Forecasting Demand
and Beyond
Prepared by
Inez Blackburn
MTI Market Techniques & Innovations Inc
inez@blackburn.net
July 9, 2003
A Few Forecasting Techniques -
Grocery Industry
❧Pile high and watch it fly
❧Random walk
❧Dart Board
❧Back in to Bonus
❧I’m the Market Leader
❧Last year plus 10%
❧Lock and Load
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Collaborative Demand
Forecasting ...
The process of collectively
estimating future demand for an
organization’s products or services
Interesting Demand Influences
and Relationships
❧Beer and bad weather
❧Spirits and really bad weather
❧Red wine and the Atkins diet
❧Ice wine and over 55
❧Martinis and Baby Boomers
❧Crown Royal and under 25
❧Growing importance of ethnic population and
imported beer
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Demand Forecasting
Customers
❧ Who is target customer
❧ Size of target market
❧ Buying power
❧ Buying behavior
Competitors?
❧ Growth potential Market Position?
Products Promotions?
❧ Unique or commodity
❧ Really New or Me Too
❧ Size of market
❧ Market potential
❧ Capacity for Profit
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Transition Cycles in Consumer Marketing
Advertising (Awareness) Promotion (Preference)
Merchandise
Processing Shelf Product After-Sales
Warehousing Use Support
Delivery Stocking
Satisfaction
Manufacturing/ Retail Purchase/ of
Consumer
Distribution Cycle Consumption Demand
Cycle Cycle
Production Product Store/Category
Demand Merchandise Inventory Selection Selection
Scheduling
Estimation Planning Reporting
Distribution Point of
Centre Sale
Consumer
Product/Program
Feedback
Evaluation/Modification
Product to shelf Shelf to Consumer 6
Product to Consumer
Forecasting
Implications Internet
Conventional
Manufacturer Manufacturer
Distributor Distributor
Agent Agent
LCBO LCBO
Consumer Consumer
Past Future
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Elements of Collaborative
Demand Forecasting
Consumer Predictability
Effective Communication
Levels of Influence & Responsibility
Manage Process
Demand Forecasting
Inventory Policy
Scheduling and Production
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Collaborative Demand Forecasting
will require a strong commitment
to effective communication and
the continuous sharing of
information between key
stakeholders
Demand Forecasting
Historical Distribution
Data
Forecasters Finance
Working
Management Demand Forecasting
Forecast Sales
Sales Force
Manufacturing
Market Consumer
Influences Influences
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Inventory Policy
Total Cost
Safety Stock Inventory levels
Inventory
Reorder Point Policy Number of Orders
Order Quantity Customer Service
Forecast Number of Turns
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Scheduling & Production
Demand Allocation
Demand
Capacity Management
Accurate Budgets
Scheduling &
Resource Dependable Plans
Production
Materials Balancing
& Optimization
Finite Capacity
Inventory Replenishment
Scheduling
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Demand Forecasting
Challenges
❧Too much information
❧Not enough information
❧Wrong information
❧Can’t find information
❧Do not understand information
❧Cannot share information
❧Do not use information
Garbage in Garbage out
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Information Sources
Manufacturer Retailer
❧POS Data ❧Sale of data info
❧Consumer Data ❧Consumer Data
❧Primary Market Research ❧Primary Market Research
❧Secondary Market Research ❧Secondary Market Research
❧Promotion and Advertising ❧Promotion and Advertising
❧Market Trends ❧Market Trends
❧Consumer Dynamics at ❧Consumer Dynamics at Retail
Retail ❧New Product Performance
❧New Product Performance
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Information Sources cont’d
Manufacturer Retailer
❧Warehouse and ❧ Warehouse and
shipment data shipment data
❧Consumer preference ❧ Consumer preference
data data
❧Geo-demographic ❧ Geo-Demographic
information Information
❧Space management data ❧ Space management data
❧Market level data ❧ Market level data
(pricing, marketshare, (pricing, marketshare,
shipments, etc.) shipments, etc)
❧Airmiles MTI Market Techniques & 15
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Collaborative Forecasting
Opportunities
❧Collaborative forecasting significantly
increases forecast accuracy
❧Most companies utilize 25-50% of available
information to forecast demand
❧An opportunity for Marketing and sales to
work together more often
❧More information will be shared and
internalized
❧Most forecasting information requirements
exist in your organization &
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Collaborative Forecasting
Benefits
❧ More accurate demand forecasts resulting in
increased sales and profits
❧ Ability to more effectively capitalize on market
opportunities
❧ Better understanding of the evolution of consumer
needs
❧ More effective new product launches and promotions
❧ Faster adoption of current and emerging technologies
and industry initiatives (ECR and Category
Management)
❧ More effective communication between the LCBO and
the Trade MTI Market Techniques &
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Collaborative Forecasting
Benefits - Supply Chain
❧More effective production scheduling and
lead times
❧More effective utilization of supplier
production
❧ facility
❧Reduced out of stocks and higher fulfillment
accuracy
❧More effective and efficient utilization of
Supply Chain Resources (ABC impact) (i.e.
