators and how long it took these results to manifest themselves within demand Start tracking these indicators now.

Bring it to S&OP—now: Sooner than later, proactive planners should escalate conversation about recessionary contingencies to the executive review phase of their S&OP processes, since the topic is a strategic issue that needs to be part of the executive conversation. Create a one-slide summary of key factors likely to have the greatest impact on your business and track them in each meeting.

There is no magic to understanding and navigating the potential impacts of a recession, whenever the next one may come. The solution is the hard work of becoming intimately knowledgeable about past impacts on your business, tempered with updated knowledge of changes in your business model (such as the growth of e-commerce) and in your product offerings.

Bottom Line

When you’ve weathered as many recessions as I have, you learn what to look for and you recognize promising responses that have worked in the past. Some of the most interesting dialogues I ever had in the S&OP process occurred during difficult economic times. Demand planners and S&OP leaders should take action now to initiate forward-looking conversations about recessionary impacts. It is a fiduciary responsibility of the planning role to facilitate this difficult discussion.

This article was first published in the Summer 2019 issue of the Journal of Business Forecasting. To get the journal delivered to your door quarterly and a host of other benefits including free workshops, discounted events, and access to the entire IBF knowledge library, become an IBF member. Join the IBF tribe here.

Andrew Lewis - Electrocomponents

The Background…

Throughout a financially turbulent 2009, the Supply Chain at Electrocomponents plc needed to better integrate into the business and become more intelligent, agile and effective. Just two years into our long-term transformation journey, our key innovations have been to:

• Introduce formal forecasting.
• Embed leading Supply Chain thinking including demand planning and SIOP where many thought it couldn’t be done in an industry like ours.
• Integrate leading edge forecasting technology.
• Identify unsatisfied demand resulting in back orders, lost sales or substitutes.
• Transfer our Supply Chain from the UK to an international focus.

The Burning platform…

Our Electronics Division’s strategy to expand our global range by 120K products over the next 2 years required a step change in forecast accuracy and safety stock policies. This in turn would  support the high level of New Product Introductions (NPI) that would be involved. Our outdated processes had been designed to cope with circa. 5,000NPI/annum and had to be changed so  that they would be capable of coping with 5,000NPI/month.

A key challenge for the Supply Chain in most organizations is aligning the business behind a single set of numbers. We chose a SIOP process rather than S&OP process to manage this because we do not consider inventory to be waste, unwanted or an accident in our business. Inventory  is fundamental to our business model as a distributor.

Above all else, it has been real innovations like positioning our Supply Chain within a Demand Driven Value Network , SIOP, and the development of true lost demand that have started to shape a truly agile and intelligent global Supply Chain at RS Components. In the future we hope to integrate trend software drawing from our eCommerce site to further strengthen our demand signals.

The payback…

Our Supply Chain performance has improved with:

• Increased service to our customers whilst adding nearly 60,000 products per year.
• Process 40,000 parcels per day (1 every 2 seconds), and deliver 99.8% on time in full.
• Maintain stock turn and increase cash flow during the difficult transition period.
• We have gone from 5,000 New Product Introductions (NPI)/year to 5,000 NPI/month!
• Stock Availability greater than 97.5%.
• Reduced Supply Chain cost by 9.5%.

We have learned a lot of lessons, some of them the hard way, as we have taken this journey and I look forward to sharing our experiences with you at IBF’s Demand Planning & Forecasting: Best Practices Conference in Dallas, Texas.

Andrew Lewis
Head of Global Supply Chain Planning
Electrocomponents plc

Hear Andrew Speak At:

Constance Korol

As we ease out of crisis mode and plan for more stable waters, we find ourselves asking  how  can we take advantage of the upturn, and what will it take to do so? Going back to my undergraduate days of pursuing my degree in Education makes me think of the structure of a lesson plan.  The lesson plan clearly identifies the mission statement, goals and objectives, for both the long and short-term. This brings to the forefront the questions of where to obtain the resources, the drive, and best practices to implement this plan. Lastly, of course, would be to determine a way to track and measure the results in order to evaluate the successes or shortcomings of this lesson plan. Common questions that professionals find themselves asking at this stage usually include:  Where do I start? What should be my primary focus? What areas need the most work, and how do I communicate this to others?  Let’s start with something that health care professionals refer to as a SOAP note or:

Subjective

Objective

Assessment

Plan.

The “S” stands for subjective and is defined by Wikipedia as, “The patient’s current condition in narrative form. The history or state of experienced symptoms are recorded in the patient’s own words. It will include all pertinent and negative symptoms under review of body systems.” If we translate this to business conditions, we must describe the state of affairs using our own words. For example, “Our team that produces the forecast continues to struggle, especially with today’s greater variation in demand.  This contributes to our company’s cash flow troubles and as a result, we  continue to lose customers for some products due to out of stocks.   For other products, much of our money is tied up into inventory that is slow to sell?”

