Many economic indicators point to new growth in consumer demand in the coming months.
But when will it happen? And is your supply chain equipped to handle it?
By Adeel Najmi
Businesses around the world are closely monitoring market trends and economic indicators, watching to see if consumers are feeling confident again—and if demand is beginning to rebound.
While the re-emergence of demand will certainly be welcomed, it is also fraught with risk. Companies will face potential raw materials and transportation price increases as the economy rebounds. And they will be challenged to effectively meet new demand with the reduced workforce, constrained capacity and lower inventory levels they established during the downturn. A recent study by AMR Research revealed that 44 percent of executives believe their greatest risk in 2010 will be managing the economic recovery, while only 23 percent are concerned about the effects of a continued economic recession ("Better Times Right Around the Bend? Executives Downgrade Supply Chain Risks." AMR Research, September 28, 2009).
As we prepare ourselves for the re-emergence of demand, it's critical to recognize that "business as usual" is a thing of the past. Our world has been dramatically transformed by the economic downturn of the past two years. Every company must approach the marketplace with a new mindset, poised to react to any future demand changes with agility and responsiveness. Businesses must actively prepare to re-energize their supply chains to meet upward demand trends, but they must also mitigate their exposure to financial risks in a market that continues to be characterized by unpredictability.
To effectively manage these risks, every business should take a hard look at its approach to the marketplace and, in turn, make mindset shifts in response to today's altered economic landscape. The world has radically changed, and organizations must make equally radical changes in their most basic supply chain processes in order to continue to meet ever-shifting consumer needs.
Replace "planning for execution" with "planning for discovery"
Perhaps the most significant shift companies must make involves rethinking the purpose of their planning and forecasting activities. Businesses of all types should move away from the idea that the goal is to achieve the most reliable execution plan possible—and instead recognize that real value and agility result from "planning for discovery."
If the last two years have taught us anything, it's that even the best forecast is still only a forecast, and even the most well-defined supply chain plans will need to be adjusted as marketplace realities shift. The question that executives need to ask is not, "Will our forecast be wrong?" but instead "When will we first know the forecast is wrong, and how will we correct our course?" In today's volatile markets, plans can no longer be thrown over the wall periodically, to be executed in an open-loop, single-direction manner.
It is critical that feedback and correction take place frequently so that organizations can sense and respond to demand changes.
In response, many businesses have created plan-do-check-act (PDCA) cycles that continuously monitor supply chain performance and make adjustments as needed. Prior to the economic downturn, most of these organizations were investing significant time
and energy in the "plan" and "do" phases: creating elaborate supply chain plans based on historic demand levels, and executing them. But as demand uncertainty increased, these plans rapidly lost relevance, and companies were left scrambling to re-plan and re-execute.
In the new business world, the final stages of the PDCA cycle—"check" and "act"—have become as important as the initial planning and execution phases. Instead of being rigid and difficult to change, today's plans must be flexible enough to accommodate the constantly changing parameters under which supply chains are operating.
Companies must go beyond the typical goal of closed-loop PDCA, which is to create the most accurate execution plan possible, because this merely results in reactive re-planning. While closed-loop planning for execution is more effective than simple open-loop planning, it is still limited because its only input is a periodic, one-dimensional demand performance review.
The new proactive paradigm of "planning for discovery" takes PDCA to the next level. Not only should companies monitor their performance against actual demand, they should also answer more complicated questions: "Were our assumptions correct? Did we anticipate and manage risks effectively? Did we apply the right levers to correct our course?" This is a much more sophisticated process than simply measuring forecast accuracy.
