Jan Fransoo

From demand forecasting to actual demand planning: In times of Corona this is now for real

Over the decade, the profession of demand forecasting has been renamed many times to reflect the broader designation of the role. Demand management has been a term that has often been deployed. The term suggests that this is not just about forecasting, but also includes the shaping of demand, for instance by pricing and management of promotions. Als the term Demand planning has been frequently deployed as well. This term suggests that the role also involves the allocation of supplies to the demand, or maybe even actively planning or shaping demand to meet supply.

In reality, however, many companies that have deployed alternative names for the forecasting role have not done more than actual demand forecasting, i.e. the estimation of future demand – often based on some algorithm that uses past sales information augmented with some human judgment. The current Coronacrisis however presents both a need and an opportunity to really develop this function.

With drastic demand changes, algorithms need to be shut off

Demand forecasting algorithms that are deployed are based on time series of previous sales. Most of these are using relatively simple statistical methods that extend and smoothen previous time series. In the last few years, there has been much promise of machine-learning (sometimes dubbed as “Artificial Intelligence”) that takes additional external information, such as the weather or the pricing of competitors, into account when determining the forecast. With any of these algorithms, the basic presumption is that the underlying system does not change: relationships between independent variables (previous sales, assortment, weather, etc) and dependent variables (future demand) remain unchanged. Obviously, this is not the case in the current circumstances. Hence, it makes perfect sense to switch off your automated forecasting support tools, especially if they are “hands-of-the-wheel” linked to orders being placed by your replenishment system without any human interference.

When will demand go back to normal?

This is of course the million-dollar question that everyone is facing. In all cases, it is important to first estimate when the situation may go back to more normal patterns of demand. This time estimate is difficult, but there are some basic elements that you can work with:

  1. Remaining time of the governmental measures that cause you drastic demand change. From the China situation, we know that this may likely be at least 3 months; maybe longer if the hospital capacity is really stressed.
  2. Lead time between you and the consumer market: the is the cumulative lead time that a molecule, part, or product leaves your plant and is being consumed by a final consumer. For a retailer, this is a just a few days, while for a chemical producer this can easily be half a year.

Demand changes at the consumer level will roughly take the sum of these two times to reach you. However, they are affected by inventory adjustments:

3. Cumulative surplus or shortage of inventory in the supply chain: if your customers or consumers have a shortage of inventory now compared to how much they would stock normally, this will need to be brought back to “normal”. This could imply additional orders in case of shortages, or reduced orders in case of surpluses. For instance, consumers will likely not buy toilet paper for a while in many countries, while the shortage of electronic parts in the automotive supply chain will need to be replenished. Such inventory replenishment requests will reach you more or less instantaneously and will not face the delay above. We have learnt this from the recovery after the credit crisis.

Finally, all of this will be exacerbated by the infamous bullwhip effect. Again, from the credit crisis we may reasonably estimate that the order inflation may easily be in the tens of percentage points, with this inflation being larger if you are further upstream from the consumer.

Real demand planning requires strategic choices and subsequent analytics

Current demand planning requires both strategic choices and subsequent operational analytics. The strategic choices depend on whether your market is currently facing (huge) drops in demand or (huge) increases in demand, or whether there are significant demand shifts between products or channels.

Currently facing drops in demand

Of course you are currently looking to serve alternative markets or trying to make alternative products for which there may be demand. But in many cases this may not be feasible. Then what remain is trying to estimate when demand will go back up, which I have discussed above. It makes sense then to decide whether you want to build up inventory in advance. If you have the financial means to do so and your products are not perishable, this may be a very sensible strategy. Demand will go up, and more than you expect, as discussed above, but the exact timing is hard to tell. What is critical is to involve your sales force in this plan. They need to be aware of the constraints of supply.

Currently facing demand increases

You are currently scrambling to make supply meet demand. Several companies have reduced assortment size in order to keep capacity up (by saving on changeover times). At some point, demand will go back down. In order to avoid a bullwhip, it is really important to keep a very clear picture of the actual consumer demand and the accumulated inventories between you and the consumer. Thinking cumulatively rather than incrementally makes a lot of sense. From a planning perspective, you will need to ask from your sales force to do something they don’t like to do: sensing in the market how demand will go down eventually. Your sales force needs to understand that if they are too late with their sensing, they will be causing potentially large amounts of unsold inventory somewhere in the supply chain.

