The supply chain today is a field that sometimes faces the increase of demand volatility and the multiplication of product portfolios. This is why it’s important that demand planning is done in a correct manner as inaccuracies in demand forecasting can cause unforeseen costs throughout the entire supply chain. Forecast accuracy has been placed as the most important factor of the metrics hierarchy.
Regular analysis of detailed transactional data from many enterprises combined with process information on exactly how demand planning is performed within the enterprise(s) is needed. Individualized results from new analytical approaches have created previously unavailable insights.
The four critical findings from the Chainalytics Demand Planning Intelligence Consortium mirrors those of Don Miguel Ruiz mentioned in the successful and widely read book, Four Agreements. Here are the four agreements supply chain owners need to adhere by for efficient demand planning and forecasting:
Agreement 1: Be impeccable with your word
There are limits concerning how far forecast accuracy can be improved for each business. It is not advised to commit to targets that will be unrealistic. All businesses are able to improve demand forecast accuracy, however the average forecast accuracy improvement potential is roughly 10% based on results to date. Gains that reach double digits are possible but are unlikely in some cases. Forecast accuracy improvement targets set without the benefit of market-based data are often entirely unachievable without additional investments in planning. Realistic brand-level forecast accuracy targets can differ majorly from the overall forecast accuracy that is possible.
Agreement 2: Don’t take anything seriously
A lot of the times, other business units aren’t exactly directly comparable to yours. That means that demand behavior between companies and business units can vary regardless of being in the same industries and markets. Demand segmentation results reveal that no two businesses are directly comparable no matter how similar they seem at eye level. This is also regardless of selling similar products to the same customers – difference in promotional strategies and portfolio management approaches still equates to demand profiles which need to be planned for and managed in dissimilar ways. Comparisons have to be controlled in order for these differences to create valid results.
Agreement 3: Don’t make assumptions
Knowledge surrounding what is “right” regarding demanding planning is more often than not, flawed. There needs to be facts and use of data to measure and quantify. A lot of demand planning functions are seen as underperforming because of lower forecast accuracy. However, in many instances, that lower forecast accuracy is entirely within an appropriate range relative to the complexity of the planning environment. If a company’s strategy were to rely heavily on new product introduction and promotions, a 60% (example only) forecast accuracy could actually be “market-leading,” even though another company selling competing products to the same customers may have a forecast accuracy of 80% if its go-to-market strategy creates less volatile demand.
Functional owners have the tough task of explaining to their peers and executive leadership how wrong can actually be possibly good more than half the time. But the data clearly illustrates that the definition of good must be viewed in light of a standard measure of demand Forecastability. Of course the reverse is true as well: some “outperforming” planning functions are not actually leading the market once Forecastability is controlled for in the analysis.
Agreement 4: Always do your best
Companies that perform the best make use of segmentation because demand segmentation and differentiation create more accurate forecasting. Businesses which segment their product portfolios with respect to their demand planning process achieve higher forecast accuracy than those which do not. Classification methodologies vary greatly in the marketplace, and there is still no widely-accepted single standard on how best to segment demand for the purpose of differentiated demand planning. However, companies that do any kind of formal demand segmentation for use in demand planning measurably outperform their counterparts.