As of this writing, Central Banks’ efforts to reduce inflation are underway. Central Banks around the globe are increasing their interest rates in response to the rate increases by the U.S. Federal Reserve. Whether you’re in the USA or elsewhere, the impact of rising interest rates on firms and the broader economy can be severe, and requires robust planning responses. 

Rising interest rates are designed to tackle inflation by reducing demand. The cost of borrowing increases which impacts cash flows for firms and consumers alike, eroding economic growth and financial performance of businesses. Further, as equity markets decline around the globe (US equity markets have declined around 20% from their peak), consumer wealth is declining.

All this means we’re in for a rough ride ahead. Here’s what we as planning professionals can do to understand what is happening to our demand and mitigate the impacts of rising interest rates on our businesses.

What Rising Interest Rates Mean for Demand Planners

One thing is for sure – customer and consumer behaviors are changing in the face of attempts to dampen inflation. Time series models are typically used when forecasting demand in the short term but their accuracy is eroding rapidly in the current environment of volatility and of demand pattern change.

If our usual forecasting techniques are not working, we need a different approach

The accuracy of these methods is dependent upon the recurring patterns of demand through time and assumes that the factors affecting demand are stable. We have seen how COVID has disrupted these patterns and we are seeing it again with Central Banks’ efforts to reduce inflation with increased interest rates. If our usual forecasting techniques are not working, we need a different approach.

Start Discussing the Drivers of Demand

Using historical time series data for estimating demand will be a risky proposition under the current circumstances. It is time for us to analyse and evaluate how the evolving economic and financial conditions are affecting our consumers, customers, and business. Collaboration is essential in gaining different perspectives on the situation and how behaviors are changing. [Ed: More on understanding changing consumer behavior here]

Develop hypotheses regarding the current drivers of behavior

The place to start is to develop an ongoing conversation and exploration with experts inside and outside of the company. This allows us to develop hypotheses regarding the current drivers of behavior that underline demand.

Test Alternate Drivers of Demand With Regression Analysis

Regression analysis can be an excellent means of evaluating and testing alternative drivers of demand that result from these discussions. It can also measure the degree of influence that each driver has on demand, both individually and collectively. The variables identified can be deployed to simulate alternative scenarios given assumed conditions that the demand forecaster wants to evaluate.

Regression analysis is an excellent means of testing alternative drivers of demand

The assumed conditions result from gathering information, experiences, and expectations from customers, consumers and related industry experts. This qualitative information is key in a collaborative process where one is dealing with shifting conditions and customers are adapting to new circumstances. Having this qualitative information gathered as part of the demand forecasting and planning process is essential when prevailing conditions make assumptions of time series models invalid.

Tap Sales & Marketing for Insight

Two of the best internal sources of customer and consumer behavior information are Marketing and Sales. Quite often they are fielding research that provides key insights into behavioral shifts and changes. These field studies in conjunction with their professional experience in market facing roles can be a valuable source of information which can improve the quality of demand forecasts and plans.

Used in conjunction with the regression analytics, this can marry quantitative and qualitative demand information. Diversity of perspectives and opinions is an important dimension that time series projections cannot capture during times of momentous change and behavioral shifts.

Things You Can Do Now

Act now: Review your demand forecasting and demand planning processes. Expand the qualitative information dimensions of these processes and develop regression analysis and modeling activities to capture how consumers and customers are reacting to current circumstances.

Collaborate: Expand the breadth of collaboration to add market information research to your demand forecasting efforts. Continuously update this information to track behavioral adaptations of your customers and consumers. Seek out information and opinions from stakeholders.

Be Dynamic: Be prepared to roll with changes. The situation requires a dynamic rather than a static mindset to capture the evolving conditions affecting customer and consumer demand.

Scenario Plan: Develop alternative scenarios and contingency plans. Think in terms of hedging where possible. Collaborate on multiple fronts – demand planning’s efforts in this regard can aid in informing marketing and sales strategies that respond effectively to changing demand. [Ed: More on scenario planning in high interest rate environments here]

Join us in Amsterdam for IBF’s Business Planning, Forecasting & S&OP/IBP Conference. It’s Europe’s biggest and best forecasting and planning conference with dozens of workshop sessions delivered by leading experts, roundtables, panel discussions and networking and socializing opportunities. 

“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.