Demand Planning in the CPG industry- The decade that was
I wish the readers a very happy new year and a happy new decade. This morning, I was reminiscing on my journey through the past decade, on how during the last 10 years I saw myself transition from a student to young professional to a doting husband to a responsible father. I concluded that life seemed much simpler 10-20 years back, in retrospect that is. Well, how is it connected to demand planning in the CPG industry (the topic of this blog)? You are right; there is no connection, except that demand planning in the CPG industry also underwent a transition during this decade, just as I did.
During the last 10 years, CPG companies saw a series of transformations in their external environment, which led them to re-think their demand planning processes.
Foremost, the decade saw significant increase in trade promotion spending (67% of marketing spend and 17% of revenues). As a result, promotions and customer events drove the variations in the sales volumes. CPG manufacturers reacted by enabling their customer account teams (instead of HQ teams) to take more ownership of the customer forecasts, in the horizon they had the best information. On the process side, the need to separate the promotions generated sales lift from the base demand became more pressing in order to achieve better forecast accuracy. CPGs built simple custom logic to achieve the demand decomposition.
Retailers became more powerful, private labels threatened the very existence of CPG. Product innovation became the key for the CPGs. With increased new product introductions and product varieties, number of SKUs increased manifold- so did the number of different and unique demand patterns. CPGs realized that one size didn’t fit all when it came to forecasting algorithms-product companies pitched in by adding more algorithms for forecasting different demand patterns.
Competition became global. China became a force to reckon with, challenging US companies on their very cost structure. Low forecast accuracy was already costing them millions of dollars in tied up inventories and lost sales. CPGs reacted by elevating supply chain management from mere demand and supply matching exercise to integrating it into their business and strategic planning process. CPGs rushed to implement structured S&OP workflows which gave them a single consensus view of demand that drove their end to end supply chain in the most optimal manner possible.
S&OP process brought everyone together within the company. However, CPGs realized they cannot be looking at supply chain holistically without including their customers and their suppliers in their planning process- so collaboration gained the center stage.
Collaboration led to sharing of downstream data. CPGs discovered more automated uses of the downstream data. They started incorporating them into their demand planning process in lieu of shipment data. But not all retailers could provide downstream data. So CPGs used real time customer order information to sense and respond to daily changes in demand signals.
As they started using more and more of downstream data, they felt a need to manage all their demand signals in a central place- the concept of demand signal repository (DSR) was born.
DSRs, base forecasting, trade promotions management, S&OP, demand sensing and replenishment systems, when integrated, unlocked the possibilities for CPG manufacturers to shape the demand most profitability for their supply network.
In short, the last decade was all about CPG companies moving close to the point of consumption, on a quest to becoming demand driven. Most of the supply chain technology investments made by leading CPG manufacturers during this decade were towards the DDSN objective.
Yet, at the end of the decade, very few companies are even close to being demand driven. There is still miles to traverse. The next decade will see CPGs continuing to invest in technologies that will help them reach their vision of ‘sell one make one’.
What do you think?