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Why Forecasting Demand is Still the Biggest Supply Chain Question Mark

July 28, 2020

Four months into the COVID-19 pandemic, consumer demand is still exceedingly difficult to forecast. Here’s why Demand Planners are up to the challenge.

The COVID-19 pandemic has caused all sorts of Supply Chain impacts, many of which we’ve chronicled on the Argentus blog. Across a staggering array of industries, companies have been forced face the music: Supply Chains need to become more resilient, more flexible, and more responsive. Four months on, companies are reassessing their capability and reorienting their Supply Chain organizations to face these challenges.

During this period, we’ve also seen the general public become more aware of the role that Supply Chains play in our economy – particularly when it comes to shortages or excess of physical goods in stores. Think back to March: the (in)famous runs on toilet paper, or reports of 200 million pounds of extra potatoes in storage, unable to become french fries with restaurants closed. More than ever, people are realizing the vital importance of Supply Chains to the global economy. They’re seeing how getting the right amount of goods – from PPE to medical supplies to consumer goods – to customers is no trivial task.

As we work to shine light on some of the biggest Supply Chain challenges in this environment – as well as the talent-based solutions to those challenges – we want to highlight a major challenge that’s still a thorn in the side of many manufacturers and retailers: estimating the actual demand for products in a wildly unstable economic environment.

As we discussed with Retail expert Gary Newbury in a recent interview, unpredictability in Consumer Demand is one of the biggest drivers of Supply Chain uncertainty in the post-COVID-19 world. Companies have long set their Supply Chain strategies with a just-in-time inventory model. In layman’s terms, that means that they find efficiency by minimizing the amount of inventory on hand, striking a delicate balance to avoid having too much product sitting in warehouses, while avoiding shortfalls that lead to empty shelves. Both outcomes can completely sink profitability. So companies have invested lots of manpower and built sophisticated systems to forecast supply and demand and nail the equation.

Supply is, in some senses, easier to forecast – though not without its own considerable challenges in this environment. But COVID-19 has thrown the demand forecasting function completely for a loop. With the economy shrinking this quarter, and consumer spending patterns rapidly changing, demand for certain goods has dropped off a cliff, while demand for other goods, like PPE and groceries, has risen.

It’s hard enough in normal times to nail a demand forecast, which is based on numerous unpredictable, very human variables. But throw in a black swan event like a global pandemic that’s reshaped consumer behaviour like never before, and it becomes even harder.

We were struck by this excellent article in Supply Chain Dive that addressed this very problem. It cited a Reuters and CalAmp survey of 587 Supply Chain executives from around the world, asking about the biggest challenges they face in the post-COVID-19 era. A slight majority – 51% of respondents – said that unpredictable consumer demand was the biggest challenge to effective Supply Chain operations. What’s the upshot for companies developing their Supply Chain talent strategy?

Demand Planning – and skilled Demand Planners – could be even more valuable than ever.

The Demand Planning function has long been seen as a crucial Supply Chain discipline. It’s often a thankless – though well-compensated – role: it’s always easiest to blame the forecast if inventory doesn’t match demand, which speaks to just how difficult it is.

Demand Planning is a crucial component of the Sales & Operations Planning (S&OP) or Integrated Business Planning (IBP) process within companies. In the past, Demand Planners would rely on an understanding of past trends, seasonal variations in demand for products, independent research into market conditions, and other more “hands-on” methods to predict future demand. But with the rise of big data, organizations have put considerable resources into building machine learning algorithms, predictive analytics and other sophisticated automation to improve their demand forecasting.

Almost all of which are completely upended by a black swan event like the COVID-19 pandemic.

For many categories of products, these models are trained on historical data, which is out the window in an unprecedented time. Automated solutions are extremely powerful in an environment of consistency, but they’re less useful now. That means that, to nail a forecast, many organizations once again need the human touch.

Supply Chain Dive interviewed University of Arkansas professor John Aloysius about this shift, and the need for skilled Demand Planners who can not only babysit the models, but also form new forecasts based on strong research skills and understanding of the evolving situation. In their words, “a human’s ability to pick up on cues and diagnose events significantly outpaces that of machine learning tools. Humans can read the news and get a general grasp of the pandemic’s effect on demand: more sales for cleaning products, less demand for clothing.”

In his comments, Aloysius outlines how automated forecasts haven’t become obsolete – they just need time to catch up. By introducing variables to represent the pandemic, these models can gradually adjust their outputs to match the uncertain post-COVID-19 reality. But as the models evolve, companies need Demand Planners who can use a strong understanding of current events and intuition to create forecasts — possibly including regional variations in data as outbreaks wax and wane – and safeguard profitability in the short and medium term.

From our perspective, it’s helpful not to think of these people as “old school” Demand Planners. Instead, they’re people with a combination of the “hard skills” of data analysis and management, who are also adept at the “soft skills” of reading tea leaves for big-picture trends, with the ability to communicate and advocate for their interpretations to leadership in the business.

The good news is that these people exist. They’re out there, in the marketplace, ready to apply their skills. In many organizations, they’re evolving the Demand Planning function to respond to this black swan event. The competency is there, for companies willing to bring on new resources to think more creatively and up-skill the function.

We’re four months into the pandemic. If your Demand forecasting is off the mark – either because of outdated models, or a lack of sophistication in the first place – now is the time to bolster your hiring. For today’s uncertain environment, and for other black swan events that may be coming down the pike.

But what do you think? How is your organization changing their demand forecasting to respond to this uncertainty? Let us know in the comments!

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