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Forecasting demand in a world of uncertainty

Forecasting should never become a goal unto itself, and should always be linked to the wider benefits; but how can you get it right when so much is changing?

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With intense retail competition, pressure on margins and rising shopper expectations, it’s never been more important – or more challenging – to get forecasts right and deliver to plan.

IGD surveyed the industry to find out how supply chains are adapting to deliver successful planning for their businesses.

The challenge is rising…

Our research found that two-thirds of businesses (67%) think that it’s getting harder to forecast demand. Much of that comes down to a fundamental shift in shopper behaviour in recent years, partly in reaction to the economic downturn and partly due to digital technology. Shoppers are spreading their purchases across multiple formats, such as supermarkets, convenience stores, online and discounters, with 58% shopping in four or more channels in the UK each month. This fragmentation of demand across more channels and more competitors – each of which might have different product portfolios – has resulted in smaller aggregations of data from which to forecast, increasing the challenge and complexity.

Businesses have responded to these changes in shopper behaviour through reactive promotions and price changes, meaning volatility at short notice. In addition, some manufacturers and retailers are reducing their ranges, which can cause demand across the surviving products to change dramatically. The world is getting harder to predict.

… And businesses are rising to meet that challenge

Despite this unpredictability, recent investment in forecasting has paid dividends, with more than three-quarters (77%) of businesses reporting improvements in sales forecast accuracy over the past five years.

Much of this improvement has come from better forecasting systems, access to more data on demand drivers and improved analytical capabilities within supply chains, to unravel the tangled impact of a multitude of different factors on sales.

But forecasting should never become a goal unto itself, and should always be linked to the wider benefits improved accuracy can deliver, such as improved availability, lower inventory and reduced waste.

Planning better, together

Forecasting systems and sophisticated statistical models are only as good as the data they are fed. That means accurate and timely information on anything that impacts demand being shared across the end-to-end chain.

Internally, this requires a close relationship between supply chain and commercial teams. Some 63% of suppliers say these two functions meet regularly to discuss account plans, helping them to form a single consensus-based demand forecast, usually through integrated sales and operations planning.

For retailers, no such established industry-wide process exists and this results in almost half of retailers (47%) having multiple demand forecasts created by different functions, for different purposes. It’s no wonder that 58% of retailers rate the ability to work across functions as one of the top capabilities needed to improve the forecasting process, just behind analytical and statistical skills.

Balancing people and technology

Competitor activity is rated as the second biggest external demand driver, just behind events and seasonality. Events can be planned for well in advance – with 73% of businesses building these into their sales forecasts – whereas the impact of competitor activity is much less understood, with only 27% of businesses taking it into account. There tends to be more of a reaction in commercial activity – through promotions, marketing and price changes – rather than in demand planning.

Local knowledge and manual review of forecasts will always add value and though there is a tendency to move towards greater automation, businesses need to retain the ability to manually amend the base forecast.

Planning to be agile in the future

As the challenge grows, responsiveness will play an increasing role in how businesses deliver their priorities.

Currently suppliers tend to prioritise forecast accuracy over responsiveness – understandable because planning in advance can remove cost from the supply chain and helps to ensure well considered decisions are taken.

But recognising the increasing amount of activity that will happen at short notice and which can’t be predicted, there needs to be sufficient flexibility built into processes to enable a responsive approach. An equal focus is needed to get the plan as accurate as possible and then retain just the right amount of flexibility to meet the additional volatility driven in by external factors.

Scenario planning can be used to plan the right response to all eventualities in advance so that, when the time comes, you can rapidly execute the best response without having to then spend time in crisis mode working out what to do.

Find out more

The twin tools of people and technology form the theme of this year’s IGD Supply Chain Summit on 11th November, where businesses across the FMCG industry will be sharing ideas about how they are unlocking real value from the end-to-end chain through these key areas.

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