CRM - November 2008 - (Page BPS3)

Sponsored Content November 2008 3 DEMAND PLANNING: POOR FORECASTING = POOR PROFITS OPTIMIZING OPERATIONS ACROSS THE SUPPLY CHAIN Poor demand management is costly for manufacturers and distributors in other ways as well. One large maker of data storage products that distributes via consumer electronics retailers found it was constantly playing catch-up with its dealers, routinely missing shipments and order dates. “ Although we were spending more than a week each month planning and forecasting, we were still facing fines by our retailers for missing shipment dates,” reports the director of sales planning. To help solve the problem, the company purchased a demand forecasting software package. The software takes into account each product’s demand pattern, while allowing decision makers to adjust forecasts and inventories to meet the company’s goals. Other downsides to inadequate demand planning include poor customer satisfaction, out-of-stock items, and high inventories— all of which drain the bottom line. Any time a customer finds an item out of stock and goes to another store and buys a competitor’s product, both the manufacturer and retailer have lost sales. Even with demand planning, forecasting remains difficult; variables ranging from promotions to store openings to retail channel shifts must be included in estimating demand. “When Dell mails out catalogs and sends out e-mail blasts,” says MaxQ’s Pavain, “they must use past history as a guide to plan how much of a sales increase is expected.” Still more difficult to assess is the demand for a new product. “You can do market research and look at similar products, but for products that are instant hits or fads, it’s very much like trying to predict the future,” says Pavain. “Who knew Apple’s iPod was going to take off, whereas the Newton [an early handheld PDA] was a dud.” DEMAND PLANNING TECHNOLOGY Whether it’s for consumer packaged goods, industrial manufacturing, high tech and electronics, or automotive demand, sales forecasts often lack the sophistication needed to optimize both operations and profits. “We’ve been pretty wrong on forecasting—in both directions—for our suppliers and for our customers,” says the CEO of a multibillion-dollar high tech manufacturer. “In fact, we’ve been wrong pretty massively. With sales forecasting, it’s sort of, why bother? The people who do the forecast don’t know because the customers don’t know.” Manufacturers and distributors routinely accept the idea that sales forecasts will err by as much as 10%, and often 20% or more. In some cases, companies have not only accepted the fact that forecasts are “soft,” they’ve begun using software tools to enable them to track the level of variance over time, adjusting their materials procurement, operations, and distribution plans accordingly. “We track our forecast accuracy, so that we can see a forecast wandering out of the norm,” says the director of production planning and forecasting at a large packaged foods manufacturer. “We want to know exactly the number of weeks we are above or below a certain accuracy level in our forecast. That way, we build up a consistent trend of error.” Granted, this food manufacturer has a special business need—to minimize the amount of product lost due to expiration at different warehouses. Adds this executive, “The software we are using gives us the ability to look at the freshness level and inventory for each product at different warehouse locations.” His company is able to adjust product levels at its warehouses as needed, while avoiding losses due to product expiration. This feedback capability allows the business to tweak both production and inventories for maximum profitability. These problems are similar to those experienced in other industries, including high tech and electronics, where chips, subassemblies, and even finished products such as computers have limited effective shelf lives. Here, too, inventories must be managed in such a way as to maximize sales and minimize “spoilage” as products become obsolete or unwanted. In industries such as steel, excess finished-goods inventory ends up as expensive scrap later melted down to fill new orders. Meanwhile, steel producers lose production time and waste labor producing and storing the unwanted inventory, some of which was rejected because its production was too late for customer demand. Indeed, an entire industry—the steel service center—has arisen to cater to the needs of steel customers who couldn’t wait for their orders to be coated, slit, shipped, and delivered. The automotive industry faces an even more complex problem. General Motors, for instance, began trimming production this year at certain plants in late summer and early fall to bring inventories more closely in line with slowing sales figures. Yet even as dealers around the country found themselves burdened with unusually high inventories on their lots, GM kept shipping vehicles —because the company books revenue and profit at the time it builds and ships vehicles, not when they are purchased by consumers. This system has predictable and painful results: As of July, the average time it took to sell a new GM vehicle was up to a record 91 days, forcing the company to offer sales incentives of up to $4,500 in rebates per vehicle. If, however, an effective demand planning process had been in place, timely analysis of key factors—including sharply rising gasoline prices and negative consumer attitudes toward the safety and environmental friendliness of SUVs—would have prompted GM to scale back production of Hummers and other large SUVs, whose sales were hit the hardest in the first half of the year. Now, however, with the 2005 models ready to hit showroom floors, inventoryswamped dealers were understandably reluctant to accept additional inventories. In turn, the reduction in dealer orders finally curtailed production. Yet existing inventories remain high, costly to both carry and unload at discounted prices. Says one securities analyst regarding the situation’s impact on GM’s earnings: “It’s the company’s choice whether they pay it back now or pay it back later.” Where just five years ago only large enterprise clients could afford sophisticated demand planning systems, new software packages are well within the budgets of most companies. Yet despite the availability of new technology, many small and midsize manufacturers and distributors continue to forecast using simple spreadsheets. Says one technology analyst, “[Microsoft] Excel http://www.microsoft.com/dynamics/request_more_info.mspx?id=10178&wt.svl=10178

Table of Contents Feed for the Digital Edition of CRM - November 2008

CRM - November 2008 Contents Front Office Feedback Reality Check Customer Centricity The Tipping Point Working with the Years CRM on Twitter Virtual Spenders Contact Centers Chatting to Success The Complexity Chasm Required Reading Generational Spending: A Special Report Who, What, Where, When, Y The Slackers’ X-cellent Adventure The Boomer Boom The Matures Endure Boosting Productivity North of the Border Changing the Channel Invicta’s Thrill of Victory Secret of My Success Connect Re:Tooling Pint of View

CRM - November 2008

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