Demand visibility: the death of forecasting

A computer software displays real time demand data to the user

Many companies often suffer from products running out of stock or just having too much inventory.  Managers point to their firms’ inability to read true demand. This inability has managers resorting to demand forecasting, or attempting to predict what demand would be like. But despite what methods are used, sophisticated or not, forecasts hardly are accurate, at least not accurate enough for operations managers to formulate purchasing and delivery schedules that precisely match what and how much customers will actually buy. Forecasting is an application that managers use when they don’t have the means to gauge true demand.

But as new technologies continue to be introduced at a breakneck pace and with far-reaching innovative potential, executives are suddenly realizing that the ability to grasp true demand is much more attainable than ever before.

Business firms put much effort to avoid out-of-stock and excess inventory. Managers thus are continuously seeking ways to read true demand or what and how much end-users actually need. By having a grasp of true demand, operations managers can plan how much to supply to maximize the availability of finished products.

Many companies resort to mathematical or arbitrary demand forecasts in their operational planning.  Some firms confuse demand forecasting with sales targeting, which results in projections based on management goals than on end-user needs. Because forecasts don’t really mirror true demand, they have margins of error that result in firms ending up with either too little or too much stock.

It gets even harder when a company’s products pass through distribution channels. Distributors, dealers, wholesalers, and retailers tend to speculate in their purchases than buy only what the market requires.  This is because channels don’t fully trust the reliability of their suppliers. Even so, many firms rely on the demand of their channels instead of end-users such that supply quantities cascading through distribution networks would tend to swing sharply to the detriment of operational efficiencies.

Organizations in recent years have tapped information technology innovations to enable real-time demand visibility and render forecasts obsolete.

Apple’s retail stores, for instance, communicate consumer sales in real-time to its supply chain network. Apple’s supply chain partners thus plan their operations based on what customers are buying.

Large American retailers also gather real-time data but go one step further. Amazon, for example, uses software that tracks customer buying behaviour and analyses the cumulative data to formulate marketing projections. Wal-Mart and Best Buy categorizes customers by those who buy based on bargains versus those who buy based on need. Both retailers focus their marketing efforts on the latter customer type, the group that contributes the most profit.

In Asia, some fast-moving-consumer-goods (FMCG) firms gather point-of-sales data from retailers to project demand and plan marketing initiatives. Many Asian businesses, however, still have a long way to go in instilling visibility in the marketplace and using the information from such for operational planning.

Businesses that recognize the importance of demand visibility would do well to consider the following key approaches that would enhance their operations:

Demand-Supply Integration

A firm’s marketing and sales departments should integrate with its supply operations group to fully take advantage of demand visibility information. The firm’s supply operations would need to fully support sales and marketing initiatives in a flexible and timely manner, especially if real-time demand data indicate unexpected trends. This may require paradigm shifts in strategic operational planning especially in long-term plans involving capital expenditures and investments.

Internal Supply Integration

Firms that integrate their purchasing, manufacturing, and logistics functions would be better able to harness the data from demand visibility and respond accordingly. Manifestation of such integration comes via a single unified supply plan. Focus would be servicing actual end-user demand to the extent that efficiencies could be sacrificed in favour of making available only what is needed.

Customer and Supplier Collaboration

Focusing on end-user demand will mean changing mind-sets in dealing with downstream distribution channels and upstream vendors. Parties would have to accept the value of end-user demand versus traditional speculation.

Information Technology (I.T.) Integration

Firms that tap innovations in information technology would exploit demand visibility data not only in getting it real-time but converting it quickly to credible marketing projections.

Companies should no longer operate blindly in terms of predicting consumer demand. With available technology and proper integration with partners, firms have huge opportunities to capture real-time demand and respond with competitive speed. Do we really need forecasting?

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About the author

Jovy Jader

Managing Partner, Prosults Consulting LLP

Jovy is a supply chain consultant and speaker of Prosults Consulting LLP. His clients include multinational companies in the food, pharmaceutical, consumer goods, energy, and export industries. He is the author of Speed Kills…Your Competition “Driving Growth Through Supply Chain Excellence”, and has been a regular contributor to BusinessWorld. Jader was with Procter & Gamble Philippines and PriceWaterhouseCoopers, assisting companies across Asia in Supply Chain Management improvement projects. Jader holds MBA from the University of the Philippines and a BS in Chemical Engineering from Pamantasan ng Lungsod ng Maynila.

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