Is Communication More Important than Accuracy in Demand Planning?

Demand Planning performance is driven by metrics. MAPE and bias provide a compass to evaluate performance, and make necessary changes to the forecast. It is for this reason that most Demand Planning teams put a significant amount of emphasis on delivering improvements against these objectives, and why industry benchmarking reports focus in this area.

In this article, I explore whether metrics alone can truly drive the business results that most executive leaders are looking for. I share some experience that highlights the importance of communicating the context surrounds a forecast. It is highly plausible that synergizing performance metrics with the right communication strategy creates a formula that unlocks enhanced supply chain results.

Several weeks ago, I was having dinner with a prior colleague who helped me to transform the Demand Planning and S&OP environment for a food company many years ago. We started reflecting on the forecasting revolution that we had created within that organization. There were both good and bad days, but the results were undeniable. We had accomplished something amazing; a Demand Planning team that fostered best-in-class results. I do not use the phrase “best-in-class”
lightly. The term has become cliché, similar to the way my kids use the word “awesome.” There are not a lot of awe striking events that happen during a typical day, but they use that word all the time. Our industry makes the same misuse of “best-in-class.” However, in this case, we truly lead the industry according to our metrics. We had sustainable SKU-levelLag-1 MAPE performance under 14%. At the time, the IBF Benchmarking Journal cited 27% as the industry average, and noted that the top five companies reporting averaged 17%. We had best-in-class performance by the numbers, but it came with an unexpected consequence. I had thought that excellent MAPE results were the end-game, but they were only the beginning of a much longer journey. What felt like success became a colossal failure and it forever changed my approach to planning. It was the opposite of awesome.

Defining the Measurement of Success

The back story that leads to this failure defines one of the most difficult lessons that I have learned in my career, and I want to share it with you. Perhaps this will help you to avoid the same pitfall.

In early 2007, my company’s COO came into my office and declared the following, “John, as of Monday, you will be reporting to me. I need you to build a Demand Planning team. The Marketers are killing my supply chain costs with their aspirational forecasts, so I am going to create a forecasting function within my organization.” I was reporting to Sales at the time, and was surprised by this request. The following Monday, I had gotten started. My first goal was to collect a “quick win,” and I knew that would come from scrubbing the forecast data. While I was spending my days developing organizational designs, job requisitions, vision statements, and building the coalition for change management, I was spending my evenings in our forecasting system, scrubbing demand, SKU by SKU, and DC by DC.

Within six months, I had a team of six employees driving the newly formed Consensus Demand Planning process, and we were preparing the launch of Level 1 Maturity S&OP. We quickly started using MAPE and Bias metrics to educate our Executive Committee about the improvements being made to forecast accuracy. The results were compelling, and compounded for the better after every monthly cycle. We were driving a transformation, and had everyone on board. Yes, it was awesome.
Then, “THE” meeting happened. Our COO called a 1:1 meeting with me on a Monday morning. When I sat down, he had a copy of our latest Consensus Demand Meeting presentation in front of him. It was opened to the page that showed our MAPE and Bias metrics. He handed me the presentation, and simply said, “Can you answer this question?” On the page, he had circled the best-in-class 14% MAPE figure, and underneath it, wrote, “Where are my savings?” That meeting changed my outlook on Demand Planning as a function.

Opening the Airwaves

I did not have an answer, but quickly looked into it, and found that he was right. Our distribution network could hardly contain our large inventory levels, and case fill rates were still below our 98% target. It quickly became apparent that my team was not communicating effectively to the rest of the supply chain.
I called my counterpart in Supply Planning, and discussed a plan for opening lines of communication with a higher level of frequency, and his response was shocking. He told me that was not necessary. They were happy taking our forecasts verbatim, and using them to highlight to management why they could not hit their objectives. I had not realized this behavior until he mentioned it, but later confirmed this was happening. This was a puzzling phenomenon. We had industry-leading MAPE results, at 14% error. Our Supply Planning team was leveraging this 14% error as a means of defecting accountability. This was clearly dysfunctional, but it further convinced me that more robust communication had to be the answer to unlocking the business results that our Management was looking for.
In a follow-up meeting with the COO, I proposed a new organization structure that would allow me to lead both the Demand and Supply Planning teams, to ensure that the synergies were being passed through properly. After some negotiation, and a formal commitment to deliver his savings, he agreed with the idea. Several months later, about 1 year after joining his team, we achieved the results that he wanted. Inventories were down 33% due to reduced safety stock targets, and our service levels reached marks that were not seen in the company since the 20th century. Costs were also down over 4%, driven primarily by the reduced carrying cost of inventory, minimized plant schedule changes, and more efficient transportation moves. Our colossal failure had become an awesome success. In fact, our COO ordered banners to be hung in corporate HQ and our plants, congratulating everyone involved for their hard work in achieving these outcomes.“THE”meeting was now a distant memory, but it forever remains the inflection point in my career. Now that … is awesome.

What We Did Differently

The title of this article asks whether communication is as important as accuracy in Demand Planning. The example that I just shared makes a good case for this, but the lesson here is that we need to have both. Active communication and high levels of forecast accuracy are separate initiatives that must be synergized to launch transformational supply chain results. The following ideas provide insight into the toolbox that I used to turn failure into success.

Combining Functions. Merging Demand and Supply Planning created a unique proposition. My team was no longer responsible for delivering metrics. Our primary objective was now the active balancing of demand and supply. That may sound eerily like Macroeconomics 101, but this balancing act was the missing link that became an “unlock” for higher business results.

