One. Two. Three Four. Count them. Embrace them. And, move forward.
If someone loses the plot, they have stopped being rational about something. I frequently see many bright, bright supply chain planning people talk about demand planning irrationally. I feel that they have lost the plot. In this blog post, I share four reasons why I think that this has happened.
It is ironic. I see these very bright capable supply chain leaders, that have driven millions in savings for their business through continuous improvement, unable to be rational about managing demand. It is emotional. It is something that they cannot control. They want to focus only on supply. They do not want to touch demand. They do not realize that no matter how much they focus on supply processes that they can never overcome a bad demand signal through supply tactics.
So, it is for this reason that I believe supply chain leaders have ”lost the plot.” Here are four reasons that I believe this has happened:
- Want to be More Accurate? Just Ask Sales. This has a good intent; but, it is bad for business. One of the biggest mistakes that we have made in the evolution of demand management processes was the introduction of consensus forecasting in 2002-2005. It was a good idea that was poorly implemented. People were asked their opinion, but there was no accountability. All inputs into a consensus forecast should be measured for bias and error. Individuals on a team need to be held accountable. Organizations confuse sales-driven processes as demand driven. What we see in working with clients, is that the most biased group in consensus forecasting is sales. Sales tends to be “coin operated” with a bias based on the bonus structure, and this bias comes through in all consensus forecasting processes.
- Getting Perfect on Imperfect Data. Leaders Focus on the Probability of Demand. Laggards Talk about How the Forecast is Never Right. Often people get so excited about improving the forecast that they lose common sense. For example, I often see companies calculate forecast numbers to the ninth significant digit when the forecast accuracy is 30-50%. I say, “Really? How does this make sense?” I find that leaders focus on understanding the probability of demand, while laggards try to make imperfect numbers more perfect. I wish the companies would put more energy into accepting the probability of demand and building that into decision processes.
- Lack of Understanding of how to Make it Better. These same leaders excel at the management of continuous improvement programs for supply. However, they have not thought about applying similar logic for demand. They lack the understanding of Forecast Value-Add (FVA) and how to drive continuous improvement programs in demand planning. Instead of a programmatic way of driving improvement, they ebb and flow and say, “Lets take a closer look a the numbers.” A closer look will probably reveal nothing, but a continuous improvement program can drive big dividends.
- Matching Aspirations and Capabilities in Channel Relationships. In the last decade, there has been a fad to do more Vendor Managed Inventory (VMI) and CPFR relationships. These relationships are negotiated without any alignment of skills and capabilities of the channel relationship. I seldom see a client that has measured the forecast accuracy of a channel relationship and discussed how to improve it in the top-to-top meetings. VMI relationships should only be aligned with channel partners that are significant in volume, have clean data, and high forecast accuracy. Too few companies know the forecast accuracy of their downstream channel partners; yet, they staff 30-50 Full Time Employees (FTE) to work in VMI relationships.
What do you think? Why do you think that progress in demand management is stalled?