Aberdeen Group A Harte-Hanks Compeny Demand Management Enabling Sell Side Collaboration to Improve Sales Revenue November 2009 Nari Viswanathan ~ Underwritten, in Part, by ~ Kinaxis- SARAPage 2 Executive Summary In these times of economic uncertainty and global credit crunch, companies are actively seeking best practices for improving their demand network. ‘Companies need to balance the demand planning with short term responsive strategies to manage the high levels of demand volatility. Aberdeen's survey of over 135 companies about their demand management. practices have highlighted the specific approaches that companies with different types of supply chain - build to order, build to stock and engineer to order ~ need to adopt with respect to demand management, Best-in-Class Performance The following metrics were used to define Best-in-Class performance, which forms the basis for the Competitive Framework in Chapter Two: + Customer service levels (on-time and complete to the customer's requested date) ~ 95% + Average cash conversion cycle — 44 days Average forecast accuracy at the product family level — 87% © Average forecast accuracy at the SKU level ~ 77% Competitive Maturity Assessment Survey results show that the firms enjoying Best- shared several common characteristics, including: Class performance + Build-to-stock style companies tend to focus on demand management using a combination of statistical techniques and collaboration to gain market force knowledge to deliver a forecast for the purpose of setting inventory / service policies + Build-to-order businesses forecast only as a starting point, but more frequently use sales driven “consensus” forecasting with limited statistics, and use the forecast to drive procurement decisions and capacity management, rather than build plans for end items + Best-in-Class companies use supply chain visibility techniques to gain control in the demand execution window Required Actions ‘Chapter Three summarizes recommendations for improvement, focused on: © Improving demand forecast accuracy improvement using internal demand planning ‘© Creating customer driven forecasts through robust S&OP processes ‘© Creating sell-side collaborative processes to manage demand within the demand execution window Derand Managemen: Ebling Sl ie Claboration to Improve Ses Aber deen Grou ip SEE Aberdeen's Research Benchmarks provide an in- depth and comprehensive look into process, procedure, methodologies, and technologies with best practice identification and actionable recommendations “Our biggest challenge is customers not wanting to commit to activities until late in the game, and we need ‘more lead time for that. They don’t necessarily want to give that time because they want to be able to react to their competitive activity and their consumers. We're ina {quandary at times when we need to put information in to keep our supply chain moving, but we don’e always know our customer's plans Compared to our level of internal collaboration, we don’t have the same level with ‘We're working with our largest customers to commit a supply chain resource, to work with them, One of the things at the top of our supply chain list is demand management collaboration, " ~ Materials Manager, Colgate-Palmolive Canada © 2009 Aber en Group, Telephone: 617 854 5200 Fox: 617 723 7897Page 3 Table of Contents Executive Summary. Best-in-Class Performance. ‘Competitive Maturity Assessment. Required Actions. Chapter One: Benchmarking the Best-in-Class Business Challenges. The Maturity Class Framework. The Best-in-Class PACE Model Best-in-Class Strategies. Chapter Two: Benchmarking Requirements for Success.. ‘Competitive Assessment. " Capabilities and Enablers Chapter Three: Required Actions 19 Laggard Steps to Success. 19 Industry Average Steps to Success Best-in-Class Steps to Success. Appendix A: Research Methodology. ‘Appendix B: Related Aberdeen Research. 23 Featured Underwriters. 2 2 2 2 Figures Figure I: Top Pressures Forcing Companies to Focus on Demand Management. 4 Figure 2: Strategic Actions Differentiated Between the Best-in-Class, Industry Average, and Laggards . Figure 3: Technology Usage among Respondents. 16 Figure 4: Barriers to Technology Adoption... Tables Table I: Companies with Top Performance Earn “Best-in-Class” Status......6 Table 2: The Best-in-Class PACE Framework.. 7 Table 3: The Competitive Framework. " Table 4: Technology Adoption Plans Across Different Demand Management Technology Sub-Categories. 8 Table 5: Prioritization of Demand Management Initiatives. 20 Table 6: The PACE Framework Key. 2 Table 7: The Competitive Framework Key... Table 8: The Relationship Between PACE and the Competitive Framework Derand Managemen: Ebling Sl ie Claboration to Improve Ses Aber deen Grou ip © 2009 Aber en Group, Telephone: 617 854 5200 Fax: 617 72: 7897Demand Management: Enabling Sell Side Collaboration to Improve Sales Page 4 Chapter One: Benchmarking the Best-in-Class Business Challenges With 62% of companies reporting a drop in customer demand over the past year, according to the Integrated Demand-Supply Networks: Five Steps to Gaining Visibility and Control report, focusing on demand is critical ifa company wants to avoid a spike in write-offs due to obsolescence, when stock builds up and cannot be sold, In these times of economic uncertainty and global credit crunch, companies are actively seeking best practices for ‘managing demand volatility. Traditional approaches of solely focusing on being demand driven from a demand planning (statistical forecasting) perspective are not adequate. Companies need to balance demand planning with short term responsive strategies. Aberdeen’s survey of over 135 companies for this report, regarding demand management practices, highlights the specific approaches that companies with different types of supply chain ~ build to stock, build to order and engineer to order ~ need to adopt with respect to demand management. Figure |: Top Pressures Forcing Companies to Focus on Demand Management Increased volatility of demand Escalating customer service demands Rising supply chain management costs Increased frequency of new product Introductions. Rising complexity due to an increase in the number of value chain partners Emergence of new sales channels 0% — 20% © 40% © 60% + 80% = 135 Percentage of Respondents, Source: Aberdeen Group, November 2009 ‘+The reason why companies have highlighted these pressures is exemplified by the following data points. When asked about