The new paradigm of PDCA requires that plan assumptions are explicit, that likely disruptions are anticipated and that opportunities for learning are built into the plans themselves. It is no longer enough to simply monitor demand and make corrections. True supply chain leaders are sensing and responding to disruptions proactively, and then driving ongoing learning through systematic post-mortems of their execution results. They are not just re-planning when deviations and exceptions occur, but also using these opportunities to capture information that will improve their future assumptions, risk management strategies, process playbooks, lever libraries and other plan components—as part of a closed-loop, ongoing process of discovery.Â
Traditional sales and operations planning (S&OP) has focused primarily on cross-functional synchronization and planning, but today it must also emphasize collaborative analysis and collective learning. In a volatile marketplace, S&OP must capture knowledge regarding risks, assumptions and the effectiveness of corrective actions—recognizing that the target is no longer a fixed mark, but an ever-evolving process of understanding and responding to a changing landscape. Demand must be continuously analyzed and shaped, inventory targets must be set and re-set, and the entire supply chain must counter the uncertainty in the marketplace with agility.
While a dramatic mindset shift may be required to make this change within the typical organization, new technology solutions are emerging to support this process, from early warning systems to process playbooks that gather inputs from across the end-to-end supply chain and respond with corrective actions. These tools are growing in sophistication, reflecting the emerging needs of a volatile business world. Some supply chain events trigger an automated response that redefines the policies that govern the entire value chain, while other events may be escalated for further investigation by executives. Often, these investigations—triggered by performance exceptions—can reveal subtle, but significant, demand shifts in the marketplace.
One company that uses i2 solutions to monitor buying behavior offers a good case in point. Although its portfolio consists of thousands of individual products, i2 helps the organization discover changes in buying patterns for specific SKUs. Occasionally, these "micro" changes can signal "macro" marketplace trends. For example, i2 solutions uncovered a change in demand for just seven parts, which triggered an in-depth root-cause analysis. This investigation suggested that a broad shift in demand was imminent, and the entire value chain was able to prepare in advance, based on a small performance deviation that was detected at a very early stage. This is the kind of organizational insight and learning that is preparing many businesses to not just survive, but thrive in today's unpredictable environment.
Focus the entire value chain on the single moment of truth
In addition to changing their fundamental approach to planning, supply chain leaders are making a second shift. They are realizing that, in today's new world, the entire value chain must work together to support a single moment of truth: for instance, the moment when a shopper enters the retail aisle, finds the product and makes a decision to purchase it. This requires the concerted effort of every player in the value chain, from the manufacturing facility to the retailer.
Understanding consumer behavior has traditionally been viewed as solely a sales and marketing responsibility of the brand manufacturer, but the economic downturn demonstrated very clearly that the entire value chain is impacted by changing end-user preferences and actions. Every stakeholder in the value chain, from suppliers to channel partners, must focus on the buying decision—the pivotal moment that represents ultimate success or failure.
How can companies better prepare themselves to win at this all-important moment? A number of core competencies within the business must be aligned to create a value chain that is truly "shelf-aware":
- A focus on consumer demand. In the traditional demand-driven paradigm, all participants waited for demand signals from their own immediate customers. Today all players in the value chain need to develop their own firsthand understanding of broader consumer behaviors and preferences. Brand manufacturers cannot expect retailers to devote the resources needed to understand consumer behavior as it relates to their specific brand. Similarly, suppliers should not depend on manufacturers as their sole source of end-user insights. Instead, each stakeholder should develop its own keen understanding of consumer behavior across the entire product category so that the business can anticipate upward or downward trends in overall demand or in brand share. When any participant in the value chain develops an excess or deficit of inventory relative to true consumer demand, this raises costs for the entire chain. Point-of-sale (POS) data and other end-user insights should inform the entire end-to-end value chain, supporting a product offering that will ultimately win the sale. Forward-looking organizations are using a variety of sophisticated means—including real-time, in-aisle data sent via mobile device and "street intelligence" about competitor promotions—to sharpen their focus on end-user demand.
