Demand Forecasting: Why the Mystery?

Let’s say you’re a large consumer goods manufacturer doing business in 160 different countries, selling your products to retail customers ranging from WalMart to small stores, each with its own stocking needs. The rising amount of point-of-sale and other demand data being passed to you, particularly by your largest customers, is beginning to overwhelm your people and systems.

Meanwhile, the number of products and SKUs for which you must forecast and shape demand is soaring as your company attempts to satisfy the tastes of an increasingly global customer base. In fact, since 1998, your company has increased the number of SKUs it must manage by 4,000%. OK, now imagine coming up with an accurate, actionable demand plan for each of those products in each market. Welcome to David Mills' world.

"Complexity in the consumer products world has increased to the point where the growing amount of data to be analysed causes demand planners to spend most of their time gathering data from each customer and getting all the inputs consolidated before they can even do the analysis," says Mills, associate director of global business planning at consumer goods giant Procter & Gamble. "Instead of demand planners focusing on resolving specific issues or shaping demand, they're dealing with the data. So we're beginning to miss opportunities."

P&G isn't the only manufacturer whose efforts to effectively forecast and plan demand are being undermined by an increasingly complex business environment. Manufacturers large and small are struggling with the fact that demand forecasting and planning, never a simple process, are today being made much more difficult by trends such as globalisation, shortened product lifecycles, and customer demand for more product variety. In fact, many manufacturers are finding that, despite what they thought were their best efforts, forecasting error rates are actually rising.

"There's no doubt about it, demand planning has gotten more difficult today," says John Simrose, a supply chain practice principal at Deloitte. "The fact is a lot of companies aren't even treading water. They're getting worse at forecasting."

At the same time, there's never been a higher premium placed on demand forecasting accuracy and predictability. Customers are less tolerant than ever of out-of-stock situations. And, manufacturers say, suppliers are quick to favour manufacturers that are best in class at demand planning with things like priority ordering and even lower prices.

Manufacturers that are better at demand planning are almost always able to operate more efficiently. According to a recent report by AMR Research, consumer products manufacturers that do the best job of short-term demand forecasting average 22% better plant utilisation, 24% less raw material inventory, and 9% lower overall costs.