Currently facing demand shifts

In particular channel shift have been happening: from out-of-home to supermarkets and from in-store to online. The first question of course is how much of that remains after the crisis eases. I am reading many reports that this is the definite breakthrough of online grocery. I seriously doubt this. I am definitely not a marketing expert but the current online experience is poor with extensive delays in delivery and many out of stocks. Also, after having been locked down for months, I can imagine that going out to a store will be a great experience for many. Hence, the argument could just as well be made that online sales will drastically decrease after the crisis eases. Hence, I think it makes sense for any supplier to hedge their bets: a bit of additional inventory makes sense, and building the ability to shift demand between channels or products is a worthwhile investment.

I seriously doubt the many reports that this is the final breakthrough of online grocery shopping

In conclusion

All of the above implies that companies will need to set up true interdisciplinary demand planning teams that actually have the ability to plan. Such teams should be able to make (or prepare) strategic choices and be able to conduct analytics of the consequences of such choices. This requires different information than just prior demand; it requires knowledge of the full state of the supply chain. And much of this requires humans to do the job.

Disclaimer: This is not the direct result of any specific academic study. The above is my current analysis and interpretation based on prior research conducted by me and others in the area of supply chain management, inventory management, and demand forecasting during crises. It is not an advise for anyone specifically. 

This article was published on LinkedIn on April 3, 2020

Jan Fransoo

Making your (retail) distribution center Corona-resilient

Now that the Coronavirus has reached most of Europe and North America in sizeable numbers, preparations at many companies are in full swing to do whatever they can to try and be resilient to infections in their distributions centers. Here, I provide an overview what can be done, even at this late stage, to try and contains the effects on supplying your customers.

1. Take care of your associates

Your employees’ health is of critical importance to them and their loved ones. It is also critical to your operations, since infected associated may force you to close your facility. Much has been written about hygiene matters and access control checks, and I will not repeat them here. However, specifically for distribution centers, there is more that you can do. In many cases, distribution centers are staffed with temporary contract workers. In Western Europe, they are often workers from other parts of Europe that often change jobs and live in shared housing. Work with your temp agency to increase hygiene across these sharing housing facilities. Your responsibility in this case extends beyond your fully employed associated, also in your own interest. If you do home delivery to consumers, your associates will be in touch with many people, further increasing their and your risk. You will need to provide hand hygiene materials in your delivery vans.

2. Make sure you have sufficient supply

As trivial as it sounds, this is less than obvious. Many retailers have followed policies to try and limit inventories to reduce inventory cost. Instead, they require suppliers to hold inventory and only replenish when there is an immediate need. Given the likelihood of some disruption occurring due to facilities being temporarily closed, you want to pull in inventory to your locations rather than leaving them at your suppliers. Having the inventory in hand gives you more control in case of shortages and disruptions. Obviously, you should avoid creating a bullwhip further upstream but providing transparency to your suppliers that this is not demand-driven, but driven by an analysis of the supply chain risk. In all cases, it is important to be transparent and communicate intensively with your suppliers about such actions.

3. Distribute your inventory across multiple locations

Given the likelihood of disruptions, it is now more critical then ever to keep inventories at at multiple locations. Most companies tend to have more locations downstream rather than upstream, so moving inventory downstream makes all the sense in the world. With a virus like Corona around, traditional inventory risk-pooling suddenly becomes more risky rather than less risky. If you pool your inventory in a single location, your are unable to deliver if that location needs to be isolated. Spreading inventory across multiple locations increases the likelihood of regular out-of-stocks in each of the locations, so you need to equip your distribution network with options for lateral transshipments between locations. In the same line of thought, you need to be able to serve markets from alternate distribution centers. This may require making arrangements with logistics service providers. In case of regulated products, such as pharmaceuticals, this may require permission from the relevant authorities. It could be a good idea to obtain such permissions in advance.

4. Improve robustness in your warehousing operation

Warehouse staffing is typically fully flexible. Moving order pickers across the warehouse provides such flexibility and lowest cost. However, is also provides for maximum contact and infection risk. An option could be to virtually compartmentalize your warehouse, and assign pickers to a certain compartment only. A friend of mine relayed this to me as an option, which I think is highly interesting and where others could benefit. Slightly more cost, but much less risk.

This article was published on LinkedIn on March 6, 2020