When it comes to demand management excellence, the major difference between leaders and laggards is not process and not technology. It is the winning corporate attitude. While most companies focus on process improvements and technology, our work the past few weeks helping seven Fortune 100 companies redesign their corporate forecasting has shown how building winning behaviors is just as, if not more, vital.
First, here is a quick synopsis to untangle some of the confusion regarding demand management terms:
Demand--What customers want to buy
Demand planning--An unconstrained view or best estimate of market demand, often called the forecast though many companies have multiple forecasts (budget forecasts, new product forecasts, sales forecasts) and struggle to gain cross-functional alignment
Demand shaping--Using programs, including price, new product launch, trade and sales incentives, promotions, and marketing programs, to increase what customers want to buy
Demand sensing--Using channel data to reduce latency in sensing customer buying trends
Demand insight--Data that enables a better understanding of the shopper and customer (buying attributes) to drive buying behavior
Demand translation--The conversion of channel requirements into supply plans
Demand management--The use of demand insight data to sense demand, forecast and shape demand, and translate demand requirements to supply as well as allowing constraints from supply limitations or managerial overrides to maximize the business strategy
So what is meant by corporate attitude? For the purposes of this topic, the corporate attitude is the aggregate response of the corporation to demand management. While the demand team builds and maintains corporate forecasts, it is the corporate attitude that decides how the forecast is used across functions.
The key elements include the following:
1. Usage--How the forecast is used cross-functionally
2. Behaviors--The effect of the demand management process on departmental and cross-functional behaviors
3. Risk--The company's ability to understand not just the numbers, but also the meaning, or risk, associated with the forecast
To help assess your corporate attitude, consider the following questions.
Is your organization playing the blame game?
Sometimes the company is looking for someone to blame. And since the forecast is always wrong--the best forecast that we have ever seen in consumer products (CP) benchmarking is a 14% error on a mean-absolute percent error (MAPE) with a 30-day lag--the forecasting organization is an easy target. Companies with this attitude are spending their energy on what went wrong and why. The result is a defensive and reactive demand management group that spends its time trying not to get shot. Now let's contrast that behavior with what we see at Dell.
Correct behavior: Dell accepts that the forecasts will be inaccurate, so the goal is to understand the risk of the forecast and to develop contingency plans to focus cross-functional behavior. This culminates in the statement of "if we forecast it, and we buy it, we will sell it, as a team." It's not about who to blame, but each group taking accountability and responsibility for the supply chain response given the forecast error.
Are you ignoring the truth? When the marketing forecast falls short of the budget forecast, many companies try to force the operational forecast to meet the budget forecast expectations. But you can't will market behavior. If the corporate forecast is adjusted to the budget, it won't be in line with market behavior. However, many companies lack the discipline to effectively shape demand to tie the market behaviors to the corporate budget.
Correct behavior: Demand shaping processes in CP are unique and largely managed in disconnected silos. The ability to grow revenue and to manage margin hinges on the interconnected nature of the seven levers in Figure 1. Among CP companies, 32% have focused on cross-functional integration of these demand-shaping processes, 14% are evaluating, 18% are planning this as a project for 2008, and 36% have no plans.
Are you just following the herd? In herd behavior, large numbers of corporations, people, and cows act in the same way at the same time. For many companies, this often means looking at what other companies are doing to justify their own behavior, instead of asking what is right for their business. As a result, the industry moves in a unit, but the basic problem is not solved.
Ironically, despite the greater availability of downstream data for forecasting (trading partner inventory, warehouse movement, point of sale, and shopper insight data), CP companies still focus on shipments and orders.
Correct behavior: Our research finds three herd behaviors often stemming from IT strategies that are no longer applicable. Technologies are not largely equal and an 80% fit is not good enough. Despite a major revolution in forecasting technologies, companies are trying to implement historic processes. The goal of the process is a no longer a one number forecast. The goal of consensus forecasting is a common plan: one number is just too simplistic.
The demand signal can't be integrated into a common signal. Best-in-class demand management leaders know that this is too simplistic. Demand visibility requires the synchronization of demand--demand insights based on market behaviors, demand sensing based on channel movement, demand translation based upon supply chain strategies, and demand shaping based on market knowledge--into a comprehensive demand-management signal.
Is your organization suffering from Groupthink? Groupthink is exhibited by a group that tries to minimize conflict and reach consensus without critically testing, analyzing, and evaluating ideas. In the case of demand management it is often fueled by consulting partners that really do not understand best-in-class thinking.
Correct behavior: Consider these responses to common groupthink misunderstandings.
We will never be good at forecasting, why even try? Nonsense, even a small increase in demand forecast accuracy has a marked change in supply chain performance, our research shows. There is no other metric change that can have as great of impact on total supply chain performance as forecast accuracy.
If we change how we measure forecast accuracy the problem will go away. The measurement systems need to reflect the reality of what is needed to drive the total supply chain response. We see this in companies that have moved from a MAPE to a weighted MAPE (WMAPE). In these organizations, companies are not managing the total product profile with a direct impact to the perfect order. But don't misunderstand. We are not saying don't use WMAPE, we're saying that the perceived improvement by changing the measurement should not lull the organization into complacency.
Do we really need a forecast anyway? It is just too hard. Forecasting is a basic foundation of becoming demand driven. While many companies are focusing on demand sensing and shopper insights, forecasting has never been more important.
Can't we compensate by just being agile since forecasting is outdated? No, the company needs a forecast for long-range decision making: procurement, asset planning, and supplier negotiations. And no matter how agile the company can become, it can never excel at supply chain management without creating competency in demand management.
Your organization has to believe in the process and build a corporate attitude to be demand driven. Here are five key elements to foster effective demand-management behavior:
Winning attitude--As we've said throughout, a belief that the forecast will get better fosters process change. Don't be like the company that is showcased in "What Does Good Look Like? Answers Lie in Performance Measurement." While this company radically changed and improved the forecasting process, it failed to teach the organization how to use an improved forecast. As a result, the organization remained largely reactive and wasn't reaping the benefits that come from forecast excellence.
A market-driven focus--Directly coupling the forecast with the operational budget just doesn't work in a market-driven company. Corporate forecast is input into the budget process in demand-driven companies; but the financial budget never constrains the corporate forecast. This is a major change for many companies.
Effective supply chain strategy--Best-in-class companies target process excellence to improve demand management. However, as this progress happens, the organization compensates for forecast inaccuracies by implementing corporate strategies to increase agility.
Reduction of noise and waste--Companies that closely couple financial incentives to the forecasting process introduce noise and inherent operational waste of the process. Leading companies continually ask themselves if their incentives are encouraging the right organizational behaviors. While many companies have initiated lean practices to minimize waste, they haven't applied these same principles to demand planning.
Have patience--Improving demand management processes requires time and patience. It can only happen when a company has the right corporate attitude.
While organizations focus on processes and technologies, real results come from building the right corporate attitude. For many, this is a major transformation.
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