Demand Management

Bridging External Market Inputs with Internal Statistical Forecasting

June 2011
Nari Viswanathan

~ Underwritten, in Part, by ~
 Demand Management: Bridging External Market Inputs
with Internal Statistical Forecasting
Page 2

Executive Summary
In a recent Aberdeen survey of 191 Chief Supply Chain Officers (CSCO) Research Benchmark
and supply chain professionals, 45% of respondents indicate that their supply Aberdeen’s Research
chain was disrupted by a sudden increase in customer demand. In fact, this Benchmarks provide an
ranked as the top supply chain disruption over the past 12 months by survey in-depth and comprehensive
respondents. The focus of this benchmark report is to explore the demand look into process, procedure,
management process within the various elements of the demand network methodologies, and
such as manufacturers, distributors, wholesalers and retailers. Over 157 technologies with best practice
respondents have responded to a survey specifically focused on demand identification and actionable
management practices (Please refer to Appendix 1 for demographic details). recommendations

Best-in-Class Performance
Aberdeen used four key performance criteria to distinguish the Best-in-
Class from Industry Average and Laggard organizations. These metrics are:
• Average cash conversion cycle - 27.9 days
• Perfect orders delivered to customers (complete and on-time) -
94.6%
• Average percent forecast accuracy at product family level (across a
three-month time period) - 87.1%
• Average percent forecast accuracy at individual SKU item level
(across a three-month time period) - 70.8%
Competitive Maturity Assessment
Survey results show that the firms enjoying Best-in-Class performance
shared several common characteristics, including:
• Best-in-Class companies are 2.1 times as likely as Laggards and 1.3
times as likely as Industry Average companies to be able to segment
demand forecasts based on key product and customer
characteristics
• Best-in-Class companies are 2.3 times as likely as Laggards and 1.4
times as likely as Industry Average companies to be able to include
promotions and other demand shaping activities into demand
forecasts
• Best-in-Class companies are two times as likely as all other
companies to measure the lead-time from inquiry to order
Required Actions
In addition to the specific recommendations in Chapter Three of this
report, to achieve Best-in-Class performance, companies must:
• Create the ability to segment demand forecasts based on key
product and customer characteristics
• Close the loop with supply and inventory

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Demand Management: Bridging External Market Inputs
with Internal Statistical Forecasting
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Table of Contents
Executive Summary....................................................................................................... 2
Best-in-Class Performance..................................................................................... 2
Competitive Maturity Assessment....................................................................... 2
Required Actions...................................................................................................... 2
Chapter One: Benchmarking the Best-in-Class.................................................... 4
Business Context ..................................................................................................... 4
The Maturity Class Framework............................................................................ 5
The Best-in-Class PACE Model ............................................................................ 6
Best-in-Class Strategies........................................................................................... 7
Chapter Two: Benchmarking Requirements for Success.................................10
Competitive Assessment......................................................................................12
Capabilities and Enablers......................................................................................13
Chapter Three: Required Actions .........................................................................22
Laggard Steps to Success......................................................................................22
Industry Average Steps to Success ....................................................................22
Best-in-Class Steps to Success ............................................................................23
Appendix A: Research Methodology.....................................................................25
Appendix B: Related Aberdeen Research............................................................27
Featured Underwriters..............................................................................................28

Figures
Figure 1: Focus on Demand Network component of IDSN............................... 4
Figure 2: Top Business Pressures within Demand Management........................ 5
Figure 3: Strategic Actions Being Taken by Companies....................................... 8
Figure 4: Operational Challenges Faced on Sell Side..........................................15
Figure 5: Technology Approaches Utilized by Companies................................19
Figure 6: Technology Investment for Demand Management............................19
Figure 7: Approaches by Customer Centricity and Supply Chain Model......24

Tables
Table 1: Top Performers Earn Best-in-Class Status.............................................. 6
Table 2: Best-in-Class PACE Framework ................................................................ 7
Table 3: Top Challenges Faced by Different Levels from End Consumer....... 8
Table 4: Top Strategic Actions by Different Levels from End Consumer....... 9
Table 5: Competitive Framework ...........................................................................12
Table 6: Prioritization of Demand Management Initiatives ...............................16
Table 7: The PACE Framework Key ......................................................................26
Table 8: The Competitive Framework Key ..........................................................26
Table 9: Relationship Between PACE and the Competitive Framework ......26

