I’m often posed questions about the value and impact of demand planning to an organization. Sometimes it comes from trying to measure the effectiveness of a Demand Planning team. For example, “What should my demand plan accuracy target be? What is best-in-class?”
Other times, it comes from trying to evaluate or justify additional investment in Demand Planning capabilities (education, training, technology, people, etc.). For example, “Is there an easy way to determine how much of an inventory reduction we will see with an improvement in demand plan accuracy?”
I worked with one organization where after evaluating their demand plan accuracy, it appeared that the calculation needed to be adjusted. Under the existing methodology, they were reporting 55% mix accuracy. Under the revised methodology, it would drop to 15%. They didn’t get every item wrong, but there were significant swings in mix that led the cumulative error to be quite large. You can probably imagine the reaction that some people had to the proposed change. It felt like an insult to the demand planning teams to suggest that they were so inaccurate. There was a lot of consternation around what the perception of 15% accuracy would lead to. Putting myself in their shoes, I would feel the same way!
At another organization, faced with cost and working capital pressures, I was asked for advice on how to link improvements in demand plan accuracy to inventory reductions and cost improvements. An experienced planner there shared a “rule of thumb” that has been circulated for years, that a 1% improvement in forecast accuracy yields a 1% reduction in inventory and holding costs. To their credit, they included the disclaimer that this only be considered directional in nature, but the temptation to use a rule of thumb is certainly high – particularly when under pressure to justify the value that the planning team brings to the organization.
The question you may be asking: What do both examples have in common?
Planning is a means to an end, and not an end itself. In both cases, the only way to understand the true business impact is to look outside of the demand planning team and process. It doesn’t matter whether your demand plan accuracy is 5%, 75%, or 95%. It only matters what others in the organization will do with that demand plan, and how those actions will impact business performance.
Can improving demand plan accuracy lead to a reduction in inventory? Absolutely. But only if the planners who are planning production are taking it into account. I’ve seen many organizations who have safety stock targets that don’t reference demand plan accuracy at all. Without some sort of intervention, a change in demand plan accuracy would have no impact to inventory over the long run.
In the case of the organization where mix accuracy would become 15%, changing the calculation of the metric wouldn’t change the reality of the business. The supply chain organization was still producing and shipping products to customers. What was unclear, however, was how the metric was correlated to business performance.
George Palmatier, a retired Oliver Wight principal, worked with a company president who shared the following insight:
Not so important: That our forecasts be accurate.
Important: That our forecasts be reviewed and measured against the actual results, making us more knowledgeable of our markets and our products.
Always remember, the demand plan must be useful to the rest of the organization. It can be useful in making us more knowledgeable about our markets and our products. It can be useful in allowing us to optimize the right balance between inventory, cost, and service. It can be useful in helping us to establish sales targets and financial budgets. It can be useful in guiding our new product launches and portfolio strategy. It can be useful in so many ways.
You must understand how Demand Planning is useful to the rest of the organization to be able to understand performance and return on investment. That cannot be done without collaboration and a deep understanding of how the demand plan is used.
Greg Spira 