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- Summary
- Top Tips
- Explanation of topic
- Weaknesses Identified
- Best Practices
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Forecast accuracy is a major factor impacting
OSA on promotional lines |
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Summary
All UK major retailers and manufacturers visited were of the same opinion regarding the significant impact of forecast accuracy on promotional On-Shelf Availability (OSA).
With erratic and volatile sales during promotions leading to forecast inaccuracy, both at store level & aggregated customer level, this is seen as the main factor impacting OSA on promotional lines.
Top Tips
- Recognise the importance of collaboration, both internally cross-functionally & externally. Develop the right relationships to drive collaboration through communication. See collaboration & communication section
- Carry out promotional reviews; building a “database” of promotional performance and factors to build knowledge and understanding, taking into account potential lost sales from OSA issues.
- Increase the focus on promotional cannibalisation.
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Explanation of topic
It is clear that forecasting consumer demand is the major issue impacting on OSA of products on promotion. With sales at store level higher than forecast, the promotional products will suffer from OSA issues, driving out of stocks and potential lost sales. Low stock cover in store caused by inaccurate forecasts will then trigger erratic demand in the form of orders from the retailer to the manufacturer. If the manufacturer is not prepared for, or cannot fulfil this demand, this can cause service failures into the retailer, driving further OSA issues. So the consumer demand, forecasted by the retailer, and the retailer demand, forecasted by the manufacturer can vary hugely – causing misaligned supply chains.
Forecasting the base demand for a product is already difficult for a retailer at national level, taking into account all of the relevant internal and external factors that can effect demand, however, these factors are usually more volatile and variable when forecasting promotions. Retailers vary in their methods of store replenishment [see in store process] and in the amount of information that they share [see collaboration] – which can be critical in protecting OSA during promotional periods.
Manufacturers are using a variety of techniques and processes to try to understand and predict the likely demand seen by the retailers. Again, during promotional periods, volumes are usually significantly more volatile and difficult to predict. Tracking OSA at store level during the promotion can help to understand and predict likely demand from consumers & hence demand from the retailer. Some manufacturers provide resource to work directly in the retailer head office, using the retailer systems to help manage promotional availability, as well as managing the forecasts of products affected by cannibalisation during the promotional period [see collaboration].
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Weaknesses Identified
Lack of collaboration between retailer / manufacturer
The relationship between manufacturer and retailer can vary immensely. It is suggested that those which are simply a buyer-seller relationship are not as effective when executing promotions, leading to poor OSA & ultimately disappointing the consumer [see collaboration].
Resources
Where there has been a high turnover of personnel it could be seen to cause issues with the accuracy of the promotional forecasts. Wherever possible, people forecasting at both the retailer & manufacturer should fully understand the characteristics, trends, seasonality and different usages of the product and category.
Promotional Space
The amount of space in store allocated to a promotion & where the deal was positioned can drastically impact the promotional volumes [see in store process]. Agreement and communication of this information between commercial & supply teams was seen to be an area of weakness.
Forecast update process
Due to the volatility of promotional demand it is essential that promotional forecasts are updated on a daily basis using the latest consumer sales data in conjunction with stock cover information. Where this routine is not in place poor promotional OSA is likely to occur.
Inaccurate store level forecasts
Even with reasonably accurate “top line” forecasts at retailer level it is possible to have incredibly inaccurate store level forecasts. These are particularly important for those suppliers delivering direct to store. Store level forecast accuracy requires significant effort, time, resource & a system solution capable of considering characteristics specific to each store [see IT].
New product introductions
Most New Product Introductions (NPI) take place with the product on promotion. The combination of a product with no sales history which is then launched on promotion often leads to OSA issues due to the inaccuracy of the forecast.
Lack of focus on promotional forecast review
The lack of a post promotional review to fully understand the factors that affected the promotional performance can lead to further inaccurate forecasts if the promotion is repeated. Whilst there appears to be a degree of focus on the planning stage of a promotion, the ongoing forecasting during the promotion and review post promotion appear to be weak areas in most retailers & manufacturers [see collaboration & communication].
Price matching strategy
Whilst a price mechanic for a promotion may have been agreed between retailer & manufacturer some months in advance and the forecast created on that basis; more frequently than ever now, retailers are changing the price at the last minute in order to align with competitors’ pricing which has been seen in the market. This will inevitably increase the demand for the promotion above the agreed forecast and may create an out of stock (OOS) situation.