what. the key operational challenges that companies were facing with respect to the sell-side (or within the demand network): + 57% of respondents indicated that they had consistently inaccurate demand forecasts ears Aberdeen Group Y Increased volaticy of demand and escalating customer service demands are the top two pressures driving companies to focus on improving demand management practices 1 improving demand forecast accuracy and developing a more responsive inventory placement strategy are the top ewo strategic actions taken by companies to improve demand ‘management practices RTS 59% - build to stock/stocked product 30% - build 20 ordericonfigure to order 10% - engineer to order 2% - retail environment © 2009 Aber en Group, Telephone: 617 854 5200 Fox: 617 723 7897Demand Management: Enabling Sell Side Collaboration to Improve Sales ears Aberdeen Group Page § ‘© 50% of respondents indicated that they had poor or late visibility into channel sell-through to the end customer ‘+ 37% of respondents indicated that they had poor or late visibility into channel inventories especially ater the fulfilment of purchase orders The focus of this research is on the two ends of the spectrum associated with build to stock and build to order companies and the intermediate types of supply chains that most companies have. ‘Another focus of this research is to identify the demand management practices that are most suitable for the long term demand management and the short term demand execution windows. Pe ern en ee ees ec raat haus cutacareed ‘One example of this dual-perspective approach comes from a high-tech electronics manufacturer. The company is, in most cases, two levels removed from the customer, with its three main distribution channels comprising direct-to-carrier, indirect retail, and direct-to-enterprise. In some geographies outside of the United States, they have an additional channel through distributors, which is another level removed from the ‘end consumer. The company approaches forecasting and planning from two perspectives: a short-term demand control window of zero to four months, and a longer-term S&OP/demand management window of four to 12 months. They are challenged in conducting the proper analysis to best understand the various sources of information they receive. "[We] have grown up so fast, that the nature of our tools is not enterprise- class,” says the Senior Director of Forecasting and Operations. "We're rolling out a demand planning tool this month. Once we get that under ‘our belt, we can concentrate on streamlining processes and getting more accuracy." Another key element for improving their demand management processes is building up the staff competencies. They are investing heavily in not only process and technology improvements, but also their people. "For the four-month demand control horizon, the demand signal needs to get pretty accurate, We need the people to be able to do the analysis. ‘Currently, they are more like clerks - we need them to become forecast analysts.” continued © 2009 Aber Telephone: 617 854 5200 www.aberdeen.com Fox: 617 723 7897Dena Mangement bing Sel Sie Cllboration to Inprve Sls Abe rdeen Grou ip Page 6 ompan Perna en ee ers Integrated Demand Management Process ‘One final area for improvement is in trading partner collaboration. They have rolled out a tool to enable communication and collaboration with suppliers, customers, and contract manufacturers. Looking ahead, there is much interest in the possiblities for these relationships. "This requires trust levels between partners - the ability to share this information with them. Itis the skills of these people, and their ability to collaborate that will be interesting to watch." The Maturity Class Framework The following metrics were used to define Best-in-Class performance: ‘© Customer service levels (on-time and complete to the customer's requested date) © Average cash conversion cycle + Average forecast accuracy at the product family level + Average forecast accuracy at the SKU level Table 1: Companies with Top Performance Earn "Best-in-Class" Status De uke ne eee Rtg = Customer service levels (on-time and complete to Best-in-Class: the customer's requested date) ~ 95% Top 18% ' Average cash conversion cycle ~ 44 days of aggregate * Average forecast accuracy at the product family performance scorers | level ~ 87% = Average forecast accuracy at the SKU level ~ 77% = Customer service levels (on-time and complete to ear Sy/ATarn the customer's requested date) - 87% Middle 54% | * Average cash conversion cycle ~ 49 days of aggregate | = Average forecast accuracy at the product family performance scorers | level 65% ' Average forecast accuracy at the SKU level ~ 54% = Customer service levels (on-time and complete to Teeeares the customer's requested date) ~ 85% Bottom 28% | = Average cash conversion cycle ~ 78 days ekacdaciet a ea performance scorers | level ~ * Average forecast accuracy at the SKU level ~ 23% Source: Aberdeen Group, November 2009 © 2009 Aberdeen Group. hone: 617 854 5200 617 723 7897Derand Managemen: Ebling Sl ie Claboration to Improve Ses Aber deen Grou ip Page 7 ‘What are the implications of these metrics? The Best-in-Class companies are able to achieve significantly improved performance on multiple fronts which has a significant impact on business results: Forecast accuracy at the product family level — demonstrates the ability to forecast at an aggregate level and identify larger market trends + Forecast accuracy at the SKU level — demonstrates the ability to forecast at the field level and identify micro trends ‘© Cash conversion cycle — demonstrates the ability to be responsive and have lowered end to end lead-times ‘© Customer service levels — demonstrates the ability to store the right inventory for customer orders as well the ability to deliver the products at the requested dates The 22% percent points difference between Best-in-Class companies and Industry Average companies with respect to the average forecast accuracy at the product family is significant. However, the 8% percent points advantage with respect to customer service levels is more critical as it demonstrates the ability of the organization to take a good plan and execute it well. The Best-in-Class PACE Model Table 2 outlines a set of competitive differentiators exhibited by the Best-in- Class companies in the current study. Table 2: The Best-in-Class PACE Framework Pressures roms "Increased volatlity |" Improve demand [Create single demand | Statistical demand forecasting of demand forecast accuracy} forecasts with inputs from |» Forecast collaboration ‘Improve customer | multiple roles within the |. sop system forecast company + Promotion Planning collaboration * Ability to include ee m * Create a more promotions and other lert management responsive demand shaping activities outbound into the demand forecasts distribution seracegy | Abtlty to collaborate with s Improve outbound | internal stakeholders supply chain + Ability to collaborate with visibilsy ‘external stakeholders + Ability to integrate trading ‘outbound supply chain partner data with incernal processes organization * Visibility data accurate cover 90% of the time Source: Aberdeen Group, November 2009 © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fox: 617 723 7897Derand Managemen: Ebling Sl ie Claboration to Improve Ses Aber deen Grou ip Page 8 Best-in-Class Strategies Industry Average and Laggard companies are stil focused on an internal collaborative approach towards demand management. They still focus on demand forecast accuracy as the key metric for managing the process. This is an approach that is suitable for build to stock kinds of environments whereas in a build to order environment, this approach does not work. Best-in-Class companies have demonstrated a difference with the rest of the respondents when it comes to strategic actions. As demonstrated in Figure 2, Best-in-Class companies are focusing more on customer forecast. collaboration and creating a more responsive distribution strategy whereas, Industry Average companies are much more focused on demand forecast accuracy. Best-in-Class companies have realized the need to increase the extent of collaboration in the demand network to improve sales revenue (sell through and sellin). The importance of customer centricity was central to the presentation of Angel Mendez, Senior VP, Customer Value Chain ‘Operations for Cisco at Aberdeen’s 2009 SCM Summit. He emphasized the need to view the product lifecycle not from the typical supply chain perspective, but rather within the framework of a “unified customer experience” of processes and touch-points spanning pre-purchase, purchase, and post-purchase. The new job description of the supply chain executive, Mendez posited, should call for the ability to, "Give our customers exactly what they want, when and where they want it” (2009 Supply Chain Summit: ‘Managing Integrated Demand-Supply Networks; May 2009). Figure 2: Strategic Actions Differentiated Between the Best-in- Class, Industry Average, and Laggards Improve demand ™% Improve customer 34% W Best-in-Class Industry Average mLaggards Create a more responsive outbound distribution / logistics strategy 0% 20% 40% 60% 80% | 100% Percentage of Respondents, n = 135 Source: Aberdeen Group, November 2009 © 2009 Aber Telephone: 617 854 5200 www.aberdeen.com Fox: 617 723 7897Page 9 Aberdeen Insights — Demand Management Strategies for Pee hk eee In the current benchmark report, instead of analyzing the demand ‘management requirements across different industries, we are focusing on. the requirements based on the nature of the supply chain. to Stock: Key Pressures: 71% of respondents indicate that increased volatility of demand is a key concern Key Action: 75% of respondents indicate that the need to improve demand forecast accuracy is a key action Frequency of creating forecasts: 35% of respondents adopt a frequency less than a month and 51% adopt a monthly frequency Build to Order: Key Pressures: 61% of respondents indicate that increased volatility of demand is a key concern Key Action: Only 50% indicate that the need to improve forecast accuracy is a key action Frequency of creating forecasts: 12% of respondents adopt a frequency less than a month and 65% adopt a monthly frequency The takeaway from the above data is that build to order respondents are not very focused on creating demand forecasts at a rapid frequency whereas for the build to stock respondents itis the key weapon in their arsenal. So what are build to order respondents doing? The answer is not very clear as the votes are split across a myriad of actions that span traditional demand planning to inventory placement strategies. What should be the ideal model for companies? The crux of the push-pull model is that the enterprise finds and continually operates at the optimal operating point between a pure build to stock environment and a pure build to order environment. This ‘optimal operating point varies by model, by market, and over time. Pure build to stock is undesirable because of the cost of deployed inventory and the inevitable mismatches between inventory and what customers actually want; pure build to order is undesirable because of the cost of deployed capacity required to support highly uneven demand. The ‘optimal solution is somewhere in-between. In Chapter 2, we will see examples of the mix of process, organization, performance capabilities that are essential for companies to reach Best- Class status. Derand Managemen: Ebling Sl ie Claboration to Improve Ses Aber deen Grou ip © 2009 Aber en Group, Telephone: 617 854 5200 Fax: 617 72: 7897Derand Managemen: Ebling Sl ie Claboration to Improve Ses Aber deen Grou ip Page 10 Chapter Two: Benchmarking Requirements for Success In order to build a Best-in-Class demand network, companies must develop robust capabilities across various areas of demand planning and sell-side 1 Bestin-Class companies are collaboration. This chapter investigates the processes, capabilities and twice as likely as Laggards to technology enablers that, when combined, help companies achieve this goal. have the ability to collaborate with external oprterer rrr ene a ee cee ag ‘trading partners Focusing on Retail Customer Demand | 1 Best-in-Class companies are eRe ce nee OX are iy are a consumer products company that designs and manufactures a wide to segment demand variety of household products and own several well known brands. They forecasts based on key ‘operate in 25 offices and have manufacturing facilites in 12 countries. product and customer Their key retail customer are Wal-Mart, Costco, Kohl's, Target, Bed Bath characteristics and Beyond, etc. The company doubled its size when it acquired one of its rivals in 2005. It needed a way to streamline and coordinate all of their brands supply chain processes in a single environment. They also realized that there was a lack ‘of a single view of demand for their