- Intelligent use of channel data. Value chain partners enjoy greater access to channel data information than ever before, but most struggle to make sense of it. In fact, by applying proper analytics, channel data can be translated into valuable and actionable information. At a minimum, all value chain participants must monitor trends in channel inventory and trigger risk mitigation actions when excesses or deficits are detected in inventory levels or turns. By paying careful attention to misalignment between sell-in and sell-through trends, upstream partners can establish early warning systems that signal broad market changes and ensure that their own business is prepared.
- High in-stock availability. Even the most appealing product will not win the sale unless it is actually on the retail shelf when shoppers enter the aisle. Today, stock-outs can translate into not only temporary lost sales, but also a permanent loss of share. For example, a shopper unable to find a brand-name product might decide to purchase a private-label alternative, then decide that the branded product is not worth the higher price. Today, high in-stock availability—at a relatively low risk—can be achieved via inventory right-sizing strategies and pull-based replenishment schemes that take an integrated view of the value chain, working backward from the retail shelf. These approaches rely on real-time POS data that reveals actual buying trends at the individual store, category and brand levels. Channel managers must work to build retailer trust by demonstrating both forecast reliability and stocking flexibility, so that retail partners are confident that products will be on the shelf, without excess inventory on hand.
A truly shelf-aware and consumer-focused value chain enables all participants to have the agility to shift their supply chain strategies—including their inventory and replenishment policies—to reflect what is actually happening in the retail aisle and at the cash register today.
This mindset shift places new demands on most businesses. Many product categories are extremely susceptible to demand volatility because they represent fashion-driven, short-life-cycle products or "high ticket" purchases that consumers may be willing to defer or downsize. For example, computer manufacturers operate in an especially volatile market, where feature preferences are determined by consumers' constantly shifting budget constraints and pricing concerns.
In the last 18—24 months, even product categories once viewed as steady and predictable have exhibited increasing volatility that requires more strategic supply chain management. Facing their own economic challenges, retail giants such as Walmart are increasing the scrutiny of their product assortments in an effort to gain more sales per square foot, while also reducing their inventory levels. They are purging under-performing SKUs and giving additional or premium shelf space to those SKUs that are performing better—creating new pressure for brand owners to understand and meet end-user needs.
It is critical to recognize that while companies may have invested heavily in consumer research prior to the economic downturn, the findings no longer apply to today's vastly changed retail aisle. Consumers are budgeting and making purchases more carefully than ever before. Consumer studies from two years ago may not reflect shoppers' current willingness to try lower-priced, private-label brands, use coupons or seek out advertised promotions. It is not enough for a company to say that it understands the consumer; the company must understand what the consumer values right now.
The good news is that innovative business processes and technology solutions are making it easier to focus on consumers and align the end-to-end value chain against the ultimate "moment of truth"—ensuring that the end result is in high availability and an attractive selling proposition. While winning the consumer purchase continues to be a sophisticated process—and demand levels will always shift—sales forecasts and other supply chain decisions can be monitored and automated to minimize risk and increase the probability of success.
POS data and other consumer insights play a critical role, and it can be difficult for some businesses to cleanse and sift through the huge volume of information they are receiving from their channel partners today. For those businesses that lack internal capabilities in this area, managed services can be an effective means of analyzing and applying this information across the value chain. In the current retail environment, it is critical that companies find some way to understand shoppers' behavior at a very detailed, granular level that can determine specific tactics, instead of the aggregate approach that organizations may have used in the past.
Microsegment your business to minimize your risk
This "granular" concept is a key to achieving success across the supply chain today—not just in microsegmenting consumers, but also in understanding the nuances of selling different products, with diverse features, through distinct channels. This is a third competitive imperative for supply chain leaders today.
Traditionally, many supply chains have been managed with broad-brushed, one-size-fits-all policies. Implicit in these policies is the notion that a homogenous group of products is being sold to a group of equally homogeneous retailers and consumers.
Clearly, this is not based on marketplace realities. Different products sell at different rates, and have vastly different lifecycles.
