Leverage Your Demand Forecasting

Not having a good demand forecast can create business inefficiencies from sub-par price realization, higher inventory costs, higher replenishment costs, and significant lost sales. But the same is true when companies have too many (disparate) demand forecasts driving these functions. What is an enterprise to do? Create a single demand forecast that addresses their various needs, across functions and across time, and create plans that are fully aligned with each other.

Recent research from RSR caught my attention. The research focused on how retailers are using (or not using) their demand forecasts. The chart below says it all.

Traditionally, demand forecasting has primarily driven the replenishment for retailers. This means that other departments have created and used their own demand projections: As a result, companies have plans for Pricing, Assortment Planning, Replenishment, and so on, that are simply misaligned.  What do these misaligned plans do? Not only do they enhance the silo-ed mentality among these departments, they effectively raise the cost of doing business.

• One, every department spends their energy on creating a demand forecast rather than using a central forecast. That is a substantial duplication of effort and cost. In addition, each department will have their own level of maturity in creating a forecast, which means dealing with a large variety of forecasts, with each one claiming to be more accurate than the other. 
• Two, the misaligned plans based on disparate demand forecasts frequently result into assortments that nobody wants and inventory that must be discounted.

Therefore a good, centralized demand forecasting function can be central to achieving not only functional alignment, but also to reduce cost of operations. While the RSR chart does cover some of the common functions, a good demand planning competency can be put to use across the enterprise in execution functions with a short-term focus to planning functions with a long term focus and a lot of processes in-between. The following tables list some of these functions.

Short Term Processes Driven by Demand Planning
Process	Objective	Horizon	Granularity	Units
Inventory Planning	Establish inventory targets	Weeks to months	Product: Merchandising Category, Departments Location: Facility, Regions Time: Week to Quarter	Dollars & Units
Replenishment Planning	Determine purchase requirements
Sourcing & Procurement	Execute purchase orders
Warehousing	Warehousing & allocation
Shipping	Transportation & distribution
Price Planning	Establish optimal price and discounting
Promotions Planning	Plan for optimal promotion events
Clearance Planning	Plan for clearance events

Medium Term Processes Driven by Demand Planning
Process	Objective	Horizon	Granularity	Units
Merchandise Financial Planning	Revenue & profitability targets, budgets for marketing & discounting	Few months to couple of years	Product: Merchandising Category, Departments Location: Facility, Regions Time: Week to Quarter	Dollars & Units
Portfolio Planning	Product life-cycle planning
Assortment Planning	Product-location determination

Long Term Processes Driven by Demand Planning
Process	Objective	Horizon	Granularity	Units
Distribution Network Design	Optimized network design for projected demand	3-5 years	Product: Category based on distribution attributes Location: Facility Time: Quarter to Year	Weight, Volume, Cases, for the expected flows along the network paths
Distribution Network Capacity Planning	Capacity planning for warehousing & transportation

For a detailed discussion on how to create and leverage a single demand forecast across the enterprise, please click on the related articles links below.
Related Articles:

• Demand Planning Part 1
• Demand Planning Part 2

Resources:

• Crystal Ball 2.0: The State of Retail Demand Forecasting

© Vivek Sehgal, 2011, All Rights Reserved.

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