forecasting process. They also have had to deal with the long lead-times of their products resulting in increased inventory levels. In the last year, due to the recessionary conditions, the company has been facing even more challenges due to the price fluctuations of commodities, reduced buying from end consumers and the retailer behavior of not sharing information. These factors have increased the company's focus on demand management. ‘Asa key step, the company has selected a best of breed supply chain ‘management suite to deploy and solve the demand management challenges. This initiative has been live since 2007, and has resulted in the creation of an exception based process that is global in nature. Demand across all brands all over the world can be analyzed in a single platform. This has resulted in a formal process for a company wide S&OP process. The key action that the company has taken during 2009 is to be as close to the customers as possible. The company has set up offices at the retailers so that the forecast managers can talk to the retail managers. In addition, strategic discussions at the director level within the account ‘management organization are also happening. POS sell thru data for different brands are analyzed jointly, and if necessary, demand shaping strategies at the retailer level are arrived at. continued © 2009 Aber Telephone: 617 854 5200 www.aberdeen.com Fox: 617 723 7897Demand Management: Enabling Sell Side Collaboration to Improve Sales ears Aberdeen Group Page I tient rere a geet eer enna er tec eead The following were the key benefits gained by the company as part of the demand management initiative: Increased forecast accuracy Improved alignment of inventory with customer demand Improved inventory turns ‘Customer service was increased due to product availabilty, accurate order fulfilment and on-time deliveries Competitive Assessment ‘Aberdeen Group has analyzed the Best-in-Class, Industry Average, and Laggard companies across the following categories: (|) process (the approaches they take to execute daily operations); (2) organization; (3) knowledge / information management; (4) information technology; and (5) performance management. Table 3 summarizes this analysis and aims to provide a guideline for best practices based on the Best-in-Class performance across the key metrics. Table 3: The Competitive Framework ES Laggards Create single demand forecast with inputs from multiple roles within the company 69% 59% 38% ‘Ability to include promotions and other demand shaping activites into demand forecasts 52% 51% 28% ‘Ability to segment demand forecasts based on key product and customer characteristics Process 50% 45% 29%, ‘Ability to convert forecasts at product categoryifamily level into products forecasts at the SKU level 56% 51% 24% ‘Ability to collaborate with external trading partners 41% 34% 2a% ‘Ability to collaborate with internal stakeholders 71% 69% 41% © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fox: 617 723 7897Demand Management: Enabling Sell Side Collaboration to Improve Sales ears Aberdeen Group Page 12 Cee Laggards ‘Organizational capability for creating a single number ‘Organization | forecast | oR oe 7% ‘bility to accurately (within internally accepted potential error margin) forecast customer demand across multiple channels and tiers 2% 40% 16% ‘Ability to on-board new trading partners for process Performance | Colsboracion within two months , 27% 18% 11% ‘Ability to impact projected supply chain delivery costs by changing carriers, means of transportation, etc. 48% 39% 2% Technology enablers for demand management * Statistical Statistical * Seatistical demand demand demand forecasting | forecasting— | forecasting - 66% 63% AN% = Forecast = Forecast =Forecast collaboration — | collaboration— | collaboration — 61% 56% 31x *Alere =Alere =Alere Management | Management~ | Management Technology | 43% 36% 13% "Demand "Demand "Demand analytics and | analytics and | analytics and reporting and BI | reporting and BI | reporting and Bl =4% 50% =29% =SAOP System — | =SKOP System— | =SROP System — 46% 41% 28% Spreadsheets — | = Spreadsheets — | + Spreadsheets — 63% 1% 85% “Best ofbreed | =Best of breed | = Best of breed software -35% | sofeware- 18% | software - 13% Source: Aberdeen Group, November 2009 Capabilities and Enablers Based on the findings of the Competitive Framework and interviews with "We perform short term end users, Aberdeen’s analysis of the Best-in-Class reveals that these high- focused activity that invowves performing enterprises differentiate themselves from their peers in two collecting key trends data from separate, yet related, methods of integration: frst, che integration of inputs 2s oneal note of from internal stakeholders when preparing forecasts, and; second, the Eres ae note integration of data from trading partners through forecast collaboration. To before actual shipments” rovide a more detailed walkthrough of specific capabilities that separate p ‘one pa Par ~ Director Supply Chain, CPG Manufaceurer © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fox: 617 723 7897Demand Management: Enabling Sell Side Collaboration to Improve Sales ears Aberdeen Group Page 13 the maturity classes, we turn first to those processes whose adoption differentiates the Best-in-Class from other respondents, Process The process capabilities outlined in Table 2 are across the two areas of demand planning and sell-side collaboration. The key benefits of getting involved with the process capabilities are: + To be able to create a demand plan that is most representative of market conditions using a variety of approaches such as demand forecasting, sales and marketing inputs, promotion and causal forecasting, + Once the demand plan is created, it has to be executed within the short term, In addition, the impact of market events that happen in the short term on the demand plans must be incorporated through sell side collaborative processes. Best-in-Class and Industry Average companies have reached parity in the above two areas. The reason for the overall market improvernent in demand management is due to the concerted effort that companies have been placing towards this area for the past decade or so. However, the gap between Laggards and all other companies is stl quite large. Laggard companies are aware of the overall value proposition, but are unable to identify the key areas that they need to focus on. There are also differences between those