Combining the “Art and Science” of Demand Planning - Five Top Tips to Improve Forecast Accuracy

 “We need a new system”, that’s what I hear when the topic of Demand Planning and forecast accuracy comes up. Whether it’s a wholesale, catalog, bricks and mortar, or Ecommerce business, the first answer is often the same.  People, processes, and systems, are needed to execute a business plan. I find that in the case of Demand Planning, business process is the area that needs to be addressed first rather than a “new system”. And, if a new system is selected, implementation will require strong business processes, so it’s a perfect place to start for many reasons. Now that you have a well laid out “assortment plan”, it’s time to forecast.

  1. Oddly enough, the first place I’d suggest to begin is to acknowledge that your forecasts will always be inaccurate. Benchmark your industries’ accuracy (or inaccuracy) metrics. How do you compare? Is there realistic room for improvement? Now, make plans (or contingencies) to manage the inaccuracy as well as improve the accuracy. In inventory management this means out of stocks caused by forecasts being too low and “excess inventory” caused by forecasts that are too high as an example.
  2. If you have an idea about what is causing the inaccuracy you’ll be able to address it more effectively. Do you have a way to track inaccuracy? What is causing it? Is it really math/analytics or is it a promotion that the team did not know about? This does not need to be extremely detailed to give you a directional idea where to start. Based on my experience, there is plenty of room for improvement in business processes prior to implementing a new system.
  3. The ‘ole “tops down and bottoms up” really helps. Forecast inaccuracy is larger the further down the merchandise hierarchy that you go (ie sku). At higher levels (ie department), inaccuracy is less. In addition, when you sum “bottoms up” your number usually is too high. “Tops down” along with “bottoms up” is a great way to fine tune your forecast. Often, meeting somewhere is the middle is good. In addition, I always suggest arriving at a number three different ways – perhaps “bottoms up”, “tops down”, and current trend over last year as an example.
  4.  The longest lead time activity should drive a forecasting calendar, whether that’s product placement or marketing development. A calendar should be developed and shared cross-functionally to insure that input is received, forecasting is done, and forecasts are approved in time to meet business deadlines. Often inaccuracy can be improved by simply focusing on timeliness.
  5. Subjective, cross-functional input is crucial.  In my experience this is the biggest area of opportunity in improving forecast accuracy. The team doing the forecast not only needs to know the products, they must know pricing (promotions), space, presentation, marketing activities (advertising, circulation), like items (cannibalization), discontinued items, and trends in the marketplace. Whether you call this an S & OP (wholesale) or the assortment “hand off” meeting (retail), a regular process for obtaining this information is crucial.

Once you have implemented #1-5, you are well on your way to combining the “art and science” of demand planning and will see improvement in your forecast accuracy. You have also put in place items that will be needed if you implement a “new system”. Demand planning systems have nice analytics to help forecast “promotional lifts”, take cannibalization into account, and better forecast seasonality curves. One of the best features of a “new system” is usually the feature to manage by exception which is especially nice if you are dealing with massive amounts of data. Of course, another key element in improving forecast accuracy is to insure the right people are doing the right jobs.

I’d love to hear about your Demand Planning needs and can be contacted at Janice@jlsearsconsulting.com or 206-369-3726.

 

Inventory Management – 10 Guidelines To Insure That “Cash is King”

“Too much” or “not enough”, that's the balancing act required to effectively manage inventory. If you end up with “too much” it can mean discounting. This not only hurts your margins for the season, it can also hurt your brand image for seasons to come. If you “don’t have enough” you will lose sales and possibly “goodwill” with customers for future purchases. The art and science of good inventory management balances the two. “Cash is king”, especially lately. Strong sales produce cash and tight inventory management preserves cash.  The following guidelines help with both:

  1. Inventory levels are dependent on forecast accuracy. Forecasts will never be 100% correct. So, work to improve forecast accuracy. But, at the same time work to manage the “inaccuracies” or the “too much” or “not enough” caused by over forecasting or under forecasting. A wholesale client of mine was so intensely “sales driven” that they focused solely on “not” losing a sale despite inventory management or margin implications. I worked with them to better understand and balance all aspects of inventory management.
  2. Good inventory management cannot be done in a silo. Assortment planning and channels of distribution plans – store floorsets, catalog lay outs, e-commerce promotions, and wholesale customers – are all part of the equation and must be key input. I worked with a catalog client who had the inventory management function off by itself in a procurement department. They had tremendous excess inventory. The first thing I did was set up cross – functional processes and responsibilities. This helped to reduce inventory immediately.
  3. When buying inventory or forecasting, it’s good to remember that sales people and product people are optimistic. Clients and products are their “babies”. Each time I work on a reorganization with a client I always build in “check and balances” to address this.
  4. Strong cross-functional processes are crucial to solid inventory management. Skilled people are even better. A “new system” rarely solves your problems but is often required.  A straightforward calendar driven by lead times, with key milestones, owners, and dates has helped many of my retail and wholesale clients. An “Open to Buy” (MRP – wholesale/mgf equivalent) must be put in place and/or actively managed. Twice I have seen clients severely over inventory themselves by mixing up their cost basis inventory with retail basis sales – beware.
  5. “Tops down” and “bottoms up” - stores, catalogs, or customers - is the way to go. This is especially true for bricks and mortar retail stores at the sku level. Stores must have the proper skus to sell and they must have some sort of minimum presentation. One retail client of mine bought at the “total level”. When the goods came in they did not have enough skus to allocate to all stores. I worked with them on doing “bottoms up” buying and forecasting along with “tops down” giving stores better coverage for better sales.
  6. Always have contingencies. Things will never turn out the way you plan so have contingencies and “trigger dates”. These contingencies need to include the “upside” – dual sourcing and raw materials etc – as well as the “downside” - sales events, cancellations etc.
  7. Inventory does not get “better” with time. If a product or certain category is not performing deal with it now. It is not going to get better with time – unless it’s wine. A retail client of mine in the fashion business had kept so many styles around without discounting that their website had way too many skus. Customers never found the old product. I worked with them to clear out these styles and put a process in place to keep the assortment current.
  8.  “Inventory aging” is ok in fashionable, seasonal or perishable categories. My all time favorite example of mis-used aging is automatic markdowns taken on “men’s basic white shirts” simply because of an aging code. This makes no sense. As long as you have the cash to carry excess in basics – do it – you won’t miss a sale.
  9. Inventory metrics must be included in performance plans. Annual inventory turn is the primary measure at a category or company level. Sell through, sales stock (or stock to sales), weeks of supply (or days) works well to insure good management at the sku level. These metrics need to be included in product and sales people’s performance plans as well as the inventory management group.
  10. The shorter the lead time the better. But, don’t mistake this. It does not solve inventory management issues. It simply helps with reaction time. Many of my clients have implemented initiatives to shorten lead times – a good thing – but I also work with them to improve inventory management 1-9 above.

I’d suggest enrolling your entire team in the guidelines above to insure success. Good luck. I can be contacted at Janice@jlsearsconsulting.com.  I’d be happy to hear about your inventory management needs.