Going back to our Healthcare example, the next letter in our acronym is “O” or objective. The objective component includes:

• Vital signs
• Findings from physical examinations, such as posture, bruising, and abnormalities
• Results from laboratory tests
• Measurements, such as age and weight of the patient.

This is where you stick to the facts, and only the facts. In business terms you may ask, “What is the company’s current forecast accuracy on an aggregate and SKU level by location, inventory levels, customer fulfillment rates, orders, shipments, and other important data and metrics. Also, is there a consensus process or silo based forecasting process?   If there is a consensus forecast, is it being used or overridden?”  First you need to jot all the facts down, no matter how nasty and terrible they may look.

Then there is “A” which stands for assessment. This is a quick summary of the patient’s main symptoms and diagnosis including a differential diagnosis, a list of other possible diagnoses, usually in order of most to least likely. Translating this back to our business example would lead to answers such as,  “Our forecast error is high because there is no input from sales and marketing.”  “There are no incentives in place to improve the forecast and no reward structure.” Or, “upper management does not use the baseline forecasts, where instead they create an unvalidated goal as the forecast.” Furthermore, those with forecasting responsibilities are not certified and properly trained for the task at hand.” Think of this area as the broken rib that is causing internal bleeding throughout the body. Once addressed, the body as a whole will start to heal and run at a normal pace. Find the broken rib at your company.

So now we have reached the “P” or the point of laying out your  plan. The lesson plan, with goals and objectives which will empower team members by sharpening the tools needed for achievement. This is not the easy part in health care or business. It takes time, research, and patience.  There may be a need for many revisions in addition to utilizing networks such as the IBF Membership Network for advice.  The lesson plan is not only for you, but for your team as well. What will you teach your team in your weekly meetings?  What will they be teaching you? At the end of this journey, you should be able to teach a whole community the lessons that you have learned and developed as best practices. Collectively we’re living through a very tough economic time, and together, we can still document our rough patches, lessons learned, as well as accomplishments, all for a greater good for the company and our professional careers.

Therefore, starting with a pen and napkin, then moving over to the computer and opening up a blank word document, you can develop a lesson plan for yourself and team that can ensure no opportunity is lost as the market comes back to life.  Then, perhaps by New Years, we will not have a hangover experience, but an experience of celebration.

Constance Korol
Senior Marketing Manager
Institute of Business Forecasting & Planning

Mark Lawless

At a time where recessionary forces are at work, many questions are being asked about how businesses have evolved their management practices and how this has affected their many stakeholders. The extent and depth of the recession has surprised many, and expansion of the ranks of the unemployed has hampered demand, seriously affecting patterns of demand and the economic performance of businesses in all industries around the globe. For the U.S. with its consumption dominated gross domestic product, this has had a devastating effect on economic conditions.

The competition for lower cost, higher profit margins, and supply chain efficiency has resulted in a continuous shifting of production and service resources from geographic region to geographic region throughout the globe. The economic theory is that as these jobs and resources move, the existing regional resources are moved to their next highest and best use. And in this context, the global economic welfare and economic performance is maximized. But the emerging evidence is that while this may be true, it does not necessarily imply that everyone benefits long-term from such an approach. There are regional winners as losers as the global economic dance continues. Building global economic and business growth may have many winners and losers at different moments in time. Structural and frictional unemployment, reductions in household income as workers and resources move to lower compensated jobs and industries, reduction in availability of healthcare as a result of the relative cost of health insurance, and reduced retirement program availability are all factors that are challenging workers and whole economies and their long-term goals.

One has to ask the extent to which the supply chain strategies that have been adopted to optimize the performance of companies that have evolved from regional and national companies to global companies – outsourcing production and services, continuously pursuing more efficient and lower cost locations – may have contributed to a pattern of shift of economic wellbeing across geopolitical boundaries. Do companies have any obligation to the welfare of the communities and geopolitical entities upon whose resources they draw, or is it a relationship solely of a “transactional” nature? Is unbridled pursuit of efficient supply chain development in the long-term economic interest of the countries affected, or does it simply pass the economic baton from one region of the world to another?

These are challenging issues in these challenging times. The long-term prospects for the many regions of the world, the economic welfare of their populations, the sharing of economic wealth, and the interests of the companies operating within these regions are all mixed in the evolving and ever-changing economic brew. And a key driver of these forces is the supply chain and how it is managed and developed by the companies serving their investors and stakeholders.

What do you think?