Best-in-Class companies that are build to order versus build to stock. Best-in-Class companies that adopt a build to order model do not consider demand management to be just "Our sales managers meet bi- statistical forecasting. Creating a demand forecast through past history is monthly with our customer's just the start, These companies have realized that until the handoff is made supply chal organization to, to sales and the operations group, there are a series of steps in the process understand their andipaes that have to be managed, The greater emphasis is on planning materials and demand over the capacity that can produce the orders that come for the organization in the short term, This is very different from the build to stock industries where ~ VP Operations, having a good statistical forecast to start off is critical and sufficient. A&D Manufacturer Ina build to order environment, forecasting down to the SKU level is challenging due to the large option combinations that result in an exploding number of SKUs. This issue is even more prevalent when it comes to engineer to order companies. For example, an industrial equipment company based in Brazil took the survey, and 70% of their business is related to equipment for agriculture (pulverizers, harvesters, etc.) They ‘manufacture over 105 families of product with the total number of distinct options for the products over 2,000. This results in a significantly complex challenge in terms of demand planning, This is an area that Best-in-Class companies are clearly winning. In the case of configured products, being able to create attach rate forecasts is critical to achieving forecast accuracy. Attach rate forecasting refers to creating © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fox: 617 723 7897Demand Management: Enabling Sell Side Collaboration to Improve Sales ears Aberdeen Group Page |4 forecasts for options based on the dependent demand from fully configured orders, Organization Best-in-Class companies are |.3-times more likely than all others to have a clear owner of the consensus forecast. The owner of the consensus forecast also should be a key participant in the demand review step within the S&OP process. A recent Aberdeen report on S&OP details key ‘organizational capabilities that are needed for S&OP success, Sales and Operations Planning: Integrate with Finance and Improve Revenue In addition Best-in-Class companies are three-times more likely than all ‘other companies to have a company-wide forecast rather than completely un-integrated siloed forecasts. This demonstrates the advanced capability within Best-in-Class companies to aggregate and disaggregate forecast information across multiple business units. When we explore the differences with respect to organization for the build to order versus build to stock industries, we see some very interesting results. + 78% of build to order companies indicate that customers are . involved within the demand management process versus 44% of ‘We reer to our proces 8 build to stock companies. The implication is that build to order that sare Sith ademend em companies need to get thelr custemers involved one way or the fovea asa cre sther since is dif to do stats forecastng in these forearm ns and rene industries. there we determine an 41% of build to order companies indicate that the level of aggregation of ‘operations plan and/or sock companies, We determine the shipment plan in monthly buckets for a rolling 12 month horizon, We Performance Management compare the plans to budget Within performance management there are two broad areas of focus for and prior month plan for ‘companies — within the planning window of months, as well as within the changes and performance, We ‘execution window within the month (and maybe even days). Best-in-Class the fry level All he above ‘companies are focused on measuring the performance both in the longer plans are dove in units. We term horizon as well as within the short term execution window. then convert the shipment plan to a revenue and profi plan, also we look at total inventory dollars. Those three plans are done in dollars and are However our research shows that even for Best-in-Class companies, the ability to measure the performance of trading partners in a rapid fashion is limited and is a key area of opportunity. When we look at the differences between build to order and build to stock ‘compared to budget and prior environments, we observe the following: month plan. ~ Director of Supply Chain ata Large Industrial Equipment Manufacturer The top owo operational challenges for build to stock companies on the sell side are: poor or late visibility into channel sell-through to the end customer and consistently inaccurate demand forecasts © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fox: 617 723 7897Demand Management: Enabling Sell Side Collaboration to Improve Sales ears Aberdeen Group Page IS Whereas for build to order companies, the top two operational challenges con the sell side are: consistently inaccurate demand forecasts and expedited transportation costs are too high The takeaway we can have from the above is that both the build to order and build to stock companies essentially face the same problem. The reason why expedited transportation costs are too high for build to order companies is that they don't have enough visibility into their channel sell- through. In other words the bulk of the companies surveyed are immature with respect to their sel-side collaborative processes. Technology The two areas where we are secing differentiation for Best-in-Class companies with respect to technology are: ‘Best-in-Class companies are |.6-times more likely to adopt best of breed demand management systems ‘Best-in-Class companies are 30% less likely to be using spreadsheets for solving demand management problems ‘Technology is not the panacea but its depth of usage is. Depth of usage does not mean using all the functional capabilities even if there is no business value. Depth of usage refers to leveraging the tools beyond out-of-the-box statistical forecasting and doing external collaboration, allocation of forecasts to lower levels, and customer level forecasting for improving customer service levels. ‘An example is the usage of specialized algorithms for performing intermittent demand forecasting for spare parts in the after markets industry. The areas where we did not see any differentiation were integrated ERP systems. Out-of-box standard ERP tools