Back to the future

By Udani Wijayasinghe, on behalf of KPMG, Management Consulting

It is the annual meeting of your organisation, and your sales manager is arguing with your finance manager. One wants to ensure that the company meets customer expectations and improve customer service levels while the other wants to reduce inventory, and by extension, the cash tied up in working capital. Which one do you side with?

As a leading professional services firm in the country, we have worked with a diverse range of clients in the manufacturing and service sectors, from SMEs to the LMD Top 100. One thing we have noticed, is that this trade-off between customer service and high inventory costs haunts most of our clients.

So what are you going to do? 

Start at the beginning 

Let’s take a step back. What is the root cause of the problem?

Companies today operate in a highly volatile environment. For many of them, demand variability is increasing due to a variety of reasons; product proliferation, increasing competition, rapidly changing customer preferences, higher customer expectations and increased geographical dispersion to name a few. Highly volatile demand variability makes demand planning extremely difficult. 

Demand, as always, is only one side of the equation. Globalisation means that supply chains now transcend national and domestic boundaries and span across continents. The problem however, is that this has resulted in an increase in supply uncertainty.

Together, uncertainty in both demand and supply has led to companies facing a higher level of instability and uncertainty in their supply chains.

Going back to our initial dilemma, the higher supply chain uncertainty pushes the sales staff to request more items to be held in inventory, in order to ensure that they are able to serve their customers. As a result, we have often noticed cases where companies have excess and obsolete stock. Furthermore, we have also observed that due to the uncertainty of not knowing whether their orders will arrive on time, the sales staff tend to spend an increased amount of time in the logistics process.

On the other hand, the finance staff is under pressure to reduce the money tied up in inventory and working capital, and as such, tend to push for lower inventory levels, resulting in out of stock situations, much to the detriment of the sales staff.

Bottom line? Companies need a supply chain that is more flexible and agile. So where do you start? As always, you start with a plan. Common consensus is that a well- designed, data driven demand planning strategy is the foundation for a successful supply chain. 

Pigs don’t fly

Any attempt to plan demand starts with a forecast. However, as the saying goes, “the only certainty about a forecast is that it will be wrong”. So does that perfect crystal ball that can predict your future demand actually exist? 

Demand planning is said to be as much an art as it is a science.

In this case, the answer is not just about finding that magical tool that can forecast your future demand perfectly. After all, pigs don’t fly. It is about designing and implementing a demand planning process that facilitates collaboration between all parties involved in demand planning and providing them with the information that supports more accurate decision making.

Companies today capture a larger volume and variety of data than they did ever before. Tools and technology that enable better forecasting have emerged. Business Performance Management (BPM) and Enterprise Resource Planning (ERP) systems are now in their second or third generations. Companies now realise the imperative of successful demand planning and have empowered their employees to explore more avenues in demand planning. With all these new tools and technology at their fingertips shouldn’t every company excel at demand planning?  

So where is the gap? 

In 2011, Gartner, carried out a survey of 240 correspondents across the U.S., Europe, Brazil and China to understand the state of demand planning. As part of the process, Gartner explored the gap between how important the respondents view specific tasks in the process and how effective they thought the tasks were. The results are displayed in the figure below:

The largest gap is in the process of gathering demand insights from customers, followed by forecasting product mix and gathering demand insights from sales and marketing.

Based on our experience, the success of a demand planning process depends on several factors. The demand planning process of an organisation would begin with the generation of a baseline statistical forecast. The quality of the statistical forecast, as with any information depends on the quality of the data used. As the old adage goes, ‘Garbage in; Garbage out’. Some of the common data related problems that we have noticed in companies include: (1) data not being refreshed appropriately, (2) data residing in multiple systems and (3) data not being in the required format. 

Not only do companies need to ensure the quality of the data being used, but they also need to ensure that the most appropriate forecasting techniques are being used. One of the most important things to consider here is the company’s product range and its demand attributes. When it comes to forecasting, there rarely is a one-size-fits-all approach, even within an organisation or even a division. This is often why off-the-shelf forecasting solutions tend to fail. A customised approach is key to a more accurate forecast.

Another fact we have noticed is that most organisations take a ‘silo’ approach to their demand planning process. Each function related to demand planning; from sales staff to product managers and logistics, have their own versions of planning. What is lacking however, is collaboration between these functions. 

A company also needs a monitoring process in order to evaluate the performance of the activities and operations. The important thing to note here, is that monitoring should not just be limited to measuring forecast accuracy. The performance of every step of the process including manual adjustments to forecasts should be measured and recorded so that the company can use this information to streamline processes in the future.

Having the right data, inter-functional collaboration and a monitoring system are essential. However, on their own, these factors will not allow an organisation to excel in its demand planning process. It is important that the management takes appropriate steps to embed demand planning into the firm’s culture. Clear guidelines for the process should be defined and the responsibilities should be delegated to the relevant individuals. Not addressing these discipline aspects could severely limit the benefits of the demand planning process.

This idea was perfectly summarised by Steve Steutermann, the Research Vice President at Gartner; who said: “Determine the best method, or methods, to optimise forecast accuracy. The company should be able to address what items should be statistically modelled, what items are reliant on a collaborative process, or both. The demand-planning organisation should play a central role in identifying accountabilities across the organisation.” [IndustryWeek (2012), “A Smarter Way to Plan for Demand”]

It’s the Hunger Games

“It is not the strongest of the species that survive, not the most intelligent, but the one most responsive to change” – Charles Darwin.

It is in fact a challenging world, and every business should aim towards the continuous improvement of the agility of its supply chain. A value rich demand planning process is essential for this effort.

The tools exist. So does the knowledge. Now is the time to change.