Will 2010 be the most challenging year to forecast and plan for in history?

I have heard a lot of supply chain professionals say something along those lines to me over the past few months – and with good reason.

For example, I sat next to a VP of Supply Chain for a metals-related company at lunch one day at the CSCMP conference in Denver this fall, and he said his company was in great angst over planning, budgeting and investing for 2010. Play it highly conservative, and if the economy strongly rebounds, as some predict, you could not only lose revenue and profits, but possibly some market share on a permanent basis.

Play it too aggressive and we instead experience weak economic growth, and it could have a devastating impact on cash flow and the bottom line – and maybe send a company back towards the abyss if we see a double dip recession.

It all means the job of “demand planner” has never been more important – or more challenging.

It is thus timely that we have recently released our latest Supply Chain Digest Letter, with a focus this month on Demand Planning. Many of you should have received a hard copy in the mail, but as our list shifts based on who requests each issue and other factors (and the ridiculously high costs of mailing), you can also easily download an electronic version of this excellent 16-page letter: SCDigest Letter on Demand Planning.

As usual, it was fun to put together, and we learned a lot during the research.

After all these years, Demand Planning and forecasting are really still something of a mystery wrapped in an enigma.

I love this quote from Mark Lawless, a Senior Consultant for the Institute of Business Forecasting & Planning: “Forecasting has never been an easy discipline to apply and communicate. It may be one of the least understood (though most pervasive) among the business decision making tools in use by managers at all levels in the organizations.”

Tremendously important and pervasive in today’s corporations, yet still not well understood – that about sums the state of demand planning up.

Earlier this year, I had the pleasure of attending the Demand Planning council meeting at the JDA user’s conference, which includes some of its leading demand planning practitioners. There were some really smart demand planners and supply chain executives there, using highly advanced methods and approaches, yet even within this group there was tremendous diversity in terms of the role, pay and other attributes of demand planners within their organizations.

For some, it was basically the entry role into the supply chain, a position from which a talented person was soon to advance to some other supply chain position. At others, it was a more senior position, but one with a sort of dead-end career path. There were several other permutations.

I am paraphrasing here the comments of several of the participants at that meeting, who all said in one way or another that “The decisions of demand planner can impact the swing of millions of dollars in production and inventory, and this happens day in and day out, yet their role and place in the organization doesn’t really reflect that.”

This whole discipline has generated a lot of terms, starting with the move away from the term forecasting to “demand planning,” which to me implies a more holistic process than perhaps the simple term forecasting does. Indeed, it seems to me the case that companies which adopt new demand planning software usually have as their first goals just getting the process right and reducing total forecasting cycle times (which the automated workflow tools in these software solutions can really help).

More lately, we hear terms like “demand management,” “demand shaping,” and now “demand sensing.” Of course, demand planning is also now viewed as the key input into Sales and Operations Planning processes (S&OP), adding another dimension to the discipline.

I am going to be out of room here soon, and can just barely highlight some of the good stuff in this month’s Letter. Some key Demand Planning trends we identified include:

Rise of “Demand Sensing”: In short, this involves getting closer to what is happening at the actual point of consumption, and using that intelligence to adjust and make more accurate short term forecasts. Why it took us this long to get here isn’t clear, but it is starting to happen now.

“Decomposing” Demand: Companies have been chasing the ability to effectively use so-called “causal factors” to understand the impact of different demand drivers for years, but many simply never get there or don’t do it effectively. That is starting to improve, based in part on better technology and understanding of how to approach this challenging effort.

Focus on Qualitative Factors: Companies that have taken statistical forecasting about as far as they can go often come to a similar realization: what is missing are better insights into qualitative factors that can be used to enhance the statistical forecast. These companies are constantly looking for insights that are not easily quantifiable or “in the data” that might impact actual demand, whether that is customer behavior, competitive activity, or other factors. But the approach can be taken too far, and actually decrease the original accuracy based on the statistical forecast.

New Category of “Super Users”: These super users are typically not responsible for day-to-day demand planning activities. Rather, they are focused on improving overall demand planning processes, looking at how the demand planning software system can be “tuned” to deliver better statistical results, and maintaining overall demand planning system parameters.

Forecasting the Hard to Forecast: The so-called “Long Tail” phenomenon has led many companies to have an increasing number of low volume, very difficult to forecast products. The general trend towards product proliferation has led to similar challenges, as demand planners are faced with a growing array of new products for which there is no history. Demand planning software vendors have developed a number of approaches to improve forecasting of these difficult to forecast products.

“Leaning Out” of Demand Planning Staff: Both anecdotally and from some hard research data, it is clear, despite the critical role of demand planners, that many if not most companies have gone even more Lean with demand planning staffing in recent years. Demand planners are clearly handling many times more SKUs today than they were even just a few years ago, in most cases. This has some interesting ramifications, among them the need for more automation and more exception-based forecasting processes.

There is so much more in the Letter, or course, than I can summarize here. As always, we have developed a new Demand Planning resources page (newly redesigned – very good), where you find the e-version of the Letter, our best articles on the topic, some great additional white papers, video and more.

With all this, has forecast accuracy really much improved? The overall evidence is unclear on that, though certainly there are many individual examples of companies that have made great strides. Others appear to have slid backwards, perhaps in part due to the reduction in staff. Some of those are pursuing a “back to basics” approach.

I’ll end with this, a quote from Albert Einstein, which I think relates directly to the fact that forecasts are almost by definition likely to be wrong – but crucial nonetheless.

“All models are wrong,” Einstein said. “Some are useful.”