MULTI-ENTERPRISE DEMAND SENSING

Despite heightened awareness for the need to have an accurate demand signal to control
inventory and working capital, CPG companies continue to struggle with the business
performance on generating an accurate demand signal, both from the retailer / consumer
standpoint and their own need to replenish downstream customer channels like
distributors / wholesales. Integrating consumer demand signals into shipment forecasts are
becoming an essential survival best practice for CPG companies. So, what’s wrong with
prevalent demand forecasting/planning approaches, demand forecasting processes, and
technology solutions. Companies have struggled with data synchronization issues, lack of
sufficient seasoned in-house talent for prescriptive analytics. Multi-enterprise demand
sensing is essentially applying advanced analytics to the demand-supply matching needed
2-3 tiers upstream, where demand sensing may be producing an accurate signal for retail
store shelf pick-up from the consumer. In essence, Multi-enterprise demand sensing
blends sales/marketing strategies with supply chain replenishment and inventory
management strategies to minimize the bullwhip effect and translate retail POS based
demand signal to an accurate manufacturer shipment signal.

There has been a long entrenched and mistaken assumption that human overrides and
judgments from sales / marketing / finance / executives on top of a statistically generated
baseline forecast are the best way to go about the business of generating an unconstrained
consensus demand signal. For a lot of companies, it’s still the 90s as they execute
statistical forecasting in SAP APO or excel based on time series data and Holt/Winters
trend/seasonality exponential smoothing type basic algorithms to essentially forecast their
shipments in the next tier, not true consumer demand for their products.

Let’s examine a set of issues with prevalent demand forecasting/planning practices:

· First, the assumption that past trends/seasonality cycles will repeat themselves
forever in future is a wobbly concept in the best of times. In today’s demand pull driven
networks and omnichannel consumer world with exploding choices and fickle loyalties,
forecasting inherently unforecastable demand in terms of shipments from manufacturer to
distributor (2-3 tiers upstream from retailer store) specially with solutions and forecasting
concepts from last century is fool’s gold and a sheer waste of effort. In reality, future
demand at the retailer SKU/store level is A. relatively less volatile and B. highly sensitive
to demand shaping initiatives and variables like pricing, promotions, placement in store
like end rack displays, overall consumer confidence, weather, social chatter regarding the
product, and so on. The approach of forecasting based on extrapolating the past assumes
any error to be noise instead of understanding the causal factors driving the high noise be
it pricing/promotions you ran or your competitors did.

· Second, forecast is often executed as middle-out where data aggregation along the
demand hierarchy produces a stable ‘forecastable’ demand signal. This search of a
forecastable level of aggregation is dangerous as eventually the forecast at the aggregated
level needs to be disaggregated to the base product/distribution center/week level which is
where inventory replenishment and shipment processes reside. As valuable granular
trends are lost in the process of aggregation, the forecast disaggregation process is an
example of math craziness, where robust sounding complex disaggregation approaches
are deployed to ‘minimize’ the signal distortion, but it’s evident to one and all that the
forecast at granular level (SKU/DC) is anything but accurate. Metrics gaming occurs
fairly quickly by Demand Planning team measuring their forecast accuracy at aggregated
levels although they know fully well there is no business value of the aggregated signal to
the supply chain, no matter how accurate it may be.

· Third, human overrides on top of a statistical baseline bring in

personal/departmental bias and further hurt the end goal of producing an accurate demand
signal that maximizes revenue and profitability and minimize the cost and working capital
needed to get there. From Finance/Executives baking annual targets in the forecast to
Sales/Marketing providing the rosiest demand scenario as their forecast to guarantee
finished goods inventory oblivious to the working capital demands and inventory waste
risk, it’s actually quite easy to prove the value dilution when organizations embrace
Forecast Value Added FVA reporting and diligently capture and compare every human
touch point against the naïve or system forecast to measure value added.

