By Ally Conrad, Events Manager for Transformance Advisors
The Snowball Effect
What would happen if you asked each functional area, such as marketing, sales, new product development, and operations for next month’s forecast?
In many companies, you will very likely receive a different number from each.
- What if marketing is pushing for a huge promotion on a new product?
- But sales is not prepared with the tools to make the promotion happen?
- And new product development hits unforeseen problems right before launch!
- While operations is busy moving the equipment to a low cost country!
Issues such as these arise when each department has conflicting goals and when the communication to get everybody aligned and working in the same direction is weak or non-existent.
It is no surprise that successful organizations are created when everyone is working together and consensus is created.
So how do we do this?
Let’s take a look at how various functional areas plus customers and suppliers had help create consensus and some of the sources of trouble for many organizations.
When coming to a consensus, what can Customers bring to the table?
- Customers should be able to provide item level details on actual sales, inventory, and replenishment parameters
- They should also be able to provide information on promotions – but don’t overestimate their skills in assessing the impact of advertising
- Some customers can provide demand forecasts – this may be OK and work well, but many suppliers have been deeply disappointed in the quality of forecasts provided by customers
In the end, don’t rely too much upon the integrity of information from your customers.
Few companies have great supply chain management processes. Don’t expect your customers to be any better than you.
Customers – Source of Trouble
Customers can actually be troublesome when seeking alignment. A few examples:
- Getting to the right people at your customer who have the formation you need can be one source of trouble. For example, one company only had contact with a low level planner in the customer’s purchasing department. This planner relied on a sophisticated forecasting software tool for which they had never been properly trained. In addition, they worked in a remote office and rarely had contact with their own marketing and sales people.
- Another challenge is when your products are managed by multiple groups at your customer. The people who handle the staplers you sell are different than the people who handle the tape dispensers.
- Turnover can also wreak havoc. We’ve all see situations where a job goes unfilled and undone for weeks, or even months. Your customer may view collaboration with you as a nice thing to do. But if your contact leaves or gets promoted, then a ‘nice-to-do’ falls by the wayside.
When coming to a consensus, what should Sales bring to the table?
- Sales should have the pulse of the business in terms of what your customers are doing.
- They should be able to provide a Sales Plan going out 30 to 90 days. This should be at a fairly high level of aggregation. Most companies do not need item level forecasts from their sales team.
- The sales team should also provide promotional activity. What are the promotions that have been set up with customers?
- General market conditions are also very valuable. What is the competition doing? What are customers doing?
- Won/Loss Reports are important. What new business has been won with signed contracts? What potential business was lost to the competition? And why?
- Additional great information comes from the Pipeline Activity. What prospects are in the pipeline and where are they in terms of getting actual orders? As current customers are always your best source for additional business, the pipeline must include new products or additional volume from existing customers.
- And finally, the sales team needs to understand their Prior Performance. How did they do last month and last quarter, and what have their learned from any variations.
Sales – Source of Trouble
Sales personnel are typically not focused on “numbers”.
- One source of trouble is the number of forecast improvement projects which fail when a new process requires the sales people to crunch millions of numbers and come up with long range forecasts for thousands of items.
- There can be a lot of turnover in this area. Adding the requirement to learn and use a sophisticated software package will lead to problems every time a new person joins the team.
- Creating a forecast is generally last on the list of what a sales person wants to do. It’s important, but it should be in the sweet spot where sales people live.
What should Marketing bring to the consensus process?
- Marketing needs to bring information on product, price, placement, and promotion to the table. Known as the 4Ps, these are the fundamental responsibilities of a marketing organization.
- Marketing is an area where many companies struggle. At some companies, marketing does all the forecasting. At others, they are not involved and not interested. Neither condition is acceptable.
Marketing – Source of Trouble
A big source of trouble occurs when marketing is not integrated with sales and operations.
- For example, marketing might have plans for a big promotion or a new product. The idea might be great, but it might take sales 90 days just to schedule and visit with each customer. The problem is, marketing wants to launch the promotion or new product in 30 days. The wants of marketing do not align with the needs of everyone else.
- In another example, Marketing sees big demand on some hot products and wants to grab market share as quickly as possible. They crank up advertising and promotions without first checking on the availability of resources.
- Another disconnect occurs when sales and marketing are driven by different incentives. For example, sales has an opportunity to bid on a big order, thereby exceeding their goals and earning a big bonus. Marketing sees the bid and says that the gross margin is too low and will have a negative effect on profitability, one of their primary goals. Sales wants the new business and says “increase the forecast.” Marketing does not want the new business and says “do not include it in the forecast.”
New Product Development
When coming to a consensus, what does New Product Development bring to the table?
- Early steps – such as concepts and feasibility, will generally not have a great impact on the consensus forecast.