scheduling and receiving) &
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Something to think about ...
What information will you require from the
Trade and the LCBO to collaboratively
forecast the following and how would you
measure your success?
❧ Crown Royal Gift Set
❧ Crown Royal Limited Edition
❧ Absolut Mandrin
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Appendix 1 - Scorecards
A Typical Scorecard
Category - Canadian Whisky
Manufacturer # Skus $ Sales Trend $ Profit Trend
Vendor A
Vendor B
Vendor C
Vendor D
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Consumer Behavior
MEASUREMENT PURPOSE
❧ Item share of Cons. ❧ Brand Loyalty
Requirements ❧ % HHLDS Purchasing
❧ Penetration ❧ Frequency Purchase
❧ Frequency ❧ % Shoppers Buying
❧ Basket Analysis ❧ Propensity Pantry Load
❧ Units/Transaction ❧ Value of Consumers
❧ Cherry
Pickers/Loyals
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Do you Understand How your
Products are Purchased?
❧Can you identify your
most loyal consumer?
❧ you understand
Do
what they purchase
most often?
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Consumer Behavior
Scorecard
Basket Case # 1
Average Shopping Basket Value
% Consumers with Baskets > $60
% Consumers with Baskets > $35
% Consumers with Baskets $60 and buy cheese
% Consumers with Baskets > $35 and buy cheese
% Consumers with Baskets < $20 and buy cheese
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Performance Scorecard
% sales % Shelf %Display
Vendor A 25% 25% 15%
Vendor B 40% 15% 5%
Vendor C 10% 35% 20%
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Appendix 2 - Statistics 101
Forecasting Techniques
❧Time Series Analysis
❧Moving Averages
❧Exponential Smoothing
❧Regression Analysis
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Time Series Analysis
Time Series Analysis identifies patterns
in data
❧Trends
❧Seasonal
❧Cyclical
❧Random
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Time Series Analysis
Trend Seasonal
Cyclical Random
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Moving Averages
Simple Moving Averages
❧ Average of past data over a specific time period
and uses the result to forecast the future
Weighted Moving Averages
❧ Assigns a predetermined weight to each data
point and thereby puts more weight on recent
time periods as a basis for forecasting
Rule # 1 - A forecast is never 100% accurate
Rule # 2 - If it is something is wrong
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Exponential Smoothing
❧Uses exponential weights to to accomplish
weighted moving average
❧Exponential smoothing uses alpha α (a
value greater than 0 and less than 1)
❧Requires two data points
❧ original forecast
❧ actual demand for for present time period
F t+1= Ft + α ( Dt - Ft) α = 2/(n+1)
n = number of periods in a moving averages
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Regression Analysis
❧Regression analysis used for long range
forecasts because moving averages and
exponential smoothing can average out
important seasonal trends
❧Focus on dependent and independent
variables Y= a + bX
Y is the dependent variable
X is the independent variable
a,b are constants
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Basic Scheduling Activities
Demand
Forecast Ensure that the right things
are done by the right people
Aggregate at the right time to produce
Scheduling the desired product through
the most efficient use of
Master resources
Scheduling
Capacity
MRP
Planning
Project scheduling
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Economic Order Quantity
Economic Order Quantity = the square root of
(two times the actual demand for inventory use
times ordering cost) divided by the carrying cost
Tip - Too complicated for today’s exercise
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Appendix 3 -
Supply Chain Trends
and Initiatives
Efficient Consumer Response -
Background
ECR began when retailers began searching
for a way to compete in an environment
where consumers have a lot of shopping
choices and suppliers have a number of
alternatives for distribution
A timely, accurate, Smooth, continual
paperless flow of products flow matched
information consumption
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ECR Vision
Timely, accurate, paperless, information flow
Supplier Retail Consumer
Distributor HHLD
Store
Smooth, continual, product flow matched to consumer
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Evolution Towards Future Supply
Chain
Progressive ECR Implementation Steps
1. UPC
2. POS Scanning
3. Category Mgmt Plannograms
4. EDI
5. Partnerships
6. Multi-Company Teams
7. POS Data Vendor Forecast by Warehouse
8. POS Data Vendor Forecast by Store
9. Warehouse Perpetual Inventory cont...
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Evolution Towards Future Supply Chain
cont...