Communicating with Context. We mandated that Demand Planning provide formal documents that defined both risks and opportunities into the supply chain, allowing for more intelligent decision-making. Table 1 provided demand scenarios and the relevant impact on the supply plan. The current demand plan signals that capacity gets tight going into April, but there should be enough availability to ensure supply. Scenario 1 provides Demand Planning context for a better supply chain decision. If the new item performs at 50% greater velocity, additional capacity will be required to ensure service. The same logic would hold true if the new item had the same velocity, but achieved 50% greater distribution. In this very simplified example, it is clear that Scenario 1 leads to a very different set of choices. I am going to provide much more detail on how Demand Planning can help a supply chain rationalize complex decisions in my next JBF article.

table

Driving Communication through Process. The most critical evolution that we made was the implementation of a weekly planning process. This supplemented monthly S&OP, and was focused on more tactical and short- term issues. We reserved Mondays for focusing on key misses from the prior week. Demand Planning would evaluate exception reports showing key misses versus the forecast, while Supply Planning would review schedule attainment misses with manufacturing. On Tuesday, Demand Planning and Supply Planning would meet to discuss their learning and the impact on demand and production forecasts. As the week continued, additional discussions occurred to align our changes with manufacturing, deployment, logistics, and customer service. This team leveraged these insights to minimize service risk, inventory, excess and obsolete stock, and cost.

Demand Planning played a criti¬cal role in these meetings that went far beyond providing a new set of projections. They had made a commit¬ment to communicate¬ with context, providing additional insights to allow the cross-functional team to fully analyze and optimize decisions. Here are some quick examples:

  • We lost distribution for a certain SKU, and there was no longer demand for it in our West Coast DC. The team wanted to move the inventory to another DC that had demand, but Demand Planning knew that another West Coast customer was interested in the item, although this volume was not yet in the forecast. An unnecessary redeployment move was avoided. This was driven by communicating the context, and was not visible in the demand plan.
  • We had to order materials for an upcoming production run of an item that was recently launched. Demand Planning knew that early results on velocity from POS data were well below our target, and that the forecast may eventually need to be reduced. The production was pushed back a couple of weeks to buy more time, and that production run was never needed. Once again, the forecast data alone would have driven a poor decision, but Demand Planning’s communication of the context surrounding that forecast avoided an excess inventory situation.

There are several more examples that I can provide, and I am sure that some will quickly come to mind for you as well. The takeaway here is that if Demand Planning focused only on MAPE and Bias, then none of the decisions above could have occurred. This subtle tweak to the Demand Planners’ role is the difference between success and failure. It is why I hire Demand Planning talent that shows aptitude for leadership skills and influencing capabilities. You can read more about this in my Summer 2014 JBF article titled “The Revolution of Talent Management in Demand Planning.”

If you lead a Demand Planning organization, defining the balance between metrics and communication may be the next fertile ground for the evolution of your team’s performance. If you are a Demand Planner, finding the balance metrics and communication the context will keep you ahead of the game. Go ahead … be awesome.

As published in the Fall 2014 issue of the IBF’s Journal of Business Forecasting (JBF). All Rights Reserved.

Meet John Gallucci at IBF Orlando 2016, where he will be leading a session on “Is Communication More Important Than Accuracy in Demand Planning?”.

6 Responses to Is Communication More Important than Accuracy in Demand Planning?

  1. Great article John. I’ll be keeping a hard copy nearby as I develop a new team. I appreciate the discussion of demand planner communication with towards the supply side with the supply planners and the rest of operations. Clearly an important element. But I would love hear more discussion about communication aimed at the demand with sales, marketing and even the customers. I’m going to bring back a term which seems to have dropped out of favor, CPFR. Creating a forecast is only half way to getting it right, the next half is executing and getting the orders that were forecasted in the first place.

  2. John,
    Great article! It gets to the heart of the DP role in supply chain planning. Thanks for sharing. I’ve had this debate in my organizations and I typically land on a less communication/more-better process solution. I would appreciate your thoughts on whether the added communication/effort was bypassing potential improvements in other areas. In example, in your “We had to order materials for an upcoming production run of an item that was recently launched” win:
    o Why wasn’t the lower velocity part of the demand in the forecast? Should the supply chain execute to the lower velocities if the business didn’t yet believe in it? Should the demand signal be updated more frequently?
    o Why would the production run start before it was truly needed to safely fulfill demand? Should production plan timing be optimized by forecast variability or product lifecycle?
    o What would have happened if velocities increased?
    o Is the best case communication scenario that Production would ask DP to assess demand variability relative to each production schedule? Wouldn’t most be appropriate making the discussion inefficient?

    I hope to be in Orlando and will definitely make a point to attend your session! Thanks!

    Best,
    Keith

  3. Thanks, John for this important observation. From my experience, they are equally important but also intertwined–i.e. better communication causes better accuracy. In each of my positions, I’ve done training for the users of the forecast so they know it’s not a black box and gain an understanding of the process and particulars of what goes into the forecast which in turn breeds trust and cooperation and better accuracy. I let them know how important their input is in achieving the forecasting accuracy objectives and how much I value the learning I gain from them.

  4. Important article. Yes, communication is a key to excellent Demand Planning. Once organizations have worked together to develop a consensus forecast through a S&OP process, other members of the supply chain should have input and agree to the consensus forecast or CPFR (Collaborative Planning, Forecasting and Replenishment). CPFR makes use of an agreed upon forecast throughout the supply chain. If, areas in the supply chain can not meet the expectations of the plan/forecast, then solutions should be provided through combined efforts.

  5. Dear John

    Very good article …….agree with you that effective communication in demand planning is a key to higher forecast accuracy and over all achievement.
    It brings visibility to what went wrong in past but also aims in capturing future risk.
    Regards
    Faimid

Leave a Reply

Your email address will not be published. Required fields are marked *

WordPress Anti Spam by WP-SpamShield