are too generic to address the complexity of the demand management in terms of the representation of multiple levels of bills of materials, collaboration with several internal and external entities, configuration options and outsourced manufacturing related complexities. © 2009 Aber Telephone: 617 854 5200 www.aberdeen.com Fox: 617 723 7897Page 16 igure 3: Technology Usage among Respondents Spreadsheets Integrated ERP modules Best-of-Breed on-premise systems Legacy systems ‘Software-as-a-Service (SaaS) on-demand solutions MBestin-Class 1D Industry Average Toolkits mM Laggards 0% 20% 40% 60% 80% 100% Percentage of Respondents, n = 135 Source: Aberdeen Group, November 2009 Barriers to Technology Adoption Even though demand management sofware is the most mature among ‘ther supply chain applications segments, the high upfront cost of the software is still a major concern as identified by the respondents. Concerns about the lack of executive support have been identified as the second most frequently identified barrier by respondents. Software as a Service (SaaS) or managed services are the approaches that companies who are looking for demand management software should look at. Traditionally demand management has been an area where SaaS has not really obtained good traction due to security concerns. However the SaaS. ‘model is definitely something that can be evaluated by mid-size companies to gain an entry into the demand management application space. Derand Managemen: Ebling Sl ie Claboration to Improve Ses Aber deen Grou ip "We have two channels for our products ~ retail and the instructional dealers who in ‘urn supply the teachers and students, We have also seen a reduction in demand due to the recession, and our inventory levels have shot up (though the impact is likely to be lower than other consumer products). We have added bolt-on best of breed solution ‘on top of our ERP system to ‘try to improve the forecast accuracy and reduce the inventory levels.” ~ Director of Supply Chain, Large Consumer Electronics Manufacturer, Educational Products © 2009 Aber Telephone: 617 854 5200 Fox: 617 723 7897Dena Mangement bing Sel Sie Cllboration to Inprve Sls Abe rdeen Grou ip Page I7 igure 4: Barriers to Technology Adoy Upfront cost of the solutions is too high We cannot get executive level support for these initiatives Software integration is too difficult / ‘expensive We dont know enough about the available solutions ‘We don't feel that any of the solutions fit the company Available solutions are too complex for the company 0% — 10% + 20% 30% + 40% Percentage of Respondents, n = 135 Source: Aberdeen Group, November 2009 ‘Aberdeen Insights — Are Companies Focusing on Buying the Grae eae eueaaeenueice2d The current mix of software usage when it comes to demand management technologies is skewed towards demand planning types of solutions. Only 14% of companies indicated that they don't plan to use statistical demand forecasting versus 48% of companies that indicates that they don’t plan to use sell side demand visibility software. However, these solutions come ‘out as inadequate for solving the entire gamut of issues that companies face. The mix of solutions that enterprises should invest in should more balanced across some of the other categories such as promotion planning (if appropriate for the industry), sell-side collaboration, demand visibility and demand sensing). © 2009 Aberdeen Group. hone: 617 854 5200 617 723 7897Demand Management: Enabling Sell Side Collaboration to Improve Sales Revenue Page 18 Aberdeen Group eye enter tod Pe eee ee cae Table 4: Technology Adoption Plans Across Different Demand Management Technology Sub-Categories reer ae ores Gers ae aero ee within 12 in 12-24 to Use oes Statistical 14% demand 57% 14% 18% forecasting Forecast 50% 1% We 18% collaboration Alert 31% 21% 17% 3% management Demand 15% analytics and reporting / 2% 24% 19% business intelligence (8!) Promation 3% ex ak 0% planning Sell side demand 8% Visibility 22% 13% 18% software Source: Aberdeen Group, November 2009 The reasoning behind this shift that is needed is to ensure that the demand plans that are created can be adjusted based on external market factors both in the long term as well as the short term. Promotion planning results in the incorporation of promotion events that can influence demand, Demand sensing solutions can obtain real-time ‘customer purchasing trends and influence demand, Sell-side collaborative solutions can help companies to factor in near-term trends that are ‘essential for companies to understand before stocking up on inventory. © 2009 Aberdeen Group. hone: 617 854 5200 617 723 7897Demand Management: Enabling Sell Side Collaboration to Improve Sales ears Aberdeen Group Page 19 Chapter Three: Required Actions Whether a company is trying to move its performance in demand frastFacs ‘management from Laggard to Industry Average, or Industry Average to 1 69% of Bestin-Class Best-in-Class, the following actions will help spur the necessary performance companies have improvements: demonstrated the ability to create single demand Laggard Steps to Success eoloal Coles eahin he ‘+ Drive to a single operational demand forecast across the organization supply chain with internal collaboration. Thirty-eight percent 41% of Bestin-Class (38%) of Laggard companies have indicated a strong or very strong companies have capability with respect to having a single demand forecast with demonstrated the ability to inputs from multiple roles within organization as compared to 69% collaborate with external of Best-in-Class companies. In order to resolve this issue, itis key to understand the needs of different stakeholders within the organization like executive management, manufacturing, sales and marketing - and to design the forecasting process based on satisfying the goals of each of the above. The SOP process is often the way by which companies arrive at a single operational forecast. trading partners Move from spreadsheets to demand forecasting technologies especially for statistical forecasting for key profit regions and performing collaboration with key customers. Eighty-five percent (85%) of Laggards use spreadsheets to manage their forecasts. This is a low hanging fruit issue to resolve. It is important to tie the statistical forecast accuracy to broader metrics such as profit margins and inventory levels to ensure true ROI Industry Average Steps to Success © On-board key trading partners to be able to collaborate