- Middle steps – like definition and development, can impact the consensus forecast and will be points where operations and purchasing will have an interest in the potential volumes expected with new products.
- Later steps – like validate and launch, will be critical to the consensus forecast and you want to get the entire team on the same page.
New Product Development – Source of Trouble
One big source of trouble with new product development is hitting the launch date.
- Delays can be very costly, so there is tremendous pressure to launch new products on time. Small items like approval for artwork on packaging materials can force a delay and have numerous ripple effects for others.
- Once the product is available and launched, the process cycle time for sales to work with customers can be very long and variable.
- A third source of trouble, is dealing with demand that can be way over, or way under, forecast. The uncertainty of demand for new products is a major reason why a flexible supply chain is often better than a low cost supply chain.
When coming to consensus, what does Finance contribute?
- They keep a close eye on the budget. They need to understand how the consensus forecast can drift away from the budget as monthly course corrections are made.
- Finance may also be attuned to economic indicators which can impact demand. For example, every point drop in interest rates can have an impact on housing starts. These housing starts will increase demand for furniture at some point in the future. These economic indicators should be incorporated into the forecast.
- Financial professionals also know how demand and supply impact cash flow. The launch of a new product could imply a big investment in advertising and building inventory.
Finance – Source of Trouble
Some financial folks fall in love with the budget and expect the consensus forecast to follow suit and support it.
- Finance should seek to understand the impact of the consensus forecast deviating from the budget. They should understand the impact, but not get carried away by burying heads in the sand when it comes to making course corrections.
- One organization was trapped in a situation where the leadership team would not deviate from the old budget numbers because those numbers said the company was going to make a lot of money. In reality, the true demand was much lower and there was a dire need to lower production before they ran out of space and ran out of money.
When coming to consensus, Operations needs to provide:
- Production capacity, including major maintenance and repair activities.
- Distribution capacity in terms of warehouse space and transportation requirements.
- Infrastructure activity, such as moving production to other locations or bringing on new capabilities.
Operations is generally the most important “customer” of the consensus forecast. As such, they care deeply about the quality of the information.
Operations – Source of Trouble
A big source of trouble for many companies is outsourcing production.
- This outsourcing is often done to obtain lower costs. Unfortunately, the lower costs often come with longer lead times, less flexibility, and poor quality.
- A reduction in flexibility can also impact the entire organization when people are used to seizing new opportunities and increasing the forecast when a new customer wants to place a big order.
- A hidden cost of outsourcing is the lost productivity as new suppliers ramp up their skills and more lost productivity as the operations leadership team travels all over the world to work out quality issues.
We do not mean to imply that outsourcing is always a bad idea. The intent is to emphasize that this is a complex undertaking and the risks and rewards should be incorporated into the consensus forecast.
In many organizations, Demand Management coordinates the overall consensus process.
- They are also responsible for dependent demand which is defined as that which is not normal customer demand.
- Demand management will usually own the statistical forecasting tools which focus on base, trend, and seasonality.
- They will typically assess the impact of different calendars, in terms of days per month, holidays, and other factors that can influence demand.
- The demand management team may monitor other indicators, such as economic and demographic data, which could impact demand.
- One key responsibility for demand management is measuring and reporting forecast performance. They are typically the official source of forecast accuracy measurement.
- And a final item for demand management is tracking inputs from other areas and reporting on forecast bias.
Demand Management – Source of Trouble
Demand management is tasked with managing the consensus forecasting process.
- However, they are typically not the actual owner of the forecast; as they are not responsible for going out and getting the orders.
- For some companies, the statistical forecasts can be amazingly accurate. For others, short product life cycles or lots of promotional activity will cause the demand history to be a poor source of information for the statistical models.
- In all cases, the statistics are just one input and additional knowledge from other stakeholders is required.
Our final major participant is Top Management. Top management must seek alignment with corporate objectives. In addition, they must support the consensus process by:
- Setting high expectations regarding forecast accuracy. They cannot let poor performance be explained away with “it can’t be done.”
- Top management should also hold sales responsible for keeping customers engaged and expect purchasing to share information with suppliers.
- Needs to ensure that the spirit of consensus is alive and well. Too many organizations claim to have a consensus process, but then allow one tyrant to dictate the number to everyone else. This tyrant could be some member of the top management team making it a very hard problem to fix.
Top Management – Source of Trouble
Management turnover can seriously damage a well running consensus forecasting process.
- There can be a period where no one seems to be in charge. It can get uncomfortable when two areas have different views and there is no one to make the call on which path to take.
- If a new CEO or VP of Sales and Marketing gets hired, they may bring in an entirely new team which changes everything.
- The new person sees consensus as a waste of time and does not have an interest in developing the best number for driving your supply chain.
Fortunately, it doesn’t have to be this way and companies often put a major effort into ensuring a smooth transition.