When many omnichannel retailers are executing hundreds or even thousands of promotions on a daily basis, targeted at different customer segments or individual customers, it can create a customer service nightmare marked by stockouts, lost sales and unhappy consumers on the one hand—or excess inventory, along with markdowns and lost profits, on the other.
Fulfilling Demand Across Channels: Three Major Inhibitors
What are the barriers to aligning demand forecasting and supply chain forecasting in order to fulfill consumer demand? The first is technology; the demand forecasting technology that most retailers depend upon is rigid and unable to handle the massive amounts of data generated by omnichannel retailing. In fact, many top-tier retailers rely on forecasting and replenishment science that is several decades old.
The second inhibitor is channel proliferation. As retailers continually open new channels, the customer journey can involve more than a dozen routes from viewing and selecting merchandise through fulfillment of the order. Each of those customer journeys opens up opportunities to analyze new data sources, such as web search data, clickstream data, social media referrals and recommendations, and more. The inability to analyze this data creates great uncertainty about demand signals.
The third barrier is a lack of alignment between demand planning and supply chain planning. Most retailers rely on at least two different forecasts, including a demand planning forecast (allowing them to calculate the uplift from price changes or promotions, for example) that is completely separate from the forecast that is used for day-to-day fulfillment and long-term value chain planning.
As a result, a retailer's forecasts may be wildly out of synch; for example, imagine what happens when a merchandiser believes a promotion will produce a 50% lift, but the supply chain planner believes it will only be 20%, and loads that into the forecast. It's no wonder that promotions have such a dramatic impact on the bullwhip effect; retailers and their vendors either end up holding more inventory, which costs them money, or they run lean and this affects customer service.
Synchronizing Processes to Meet Consumer Expectations
Winning consumers' hearts and minds is about aligning processes through the retail organization. Retailers can't afford to operate in an environment where the supply chain organization doesn't talk to the demand side, where different channels don't talk to one another, or where changes in demand signals aren't received quickly enough. At the end of the day, the consumer is concerned about only one thing—buying the product where she wants, how she wants, and at the right price, while being assured of timely delivery. How a retailer's channels interact to fulfill consumer demand is up to the retailer.
Three Steps to Getting Started
The good news, retailers don't have to "rip and replace" existing technology in order to synchronize processes. They can proceed incrementally, taking slightly larger steps each time to minimize the risk and realize maximum value along the way. Here are three steps to getting started.
- Improve the Demand Forecast without Replacing Systems. The first thing retailers can do is improve the quality of the demand forecast that sits behind current systems. They can do this by simply improving the effects of promotions and price changes while leaving the baseline forecast alone. This single step will improve the quality of promotional uplifts, and help to smooth out any impact on the supply chain and minimize the bullwhip effect. Retailers can continue using their existing forecasting systems and interfaces, by simply layering a more accurate promotional forecast on top of them. A number of successful retailers have taken this exact same approach, for far more accurate demand forecasts.
- Integrating Forecasting and Supply Chain Planning. To go a step further, retailers can extend the forecast into supply chain planning and retail S&OP, which extends the forecast out into weeks and months to allow for the long supply chain lead times. Then, every week retailers can incrementally revise and share this plan within the organization and with vendors as well, bringing the demand planning and supply chain functions into alignment.
- Optimize the Network. Retailers can completely discard the model of siloed channels, by viewing all channels, distribution centers and every element of the value chain as one holistic network. Today's most advanced planning and supply chain technology solutions can represent the entire value chain as a single network and calculate it every single day to determine the best stock position at each node across time.
Iain Watson is EVP Product Management for Predictix.