Lack of focus on cannibalisation
The majority of manufacturers do not have access to their competitor sales so have no visibility of the cannibalisation of their products. This can be cannibalisation in many forms, but the correlation between promoted products and non-promoted competitor products can be difficult to understand.
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Best Practices
Collaboration
Developing the right relationships and collaboration process between retailer / manufacturer can drive promotional forecast accuracy and therefore improve promotional OSA.
The success of promotional execution is largely dependent on the efficient communication between all parties involved [see collaboration section]. With all parties working towards “one agreed set of numbers” the forecast is likely to be more accurate, leading to improved promotional OSA.
All retailers vary in the quality and quantity of information that they share, but in general, the more information that is shared, the more accurate and aligned the forecasts are. Sharing information such as changes to the promotional mechanic, the number of stores the promotion will be in, agreed buy in volumes, competitor activity etc all help to shape the likely promotional volumes. If the information is shared it can then be discussed between retailer and manufacturer & the manufacturer has a chance to be able to react to, and fulfil, the demand. The retailer can also take contingency steps if the manufacturer highlights a potential issue at this early stage.
In some cases manufacturers have provided a “shared resource” to work within the retailers head office – using the retailers’ systems. This additional resource can apply the required degree of focus to the execution of the promotion having full visibility of the performance directly; rather than waiting for the information to be provided. The role can also support Vendor Managed Inventory (VMI) on some categories.
Promotional Review
"In flight" promotional evaluation on a daily basis will improve the forecast accuracy and help to drive understanding of the likely promotional volumes, protecting OSA.
A rigorous post promotional review to understand all of the factors affecting the accuracy of the promotional forecast, will aid with future promotional forecasting. This should include space on fixture, store promotional compliance, weather, competitor activity, cannibalisation & lost sales analysis.
This insight can then be applied to the promotional forecast if the promotion is repeated – creating a more accurate forecast at the outset; which can be supported due to the insight around the factors that affected the numbers [see collaboration & communication section].
Technology
Retailer replenishment tools vary in their approach and complexity; as do the forecasting methods used by manufacturers. However, it is suggested that an algorithmic method should be used for base line forecasting, whilst promotional volumes should be managed as a discrete event. Forecast systems that can hold a “database” of previous promotions and the factors that effected the volumes for use in future promotional forecasting, were regarded as Best in Class.
Retailers also provide varied access to daily store level sales and availability data. Manufacturers that had access to this data and were maximising the use of it, were seen to be managing promotional forecasts and OSA to the highest standard, especially when used in line with regular collaborative reviews with the retailer.
Accessing store level sales data after day one of the promotion and extrapolating out for the remainder of the promotional period was seen as good practice when developing and reviewing a promotional forecast. Access to this data also provided manufactures with an opportunity to improve the availability of the promoted products during the promotion, so reducing lost sales.
New product introductions
In order to develop a collaborative relationship, Account Managers from the manufacturer & Buyers from the retailer need to have a collaborative style. When planning an NPI a collaborative approach seems to generate the most accurate sales forecast. With an “agreed” number between both parties there is then a reference point to go back to in light of any problems with performance of the new listing.
Visibility of Promotional Space
Some retailers have developed a database recording all promotional space available in stores by categories. This gives retailer head offices full visibility of promotional space across all stores which is essential when developing accurate promotional forecasts, starting with the allocation of the promotion end fill. Best practice has this space system linked directly to the ordering system.
Accountability of promotional forecasts
It is suggested that best practice on promotional forecasting is where the accountability of producing the forecast is moved from the commercial teams within the retailer, to the supply chain function who will then work collaboratively with the manufacturer. Some retailers have gone a stage further in creating a separate promotional team that are solely focussed on the planning and execution of promotions through collaborative techniques.
Increased focus on cannibalisation
Where a collaborative relationship also adds significant value is in the sharing of information around competitor manufacturer products going on promotion. This enables the manufacturer time to reduce their demand forecast and hence avoid waste. System solutions that were able to track and analyse switching analysis across products and ranges were seen as best in class.
Agreed Joint Business Plans
Where an agreed Joint Business Plan is in place, delivering expectations in terms of sales and profit, there was significantly less deviation from the plan in terms of promotional mechanic and pricing changes; leading to more stable forecasts and hence improved OSA.
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Other Focus Areas:
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Distribution |
Getting Product to Store |
On the
Shop Floor |
Communication & Collaboration |
I.T |
Production |
Promotions Process |
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Promotional On-Shelf Availability - Next steps:
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