with respect to forecasts. Eighteen percent (18%) of Industry ‘Average companies have the ability to on-board new trading partners for process collaboration within two months versus 27% of Best-in-Class companies. The business environment today is very dynamic with new trading partners emerging rapidly and the lack of process collaboration with these trading partners can impede the sales of new as well as old products. This is the reason why being able to not only create B2B connectivity but also being able to reach the level of process collaboration is critical + Create ability to segment demand forecasts based on key product and customer characteristics. Forty-five percent (45%) of Industry Average companies have the ability to segment demand forecasts based on key product and customer characteristics as compared to 50% of Best-in-Class companies. By being able to perform pareto analysis on the customer base using © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fox: 617 723 7897Demand Management: Enabling Sell Side Collaboration to Improve Sales ears Aberdeen Group Page 20 profit as the metric, the key customers can be identified. Their ‘customer service level requirements and the input of the account. ‘management teams of these key customers can then drive the customer level forecasts. Best-in-Class Steps to Success + Institute a sales forecasting process. Forty-two percent (42%) of Best-in-Class companies have the ability to accurately (within internally accepted potential error margin) forecast customer demand across multiple channels and tiers. These companies should focus on instituting a sales forecasting process that tie the sales organization's opportunity forecasting process using their CRM solution to the supply chain organization's build forecast. This will help incorporate the field level knowledge of the sales team to improve forecast accuracy. Care has to be given to adjust the metrics of the sales team to provide incentive to enter and maintain the opportunity forecasts. ‘+ Control demand within the execution window. Forty-cight percent (48%) of Best-in-Class companies have the ability to impact projected supply chain delivery costs by changing carriers, means of transportation, etc. The best of demand plans are not enough if the ability to adjust to short term demand changes are not put in place. Best-in-Class companies must focus on the ability to make short. term supply chain network changes as well as the ability to sense true customer demand at a very granular level. ‘Aberdeen Insights — Demand Management for the New eed ‘Companies no longer have the luxury of being able to expend significant resources to have a multicphased demand management process and technology roll out. They need to be laser focused on selecting the right mix of processes and tools that are suitable to their unique environment. The two key determinants are: type of supply chain and the planning window. The following Table identifies the key techniques that are necessary for companies that are present in one of the four quadrants. Table 5: Prioritization of Demand Management Initiatives Long-Term Demand | Short Term Demand ea eae seed ‘Statistical and probabilistic forecasting, Price Optimization, Inventory Optimization Statistical Forecasting, Promotion Planning Sales Forecasting Inventory optimization, (collaborative forecasting), | distributed order management Axtach rate forecasting | (dynamic sourcing strategies) Source: Aberdeen Group, November 2009 © 2009 Aber Telephone: 617 854 5200 www.aberdeen.com Fox: 617 723 7897Demand Management: Enabling Sell Side Collaboration to Improve Sales pars Aberdeen Group Page 21 Appendix A: Research Methodology Between October and November 2009, Aberdeen examined the use, the experiences, and the intentions of more than 135 enterprises using demand ‘management technologies in a diverse set of enterprises. Aberdeen supplemented this online survey effort with interviews with select survey respondents, gathering additional information on demand management strategies, experiences, and Survey thec ndeded questions results. Responding enterprises inclided the following: designed to determine the ‘Job title: The research sample included respondents with the following following: job titles: C-Level executive (CEO, CFO, CTO, CIO) (6%); VP/General Manager (17%); Director (21%); Manager (35%); other titles (21%), Responding supply chain and logistics and related area ‘executives completed an online 1 The nature of demand ‘management process, ‘Functional Responsibility: The research sample included organization, performance, respondents with the following functional areas of responsibilty data and technology Logistics/supply chain (48%); operations/procurement (17%); ‘capabilities that companies Finance (2%); Sales/Marketing (7%); Corporate Management (10%); have IT (10%); other areas (6%) \ The structure and ‘Industry: The research sample included respondents from the four effectiveness of existing major industry segments - Process, Consumer, Discrete and High- demand management techlelectronics. processes * Discrete (19%): Aerospace and Defense (4%), Automotive/other 1 Current and planned use of vehicles (7%), Industrial Equipment Manufacturing (4%), industrial technology solutions to aid product manufacturing (4%) the process enhancements + Consumer (37%): Apparel (2%), Consumer Durable Goods (1%), 1 The benefits, if any, that have ‘Consumer Packaged Goods (10%), Consumer Electronics (3%), been derived from these Distribution (3%), Food/Beverage (10%), Retail (7%), Wholesale (1%) initiatives + Process (13%): Chemicals (3%), Metals and metal products! “The study aimed to identify Mining/oil/gas (6%), Paper/lumber/timber (1%), Pharmaceutical ‘emerging best practices for manufacturing (3%) demand management «© High-tech/electronics (15%): Computer equipment and peripherals ‘capabilities, and to provide a (3%), Health/medical/dental devices or services (5%); High- framework by which readers technology (2%); Telecommunication equipmentiservices (5%) could assess their own Categories of companies: The research sample included respondents of the following categories (Please note that respondents may select more than one option): Manufacturer (62%), Contract manufacturer (6%), Brand manager/manager (18%), Distributor (13%), Retailer (9%), Supply Chain Services Provider (6%), After market manufacturer (3%), Raw material supplier (4%). ‘Geography: The majority of respondents (58%) were