Each individual product segment may require a specialized forecasting model to ensure accuracy. By recognizing the critical differences in the demand patterns, end-to-end lifecycles and volumes of their products, supply chain planners can custom-tailor their forecasting techniques to meet the unique demands of each microsegment. For example, established, high-volume products with stable demand require a far different approach than new products, which typically display rapidly fluctuating demand patterns.
Effective microsegmentation can help companies improve their forecast accuracy and reduce their risk of being right at the aggregate level, but wrong at the granular level where supply chain decisions are actually made, which is a costly mistake. By applying microsegmentation strategies to manage their product lines, i2 customers in a wide variety of industries—including
fast-moving consumer goods, consumer durables and service parts management—have achieved overall forecasting accuracy improvements as high as 30 percent.
These supply chain leaders are also minimizing their risk by creating custom-tailored "designer" inventory strategies that
are matched to the actual demand for each SKU, instead of relying on universal targets that fail to acknowledge the significant differences in inventory needs across various retail channels, price points, regions and even individual stores.
These customized micro strategies define distinct performance targets that keep inventory levels closely aligned with actual demand, depending on the special needs of each product. For example, commodity and custom products have very different demand and supply risk profiles, and thus require their own inventory buffering and postponement strategies. Sales volume
is another important risk factor that must be addressed by the inventory strategy. Using microsegmentation practices, postponement and replenishment decisions can be automated for every product, based on that product's unique features—as well as the top-level strategies and financial goals of the entire business (see Figure 1).
In addition to strategically managing products, microsegmentation is helping supply chain innovators more effectively—and profitably—manage their critical relationships with customers. It is neither possible nor desirable to service all market segments equally. Some customers contribute higher volumes, revenues or margins than others, and thus wield greater power. To deliver the highest-impact results, microsegmentation strategies must consider both individual products and the channels through which they are sold.
Figure 2 demonstrates one microsegmentation strategy used by a major snack foods manufacturer to define the differences among its many products and customer accounts. Based on this segmentation, highly customized service can be provided to customers, based on their specific product mix, volume, margin and demand profile.
High-volume, high-margin, stable segments are logically targeted for higher service levels than smaller, less profitable segments that exhibit demand volatility. This approach is significantly increasing the company's profitability and overall service performance, while also minimizing risk and financial exposure.
There is no doubt that product mix, volume, margin and demand variability are paramount in segmenting customers—but there are other considerations that can help determine appropriate service levels. Strategic points in the new product introduction cycle may mean allocating inventory very differently among customers, depending on their consumer influence. And the growing diversity of today's global markets means that highly customized service levels may be needed to address localized demand.
New business processes and technology solutions play a vital role in enabling the microsegmentation of the supply chain by managing a wealth of information about products, features, customers and consumers at an incredibly detailed level. Dashboards, process playbooks and other tools can automate the management of diverse products across all selling channels, balancing inventory levels strategically and ensuring that the appropriate corrective actions are taken when demand or performance deviations occur.
Looking ahead: assume a more proactive stance
While many businesses suffered setbacks in the last 18-24 months, the economic downturn has provided an opportunity for every organization to re-examine its fundamental supply chain principles. The greatest lesson we can collectively learn is to take a more proactive posture as we look toward the future—not waiting for the next dramatic change, but anticipating it and ensuring that we are poised for immediate action.
Every business can learn from the mistakes of the past by proactively creating a closed-loop learning organization that makes agile supply chain adjustments in response to market changes, and by capturing knowledge to improve future assumptions and results. In addition, value chains need to incorporate a consumer focus that senses upturns and downturns before they happen to avoid being unprepared.
The broad mindset shifts described here—closed-loop planning for discovery, creating a shelf-aware value chain and microsegmenting the business—will separate the leaders from the followers as we continue to navigate this uncertain consumer marketplace. Taking a proactive stance means forgetting about "business as usual" and changing our most basic supply chain philosophies to reflect the new realities under which we operate today.
Adeel Najmi is vice president for product strategy and planning at i2.
