“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.