Crystal Ball, Black Box or Advanced Forecasting and Demand Planning in Retail and CPG
Neither crystal balls nor black boxes will provide the agility needed for accurate demand forecasting in today’s retail & CPG environment. Learn more about new approaches to FDP.
Two years after the word “COVID” entered virtually every conversation in both our private and professional lives, it appears that at long last there is light at the end of the tunnel. Companies are finally able to move from the rapidly evolving reactive and defensive approaches that have been so necessary, onto a more stable and longer-term focus within the “new normal”.
During this period a significant percentage of supply chain activity was focused on operational elements, requiring constant firefighting just to get any goods to market and shore up supplies, as supply chain routes and capacities constantly opened and closed.
A Better Way to Meet Customer Expectations
An interesting observation is that consumers, in the main, have accepted and understood the challenges being faced. Most have been very tolerant when the groceries they want haven’t been available and they had to accept a substitute. They’ve accepted a longer wait for that sofa/dress/laptop/garden furniture, or have been willing to go without. Barely a day has gone by when the explanation “because of COVID” hasn’t been uttered, and then accepted.
Prior to this, consumers had been on a completely different path. Expectations regarding levels of service and goods availability had been skyrocketing. The new digitally native disruptors led the way, being able to offer virtually anything a consumer desired, delivered next day, same day, or even within minutes, while still maintaining low prices. Many had also started to add the flexibility of delivering to pick-up locations rather than a customer’s home address if that was more convenient for them, while at the same time offering increasingly frictionless return policies just in case they weren’t happy with the goods when they arrived.
This has led to a very difficult landscape for traditional bricks and mortar stores to compete against, forcing many of them to digitally transform. For a large number, this simply meant getting their online sales arm better equipped to compete, while in parallel running their business-as-usual physical stores. However, if the new normal will now re-invigorate consumers’ desire for near instantaneous gratification in terms of product availability and supply lead times, how can retailers and Consumer Packaged Goods (CPGs) hope to meet this demand?
One approach is to stockpile goods at or near every retail outlet to drive sales and decrease customer dissatisfaction. However, this would be extremely P&L prohibitive, not to mention wasteful and risky, given the ever-increasing customer focus on sustainability. There is a better way, and it harnesses the same methodology those digitally native disruptors have been using so well.
Modernize Forecast and Demand Planning
The crystal ball required is the one that knows what consumers want before they do. Before customers have even ordered, retailers and CPGs have to position their products based on where consumers will require them, predicting their most likely point of delivery, and, like a lot of things in life, getting the timing right. Reading customers’ minds may seem like science fiction, but it’s actually achievable today to a high level of accuracy. Retailers and CPGs just need to buy the right black box solution, right?
Like the crystal ball, the black box solution is, alas, not the silver bullet either. It would of course be very nice, but supply chain excellence is infinitely more complicated than anything one point solution can handle on its own. There are so many elements and moving parts that influence a consumer to purchase something, and indeed when they will make that purchase. That why it’s necessary to get under the skin of all these purchasing drivers to gain the right insights into what each consumer is likely to buy.
Traditional longer-term drivers such as seasonality, historic buying patterns, and promotional effects are the entry points. Then broader and more medium-term drivers such as weather conditions and localized sporting or social events such as concerts can be introduced. Once retailers and CPGs start to overlay short-term unplanned promotions such as a social media influencer commenting on today’s “hot favorite” product, they very quickly understand that advanced forecasting and demand planning requires the most modern, real-time, and agile forecasting and demand planning technologies.
Organizations need to build a layered forecast that can handle ingesting multiple data streams for the various drivers of each and every store, product, and customer. Then they’ll need to assign weightings to each of those different drivers and be able to adjust them on an ongoing basis depending on their accuracy, and in response to a constantly changing landscape. Only then can retailers and CPGs begin to predict what consumers are going to order, by using a combination of subject matter expertise, supported by the application of millions of advanced analytic models.
Anticipating Demand in a Changing Landscape
The final piece of this puzzle is the ability to update this view on a very frequent basis. The more frequently organizations can refresh their forecast, the faster they’ll be able to react to an ever-changing landscape. As recent history has taught us, the world can change extremely quickly. Therefore, companies need to run models at the most granular level, by SKU, by store, and by customer, and refresh them in near real time.
This is what the best in the business are doing today. This is how they know what consumers will want before the consumers do. There is also a virtuous circle here: the better the initial forecast is, the less exceptions the physical supply chain has to deal with, leaving companies with more capacity to deal with the truly unpredictable arisings, which will result in better service, lower costs, and reduced environmental impact.
So, the next time you think “The weather looks nice this weekend. I’ll stock up and ask my friends over for a barbeque to watch the game on Sunday”, remember that the best retailers and CPGs in the business have already predicted you’d be doing that, and they have the technology and systems in place to have you covered.
To find out more on advanced forecasting and demand planning, please email our retail sector consultants.