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The Future of Demand Forcasting.

Byline: John Karolefski

Usage by grocers is lagging.

Grocery stores need to maintain the right balance of supply and demand to meet the needs of their customers on a daily basis, as well as during surges such as this month's pre-Thanksgiving period. The goal is to prevent out-of-stocks due to brisk sales and targeted promotions.

The latest demand forecasting technologies can take place at both the store and at the distribution center. But are grocers taking advantage of these tools?

Some experts say retailers still rely too much on manual ordering and intuition to execute the replenishment process. It's not common to employ more sophisticated methods to predict consumer demand and to use this knowledge to automate the required inventory estimates to satisfy demand.

Underused Capability

"We see demand forecasting as a capability that most grocers need, but few extend this capability to the level where harnessing consumer demand is a competitive advantage in managing the business," notes Tim JW Simmons, general sales manager, North America, demand chain solutions and services at Dayton, Ohio-based Teradata. "Not many grocery retailers have fully exploited demand forecasting capabilities to include store item-level forecasts that include baseline needs and support promotion events, or the planned launch and support of new products."

According to Simmons, smaller operators have been slow to adopt these tools and gain experience to support decision-making. Most continue to rely on last year's shipment-withdrawal data or rolled up t-log data in tools like Excel to help plan their activities for distribution or buying.

"While almost all retailers in grocery use or have a forecast, it is not typically regarded as accurate or used with confidence, particularly in the prediction of promotion demand," he says.

And that's when out-of-stocks typically occur.

Getting Granular

"Hitting this problem with a single-forecast mentality doesn't work," asserts Alan Lipson, global retail/CPG industry marketing manager for Cary, N.C.-based SAS.

He says the key is to address the problem on two fronts: at the distribution center to support desired service levels with better demand forecasting, and at the store level with better overall forecasts.

"The best forecasting technologies generate forecasts for promoted and regular-price products. The models generating the forecasts should account for time series, life cycle and regression components. The technology used also should include functionality to support new-item forecasts that extend beyond the simple assignment of a "like item.' You've got be granular to get there," he observes.

According to Makarand Deshmuck, VP at Hoffman Estates, Ill.-based Sears Retail, the objectives of demand forecasting are twofold for a grocer: footfall and profit maximization.

"A lot of grocers are after one of these objectives," he says. "For mass retailers such Target and Walmart, grocery is a subset of the total business. They use the grocery section as a footfall driver more than a profit center. Other specialized retailers pursue the profit maximization route. For pure-play grocery chains such as Jewel-Osco, it is always both, and it is a holistic model."

Shalabh, the one-named director of U.S Midwest Operations for Princeton, I.J.-based LatentView Analytics Corp., lists two key factors that complicate and drive a need for robust demand forecasting: the emergence of online operations and digital ecosystems that have demand shapes that are the exact opposite of their traditional counterparts, and customer- and member-based models that generate more stable demands in large proportions.

"In grocery specifically, we have observed long-tail patterns in shelf life and seasonality causing variation and issues in achieving goals," he notes. "The sophisticated systems that attack the problem statistically, stochastically and in hybrid are becoming the industry trend. The big chains also use stochastic demand forecasts and promotions for demand tailoring and shaping to objectives. Experimental analytics such as test campaigns in these areas are becoming a permanent arm to these demand-shaping initiatives."

One grocery executive who has mastered these complexities is Abby Fox, procurement strategy manager at Commerce, Calif-based Unified Grocers. Progressive Grocer named her one of 2014's Top Women in Grocery for her outstanding achievements in inventory replenishment buying.

She was recognized for leading a significant inventory reduction initiative, as well as for establishing a KPI-driven replenishment program designed to maximize service and profitability. Fox led Unified Grocers to an aggressive inventory reduction of $11 million while increasing customer service levels. United teamed with Marietta, Ga.-based Blue Ridge, a cloud supply-chain planning provider offering demand forecasting, planning and replenishment solutions.

Flexible Tech

The business context for demand forecasting should go beyond inventory replenishment to include planning and collaborative elements. Category managers, buyers, store managers and vendors all should be able to reconcile their forecasts using the same system, according to SAS' Lipson.

"The technology should be flexible enough to provide insight to the forecast and the ability to manage the impact of changes made by any stakeholder in the system," he explains. "Ideally, the forecasting technology would be linked to inventory optimization technology so the retailer and the manufacturer can work together to make sure consumers get their favorite holiday menus on the table without any hiccups."

Teradata's Simmons stresses that retailers don't need to "boil the ocean" to get started. Instead, a small team and good detailed data acquisition practices, combined with some industry-leading tools, should be all that are necessary. "They can deliver impressive benefits," he sums up, "in terms of reduced stock-outs, improved sell-through, inventory turns and customer service levels."

"While almost all retailers in grocery use or have a forecast, it is not typically regarded as accurate or used with confidence, particularly in the prediction of promotion demand."

--Tim JW Simmons, Teradata

"In grocery specifically, we have observed long-tail patterns in shelf life and seasonality causing variation and issues in achieving goals."

--Shalabh, LatentView Analytics Corp.

Demand Forecasting in Action

How are grocers using demand forecasting today?

"There are many areas within the grocery vertical -- from financial planning to store ordering -- where demand forecasts are used today," says Tim JW Simmons, general sales manager, North America, demand chain solutions and services at Dayton, Ohio-based Teradata. "However, the levels of granularity and sophistication vary greatly across the specific businesses."

Simmons describes several examples of demand forecasting activities driving significantly improved results:

Promotion event-planning forecasting: Leading retailers are focused on a more granular demand forecast of promotion events at store-item week and day level. This allows for a smarter overall buy to support distribution by linking future store need to the distribution center, and at the same time a better estimate of customer need at store level, improving automation and reducing stock-outs and costly overstocks.

Buying function: How much to purchase, when and in what quantity? This capability is enhanced by synchronizing the demand and inventory forecast from the lowest level of item-store days and weeks over multiple future time horizons, and highlighting their impacts on DC inventory plans and vendor commitments. Using this method improves the supply chain and allows all supply chain nodes to benefit from being demand-driven.

Computer-assisted automated ordering: Granular forecasts are developed at item-location-day to automate the order calculation based on expected consumer demand, presentation, safety stock and inventory levels, to automate the replenishment order. The reduction in the manual effort it takes to execute the orders is significant, and at the same time the order quality improves. This frees up valuable resources to focus on the customer experience.

Multi-echelon planning: The ability to deliver accurate demand forecasts and inventory projections at the lowest level of item location over multiple future time horizons (days-weeks) allows this information to drive the future estimates-buys for the distribution point or partner. This ability improves supply chain capacity-planning processes, internal collaboration and inventory productivity.

CPFR: Retailers can now change their collaborative planning, forecasting and replenishment (CPFR) processes with the ability to share the granular forecast and inventory needs by week and day with their vendors, down to individual stores and across the network.

--John Karolefski
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Author:Karolefski, John
Publication:Progressive Grocer
Geographic Code:1USA
Date:Nov 1, 2015
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