Progressive ECR Implementation Steps
10. Cross-Docking via UCS
11. Store Perpetual Inventory
12. EFT Based on Vendor Owned Inventory
13. Full Replenishment
14. Collaborative Forecasting
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The Flows of Information Support
Two Independent Replenishment
Cycles
Consumer
Store Supplier
Replenishment Replenishment
Pull to Store Warehouse Push to DC
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ECR Industry Requirements
❧Managed E-Business Solutions
❧ Intranets
❧ Extranets
❧ VANS
❧Electronic Catalogues
❧Connectivity - Business to Business &
Business to Consumer
❧Electronic Payment Solutions
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FORECASTING: Procter & Gamble/Wal-Mart
Continuous Replenishment True Partnership Based
That Eliminates Written on Achieving Long Term
Orders and Invoices Benefits for Both Parties
WAL-MART P&G JIT
Purchasing
Production
Scheduling
Store Database of
Scanner Data Forecasting Marketing
• Eliminates
need for push
sales
INCREASED SALES DECREASED INVENTORIES - Concentrate on Consumption of
Product rather than Just Getting it Out of the Warehouse 42
Must link ECR Strategies to
Financials
Functional Model Focus ECR Strategies Initiatives
Strategy & Planning
Efficient replenishment Order Management
Product & Delivery
Distributions Efficient Promotions Receiving
Payment & EDI
Strategic Program Planning
Event Presentation & Selection
CAO
Efficient Store
Operations ASN’s
Processes Labor Scheduling
Receiving
Merchandising
Strategy Relationships
Category Management Business Processes ABC
Consumer Efficient Assortment
Measurement Org. Capabilities
Information Tech Results
Category Analysis Category Analysis 43
Efficient Product Intro. Opportunity Evaluation
Virtual Value Chain ABM
Introduce Forecast and Promote Replenish Merch.
Products Plan Products Products Products
Conduct Research Forecast and Plan Manage Sales Plan Execute Sales
Execute Sales Continuos
Develop New Production Replenishment Plan
Products Manage Presentation Retail Pricing
Manage Customer Order
New Item Customers Orders management Store Merch.
Introduction Procure Materials Advertising Customer
Manage Trade Physical
Produce Products Movement Service
deals
Sales admin Orders
Waiting
Unloading
Receiving
Cross Dock
Load Product
Unsaleable
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EC Growth - Email and EDI
in the Next 5 years
200
180
160
140 Fax
120 Em ail
100 Structured m ail
80 File Transfer
60 VAN-EDI
40 Direct EDI
20
0
1996 2000
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Relationship of E-
Commerce to Industry
Verticals
Logistics Manufacturing Retail Hi-Tech Finance SME’s
Web Hosting
Outsourcing
Electronic Catalogues
High Bandwidth
Freight Rating Systems
E-Mail Services
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Components of Electronic
Commerce
P rocurem ent
C ards
CALS F ir e w a ll
S y stem s
Secu re B u lle tin
S h a re d E le c tr o n ic M e s sa g in g
Funds B oard
D a ta b a se s S y s te m s
T r a n sfe r
In te r n e t
EDI A p p lic a tio n s
E -F o rm s
In teg r a te d
M e s sa g in g S ta n d a r d s O n -L in e
E -c a ta lo g u es A p p lic a tio n E -M a il S e r v ic e s
In te g r a tio n 1
M a il VANs
E n a b le d F ile
Im a g e A p p lic a tio n s D ir e c to r y 2 T r a n sfe r
In ter c h a n g e S e r v ic e s
F ax T e c h n ica l 3
C o n v e r sio n s to D a ta 1 . A lw a ys in E C
E m a il/E D I In te r c h a n g e 2 . U s u a lly in E C
3 . S o m e tim es in E C
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Canadian Supply Chain
Initiatives
Efficient Consumer Response
Grocery
Efficient Consumer Response
Drug
Efficient Foodservice Response
Canadian VICS Council
EHCR Efficient Healthcare Response
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