Benchmarks for Demand Planning

Bobbin, Feb, 2000 by Steve Schlehuser

Increasingly, retailers are streamlining their vendor bases and passing along to their remaining resources more authority and responsibility to "verticalize" a larger segment of the demand chain.

In this regard, verticalization goes far beyond vendor managed inventory - representing alliances in which success is measured by return on retail resources (i.e., revenue/square foot, gross margin return on investment, etc.) as well as the financial rewards generated for links within the chain.

A key part of this vertical integration is demand planning, which utilizes common or shared data to make operating decisions and measure performance. It also allows the vendor and the retailer to work together to flesh out a full business plan. In turn, this emphasis leads to a sharing of retail category management decisions.

Given this joint responsibility, the apparel or sewn products vendor must be an active partner in understanding consumer expectations and must present the retailer with plans for both product differentiation and customized sales promotions. An attitude that says, "This is our product and promotion -- take it or leave it," is unacceptable when working with the retail industry's new wave of buyers.

Additionally, solid systems support and communication capabilities are essential as the vendor and retailer continually design and update plans for events six months to 12-plus months out. Following are a few of the critical components of the demand planning process:

* The vendor account manager uses point-of-sale (POS) transaction data provided by the retailer to create consumer purchase forecasts.

* The vendor account manager and the retail buyer define and develop plans for promotional events. Their forecasting/planning system suggests the best items to promote and projects the consumer sales impact. Before the plan is approved, profitability of promotional events for both the vendor and the retailer is estimated.

* The vendor account manager generates an order release forecast by modifying the system-created consumer demand plan with buyer review/input.

* During the selling cycle, the vendor account manager monitors his or her firm's product sales against the performance of the product category as a whole.

* Both the vendor and retailer exchange via e-mail relevant analysis and plan changes with the system.

* Actual performance is evaluated against a variety of measures, including forecasted POS consumer purchases, the vendor's order release forecast, shipping performance and margin dollars generated by promotional events.

* The system performs a weekly store-level analysis to detect unproductive stores, and with an "exception flag notice," automatically notifies the vendor account manager of exceptions to the forecasted selling plan. These notices also are forwarded to the retail buyer, who determines if the poor performance is caused by lack of stock (due to inventory errors or stock not on display) or by lack of stock that meets the needs of the store's specific consumer demographics. If the cause is related to consumer preferences, the system can recommend a new assortment mix based on scan data.

A successful vertical partnership can make retail space more productive than it ever could be under the management of the retailer alone because the apparel or sewn products vendor can build computer models specially designed for analyzing specific products. With this type of systems capability, a vendor can offer a retailer significant added value, provided the retailer first provides POS data as a driver.

Vertical partnership allows each link of the demand chain to concentrate on its specialty while gaining insight from business partners. Forward integration by vendors into direct sales and backward integration of retailers into sourcing is already taking place. The Wal-Mart "RetailLink" system institutionalized the sharing of data between buyers and account managers. It is time for more vendors and retailers to step up, form alliances and use information to their mutual advantage to increase revenues and profits.

Steve Schlehuser is a principal with Kurt Salmon Associates (KSA).