4 Ways Demand Planners Can Cut Through the Economic Haze
Demand planning is facing unprecedented challenges due to the current economic uncertainty. Factors such as the ongoing pandemic, inflation, and geopolitical tensions are intricately connected, making accurate forecasting a formidable task.
Because they bridge the gap between customer needs and production capabilities, demand planners are naturally impacted when economic outlooks get too hazy to decipher. Analyzing historical data is straightforward, but gathering market intelligence, building forecast models and predicting how much inventory needs to be ordered can become a gamble in a shifting economy.
The good news is that there are some tested strategies that demand planners can use to buck the trend, despite everything that the global economy may be throwing at them right now. Here are four strategies to add to your toolkit for 2024, and that you will want to continue using when the economy shifts into a more “predictable” mode:
- Track the most relevant leading indicators. Prioritize tracking essential leading indicators as a cornerstone of demand planning. Pay attention to the factors that are impacting your specific organization, knowing that every industry or company deals with its own set of indicators. Also, make sure you understand the correlation between those indicators and your planning, as some “Goldilocks indicators” have phenomenal correlation values for certain industries, while others may have a more distant relationship. Some common indicators to watch include customer confidence surveys and the consumer price index, for consumer-packaged goods (CPG) companies, and purchasing manager indices for B2B companies. You may also want to:
Become a weather watcher. Harsh weather is not a new thing, but since it impacts everything from transportation to production to demand, planners should be paying closer attention to it this year. It does not take a hurricane or a wildfire to bring a supply chain to its knees. A day of severe weather in an urban area can create negative impacts that ripple through the entire network. All this to say, paying attention to the weather can help planners improve forecast accuracy, minimize disruptions, and build resilience against unforeseen disruptions. A good starting point is the Waffle House Index that gauges the severity of a storm and its impact on a community. Known for its 24/7, 365-day service, Waffle House has become an informal (and highly reliable) barometer that reminds us of the fundamental role that restaurants play in our lives.
Pay attention to backlogs. By monitoring backlogs, planners can identify emerging patterns, gauge market sentiment and anticipate shifts in consumer preferences. This proactive approach enables organizations to strike the delicate balance between maintaining optimal inventory levels and meeting customer demand efficiently. For companies in the construction supply sector, for example, housing starts are a classic leading indicator. This number of new residential units under construction gives planners insights into future demand for building materials like lumber, concrete, roofing materials and appliances. By analyzing these types of trends and historical data, and by paying attention to backlogs, planners can forecast future needs and adjust accordingly.
- Bake the indicators into your forecasts. Once you understand which indicators are most relevant to your company and/or industry, pay close attention to how these indices are moving. And if you do not already have leading indicators baked into your forecasting method, it is time to define the processes and systems for integrating them into your approach. Simply reading about these signals in the news might allow you to account for the changes this time around, but if these indicators are not incorporated into your company’s assumptions, you are not as equipped as you could be for the next time. If you work for a CPG company that is keyed into social media, for instance, this is a very short-term indicator that immediately finds its way into the 24-hour news cycle. For example, a celebrity may post on Instagram and create an instant sellout of the mentioned product. Using sentiment analysis tools, companies can analyze large data sets on a social media platform, know the trends as they happen and then act accordingly.
- Shorten up your forecast windows. Uncertainty makes it difficult to confidently predict future demand, but that does not mean you have to sit back and take it. In some cases, a simple mindset shift to shorter forecast windows can have a profound positive impact on forecast accuracy. The shorter your forecasting windows, the faster you will be able to adapt to changing conditions. Get yourself down to forecasting monthly versus annually, for example, and you will be able to respond with greater agility to your leading indicators.
- Use well-defined key performance indicators (KPIs). In supply chain, there’s always the fear that an overreaction will create a “bullwhip effect” that eventually impacts the entire network—and not always in a good way. Planners may avoid this issue by using well-defined KPIs that signal well before a potential problem. Much like a sailor keeps close tabs on current wind direction and conditions, good KPIs help planners synthesize data and keep them on course. Good KPIs also help thread the line between overreacting to what indicators are saying and adapting to the changes that are happening. The best KPIs make corrective action evident and are tied to environmental context, so if freight costs are rising right when cost-cutting mandates are being imposed, then weekly transportation spend isn’t a KPI; it’s just data. A breakdown of shipping by mode is a step in the right direction, but tracking shipping method expenditures over time gets to the heart of the underlying cause: expedited shipping costs. With that reason in hand, the on-time in-full (OTIF) score becomes the KPI to monitor. Investigating low scores reveals the root cause of freight cost overruns that require remediation, be it evolving lead times, inventory stockouts or equipment downtime in the order fulfillment center. By aligning KPIs with broader organizational objectives, planners can ensure coherence and alignment across departments, fostering a culture of continuous improvement and innovation.
Persevering Through the Haze
Will the Federal Reserve pivot its stance on interest rates and start cutting soon? Will the war in Ukraine end? Will attacks on container ships in the Red Sea cease? And will the U.S. economy continue to expand, and inflation continue? These are just some of the questions that demand planners wish they had answers to right now. And the list does not end there…
Effective demand planning transcends mere data analysis; it embodies a strategic mindset grounded in foresight, adaptability, and resilience. By embracing leading indicators as harbingers of change and opportunity, organizations can navigate the complexities of the modern marketplace with confidence and clarity, charting a course towards sustained growth and success. While it does look like we have found the “bottom” of the economic cycle, even if the economy is not spiraling downward, we are still experiencing a “resetting” of inflationary pressures. This is much better than a depression or recession scenario of course, but there are still a lot of kinks to work out of the system, including price increases and margin erosion. The floor did not fall out from under us, but there is still more work to be done before we can get to a more level, reliable economic climate. In the meantime, adopt the strategies in this blog to effectively navigate the foggy conditions and develop accurate plans that keep your ship headed for the harbor—even in a chaotic, unpredictable environment.