· Fourth, most companies have inside-out demand forecasting processes where they
are essentially forecasting their shipments to the next downstream tier as opposed to
understanding demand downstream at point of consumption. Downstream ordering
frequencies, order sizes, quarter end incentives, demand signal latency, etc. all combine to
distort the relatively stable demand signal at retailer store to a highly volatile demand
signal 3 tiers upstream. In supply constrained scenarios, shipments do not capture true
unconstrained demand and neither do next tier customer orders, which may be inflated in
an allocation scenario. In the absence of a multi-enterprise demand sensing signal that can
link demand shaped signal at retailer store to corresponding distributor buys from the
manufacturer with proper lag, demand sensing quickly degenerates to applying data
science in the wrong place and for a short time frame which is within replenishment lead
time and not terribly useful for the supply chain looking for a mid-term accurate demand
signal.

· Fifth, given the innovation centric SKU portfolio management approaches

prevalent since last decade, there is tremendous SKU explosion and a longer than long tail
for most organizations. This long tail has intermittent demand, is extremely hard to
forecast, but given high service levels and resulting high inventory buffers, are a sure
black hole for profitability. SKU proliferation also means your demand planners and data
analysts are overwhelmed and cannot pay needed attention to generating robust predictive
models.

· Sixth, even when companies have understood the need to better sense and shape the
end point demand signal, the business teams have struggled with the complexity levels
associated with advanced forecasting methods: multiple linear regression, ARIMA
models, ARIMAX models, and so on. Throwing big data projects at the demand sensing
problem inside-out without having an analytics innovation scalability & sustainability
strategy is a costly misadventure.

There is a way out. Executive sponsors need to ensure seasoned data scientist talent is
available and closely collaborating with business users / domain experts on a cognitive,
visualization, and simulation platform that can ensure demand model accuracy on an
ongoing basis and scale high signal quality across the full product portfolio. Given the
non-linear relationships in highly volatile demand environments and the SKU explosion
long tail challenge, the prescriptive demand model building and maintenance is simply
outside the human capability of even large teams in the absence of a self-healing cognitive
platform that can both accelerate initial model definition as well as ongoing maintenance.

Multi-enterprise demand sensing platform from GitaCloud is designed to provide business

users a demand shaping what-if simulation platform or optimization abilities to forecast
most effective promotion mix as well as link and translate the consumer demand to the
replenishment demand. This helps to model the push/pull effects of the supply chain. The
platform auto develops a consumer demand sensing model by integrating retailer POS
sell-through data with all its explanatory variables: past consumption history, retail
merchandising vehicles, pricing, advertising rating points, and promotions. A secondary
model is then developed which can link the forecasted consumer demand to replenishment
demand based on explanatory variables like demand latency between POS consumption
and replenishment shipments into the channel, trade promotions, forward buying, order
frequency, order sizes, wholesale price, etc.

Qualitative Forecasting Methods

Qualitative technique are useful to forecast a market reception of the product. This is
essential as it will determine how much of the quantities are needed to be produced so that
it will can be sold into the market one step at a time without any hold. It also plays an
important role in providing the information that helps in making strategic decisions like
capital investment, inventory management and budgeting.

Expert opinion:-

The opinions of experts are considered to the areas where the forecasting or planning are
to be made. They are weighed accordingly and a meaningful projections are made with
that. There is no statistical data are involved in this process, so this is an considerable
forecasting method where statistical data or measurable datas are lacking. Easiest method
and results obtained are in anticipation of the experts.

Focus groups:-

Most commonly followed qualitative method of forecasting. This involves a group of

people from various departments in an organisation brainstrom about the target customers
and have an open ended discussion. All the questions related to product like brand
perception, slogans, designs etc. are put forth and are discussed

Delphi method:-
This is a forecasting method in which market orientation and judgments of a small group
of experts are combined using a function of iteration. The results of these iterated
combinations help to develop the next parallel meeting points in order to discover an
accurate forecast. Mind you, the opinions of the experts are gathered individually in order
to avoid the influence of the opinion of a dominating personality if it were to be a group
discussion method. Rather, an outsourced party handles opinions gathering; summarises
and bring them before the same experts. New questions may be attached to it and the
circle continues until a meeting point is arrived at. This method has proved effective and
dependable for long-term forecasting.