from North America. Remaining respondents were from the Asi Pacific region (11%) and Europe (24%). Rest of the world constituted the remaining 8%, ‘+ Company size: Forty percent (40%) of respondents were from large enterprises (annual revenues above US $| billion); 44% were from midsize enterprises (annual revenues between $50 million and $1 billion); and 16% of respondents were from small businesses (annual revenues of $50 million or less). © 2009 Aberdeen Group. Telephone: 617 854 5200 rdeen.com Fox: 617 723 7897 management capabilities,Demand Management: Enabling Sell Side Collaboration to Revenue Page 22 mprove Sales Aberdeen Group * Headcount: Sixteen percent (16%) of respondents were from small enterprises (headcount between | and 99 employees); 24% were from midsize enterprises (headcount between 100 and 999 employees); and 60% of respondents were from large enterprises (headcount greater than 1,000 employees). Table 6: The PACE Framework Key ‘Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as, follows: Pressures — external forces that impact an organization's market position, competitiveness, or business ‘operations (e.., economic, political and regulatory, technology, changing customer preferences, competitive) ‘Actions — the strategic approaches that an organization takes in response to industry pressures (e.. align the corporate business model to leverage industry opportunities, such as product/service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities — the business process competencies required to execute corporate strategy (eg skied people, brand, market positioning, viable products / services, ecosystem partners, financing) Enablers — the key functionality of technology solutions required to support the organization's enabling business practices (eg., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management) Source: Aberdeen Group, November 2009 Table 7: The Competi /e Framework Key “The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of practices and performance: jest-in-Class (20%) — Practices that are the best currently being employed and are significantly superior to the Industry Average, and result in the top industry performance. Industry Average (50%) — Practices that represent the average or norm, and result in average industry performance. Laggards (30%) — Practices chat are significantly behind the average of the industry, and result in below average performance. Tn the following categories: Process — What is the scope of process standardization? What is the efficiency and effectiveness of this process? Organization — How is your company currently ‘organized to manage and optimize this particular process? Knowledge — What visibility do you have into key data and intelligence required to manage this process? Technology — What level of automation have you used to support this process? How is this automation integrated and aligned? Performance — What do you measure? How frequently? What's your actual performance? Table 8: The Relationship Between PACE and the Competitive Framework Source: Aberdeen Group, November 2009 Peer ee ea nes ‘Aberdeen research indicates that companies that identify the most influential pressures and take the most ‘transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions. Source: Aberdeen Group, Novernber 2009 © 2009 Aber en Group, Telephone: 617 854 5200 Fox: 617 723 7897Revenue anand Mangement: Ebling Sl ie Cotborason empress AH ec. Page 23 2 itor tdeen Group Related Aberdeen Research Related Aberdeen research that forms a companion or reference to this report includes: + Supply Chain Executive's Strategic Agenda 2008: Managing Global Supply ‘Chain Transformation; January 2008 + Technology Strategies for Closed Loop Inventory Management; April 2008 ‘Sales and Operations Planning: Aligning Business Goals with Supply Chain Tactics June 2008 © Demand Monogement in Process Industries: Strategies for Being Demand Driven in a Globalized Economy; September 2008 ‘© Beyond Visibility: Driving Supply Chain Responsiveness; September 2008 © Working | Optimization: Finance and Su in Strategies for Today's Business Environment; October 2008 cand Finance; December 2008 ‘© Integrated Demand-Supply Networks: Five Steps to Gaining Visibility and ‘Control March 2009 ‘© Inventory Management: 3 Keys to Freeing Working Capital; May 2009 © Mult-Enterprise Manufacturing: The Role of Visibility and Collaboration in Driving Responsiveness; August 2009 Information on these and any other Aberdeen publications can be found at wwwaaberdeen.com, ‘Authors: Nari Viswanathan, VP / Principal Analyst, Supply Chain Management, (nari viswanathan@aberdeen.com); Scott Pezza, Research Associate, Supply Chain Management, (scott pezza@aberdeen,corn) ‘Shue 108, Abrdea's research has ban Papin cporators wore esame Bestar Oss. Fara barchmatoe te portermance of more tha 644,000 compares, Aeron furiquy postend to povde ‘ganastons wih ne fs trl maar te fais tal erable compari topo ned ad ve resl. Tats why researc rlad on by mor tran 22min readers in ver 0 courts, 0% of th Forune 1000, ard 3% ot the Teotalegy 800, ‘As aHeteHarks Conpary,Abseen plays ky rl of puting const a conto the goal ac an aged lrg compar. Abobo’ anata an indpandort view ote cusemar opinzator rcoss of Hai Hanks (tarmaton~Opperunty ~ Insight - Engagement nace) extends cle: vaue an aoe he ‘lope ole arian bing th mao Far adczoralinlematin vat Rorsoe pm abordea. com (eal (617) 72-790, ortlear more abut Hare Hark, al (00 ASESTB re eM: Nasa com. Ths Gocumerts the es of ary esearch paormes by Aberteen Gp, Aberdeen Gop mthoologs [Provide for obecive lactase researc and roresor te bel araijis arate atte eo! ution. ls {Shanes noe, ha at cones fis publoaton are copyrihed ay Abardcen Group, en may nol 9¢ Teprocuced, drut, archivod or tansrted nary eo by ay moans wihau erwin cons by oerdeen Grau, ne © 2009 Aberdeen Group. Telephone: 617 854 5200 wurw.aberdeen.com Fox: 617 723 7897Derand Managemen: Ebling Sl ie Claboration to Improve Ses Aber deen Grou ip Page 24 Featured Underwriters This research report was made possible, in part, with the financial support of our underwriters. These individuals and organizations share Aberdeen’s Vision of bringing fact based research to corporations worldwide at little or no cost. Underwriters have no editorial or research rights, and the facts and analysis of this report remain an exclusive production and product of Aberdeen Group. 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