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Demand Management: Bridging External Market Inputs
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Chapter One:
Benchmarking the Best-in-Class
Business Context
In a recent Aberdeen survey of 191 Chief Supply Chain Officers (CSCO), Fast Facts
45% of respondents indicate that their supply chain was disrupted by a
√ 42% of respondents
sudden increase in customer demand. In fact, this ranked as the top supply indicated that they are
chain disruption over the past 12 months by survey respondents. The focus focused on internal demand
of this benchmark report is to explore the demand management process planning
within the various elements of the demand network such as manufacturers,
distributors, wholesalers and retailers. Over 157 respondents have √ 21% of respondents
responded to a survey specifically focused on demand management practices indicated that they are
focused on sell-side
(Please refer to Appendix 1 for demographic details).
collaboration
As supply chain cost continue to rise and the supply chain grows √ 37% of respondents
increasingly complex, companies are aggressively seeking best practices for indicated that they are
improving their demand network. Further, customers, many of whom are focused on both sell-side as
also dealing with still slumping economic conditions, are becoming more well as internal demand
stringent in their demands. planning

Figure 1: Focus on Demand Network component of IDSN

Type of Supply Chain
Supply Network –
System suppliers,
Demand Network - Buyer of
services and products √ 52% of respondents
Contract Manufacturers, ODMs, For e.g: Retailers, Distributors, indicated that their supply
Raw material suppliers Value Added Resellers (VARs),
chain was build to stock
Component
Factory
√ 28% of respondents
indicated that their supply
chain was build to
Customers

Enterprise – Sales, Marketing, order/configure to order

Raw Material
Operations, Manufacturing, Retail Store
System
Procurement
Factory
√ 5% of respondents indicated
Enterprise that their supply chain was
Suppliers engineer to order
Logistics Network – 3PLs, Shippers, Carriers
√ 15% indicated that they were
dealing with retail
environments
Flow of physical goods, supply chain data and financial information

Source: Aberdeen Group, May 2011

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Figure 2: Top Business Pressures within Demand Management

“We have demand management
Increased demand
processes that keep us very
volatility
45% close, operationally, to the real
demand profile. However,
occasionally stuff still happens.
Growing complexity of
41% This creates waste and requires
global operations
significant management time to
rectify as well as causing a
Rising supply chain
34%
failure, on these rare occasions,
management costs to meet our customer's
expectations. Our current
Escalating demand for challenge is to execute a no-
32%
service from customers surprises policy, and we will do
this by improving the
communication lines between
Economic and financial
volatility
14% our mechanical demand
management calculations and
the intuitive assessments of
0% 10% 20% 30% 40% 50%
market conditions, particularly
Percent of Respondents, n = 157
those statistical outliers (eg.
Source: Aberdeen Group, May 2011 tender wins) that sometimes
come from left field.”
From an overall standpoint, respondents indicate that the increased
volatility of demand is the biggest challenge they are facing with respect to ~ VP of Operations at Mid-
demand management followed by the growing complexity of the global Size Medical Device
demand-supply networks (Figure 2). But if we look specifically at North Manufacturer
America, the top three pressures are:
• 40% indicate rising supply chain management costs
• 39% indicate increased demand volatility
• 38% indicate growing complexity of global operations
When we take a look at Asia Pacific, however the top three pressures are:
• 58% indicate increased demand volatility
• 46% indicate growing complexity of global operations
• 29% indicate rising supply chain management costs “Our focus is on building an
improved consensus process by
This indicates the high growth in demand in the emerging countries where engaging multiple levels of
costs have not reached the high level of priority as it has in North America. management, engaging sales,
In conclusion North America is in cost cutting mode and Asia/Pacific is in and improving revenue
alignment. Currently we have
growth mode - not surprising given the macro-economic parameters like
limited input from sales and
GDP for Asia/Pacific countries fast catching up with developed nations. customers at any level of detail
below revenue. Responsibility
The Maturity Class Framework for the accuracy of the mix is
not shared.”
Aberdeen used four key performance criteria to distinguish the Best-in-
Class from Industry Average and Laggard organizations. These metrics are: ~ VP of Supply Chain at Large
Telecommunication Equipment
• Average cash conversion cycle Manufacturer
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• Perfect orders delivered to customers (complete and on-time)

• Average percent forecast accuracy at product family level (across a
three-month time period)
• Average percent forecast accuracy at individual SKU item level
(across a three-month time period)

Table 1: Top Performers Earn Best-in-Class Status

Definition of
Average Class Performance
Maturity Class
Best-in-Class: ƒ had an average cash conversion cycle of 27.9 days
Top 20% of ƒ had a perfect order rate of 94.6%
aggregate ƒ experienced 87.1% forecast accuracy at a product family
performance level
scorers ƒ experienced 70.8% forecast accuracy at a SKU level
Industry ƒ had an average cash conversion cycle of 58.9 days
Average: ƒ had a perfect order rate of 90.1%
Middle 50%
of aggregate ƒ experienced 66.4% forecast accuracy at a product family
performance level
scorers ƒ experienced 57.7% forecast accuracy at a SKU level

Laggard: ƒ had an average cash conversion cycle of 64.6 days

Bottom 30% ƒ had a perfect order rate of 80.8%
of aggregate ƒ experienced 37.8% forecast accuracy at a product family
performance level
scorers ƒ experienced 35.7% forecast accuracy at a SKU level
Source: Aberdeen Group, May 2011

Some key observations from the metrics associated with demand

management process:
• Forecast accuracy is not the sole component of Best-in-Class
demand management performance. It is more of a lagging indicator
which requires effective short term demand execution which is
measured by customer service levels and cash to cash cycles
• If we pivot the Best-in-Class performance solely based on forecast
accuracy, we observe that the results are counter intuitive where
customer service levels are not as high. In other words, forecast
accuracy must be observed in tandem with customer service as they
serve as a counterbalance to one another.

The Best-in-Class PACE Model

Using demand management to achieve corporate goals requires a
combination of strategic actions, organizational capabilities, and enabling
technologies that can be summarized as shown in Table 2.

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Table 2: Best-in-Class PACE Framework

Pressures Actions Capabilities Enablers
ƒ Increased ƒ Improve outbound ƒ Ability to capture true ƒ Demand Forecasting system
volatility of supply chain customer demand ƒ Demand-supply synchronization system
demand visibility ƒ Ability to model the ƒ Sales forecasting system
ƒ Change our forecast at enterprise ƒ Demand Collaboration System
information customer level
ƒ Channel order management system
strategy to better ƒ Ability to perform phase
manage our multi- ƒ Pricing system
in/phase out analysis while
enterprise introducing new products ƒ S&OP application
business network ƒ Ability to incorporate sales ƒ Business Intelligence solution
forecast into the overall ƒ Short term forecasting system
demand plan ƒ Demand Signal repository system
Source: Aberdeen Group, May 2011

Best-in-Class Strategies
Strategic actions, like the ones shown in Figure 3, provide direct insight into
respondent companies' overall strategy and disposition. It has to be noted
that Best-in-Class, Industry Average, and Laggard companies have generally
prioritized the same strategic actions; however this does not mean that
their organizational capabilities are the same. In Chapter Two, we will
explore the specific differences in process capabilities between the Best-in-
Class, Industry Average and Laggard companies.
The top two actions that companies are taking are forecast collaboration
and integrating the forecast collaboration with internal business processes.
Statistical forecasting is also considered an area of focus for the overall
respondent pool.
When we look at the 60 respondents that are in the consumer industries
(CPG, food / beverage, etc.), the focus on statistical forecasting is higher and
is ranked second at 35%. Our research reveals that there has been an
increase in lumpy or intermittent demand versus the traditional normal
distribution demand. The main reason for the increase in lumpy demand is
the proliferation of multiple channels for sales as well as the growth in
geographic sales regions.

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Figure 3: Strategic Actions Being Taken by Companies

“Supply/ demand matching
remains a top priority. The
Improve customer forecast collaboration 47% challenge is do you spend time
on forecast accuracy or do you
Integrate customer collaboration processes 33% spend time on creating a
with internal business processes flexible supply chain? My team
Develop a more responsive is working to create a forecast
31%
inventory placement strategy at an acceptable level and to
build a supply chain that has
Improve statistical forecasting 31% flexibility built in to close the
gaps of forecasting. There are
Improve data management (including 19% diminishing returns on
customer/channel data) forecasting and the percent of
0% 10% 20% 30% 40% 50%
accuracy. Supply chain flexibility
Percent of Respondents, n = 157 is the key to being adaptive to
meet the increasing
Source: Aberdeen Group, May 2011 requirements of the customer.”
Many companies are looking to create a tighter feedback loop from actual ~ Manager of Supply Chain at
Point of Sale (POS) data and perform customer level forecasting for key B2B Larger High-Tech and Services
customers. In an environment where pareto analysis of the customer Provider
revenues indicate a 20-80 split, doing customer level forecasting is a very
appropriate approach for companies to take. In Chapter Three, we will
explore the actual process competency levels for Best-in-Class, Industry
Average, and Laggard companies.
Aberdeen Insights — Challenges and Strategy Based on
Proximity to Customer “With a few of our more
innovative customers, we have
Table 3 illustrates the top challenges faced by different levels (echelons) established vendor managed
when it comes to critical issues such as demand for customer service, inventory programs which gives
rising costs, demand volatility, proliferation of new products and us direct access to their
increased global complexity. The key takeaway is that demand volatility is inventory levels. Via
cooperative use of our
increasing as we go further away from the consumer. Also, issues dealing
statistical forecasting process,
with other attributes are equally challenging for all levels. we have improved their sales
forecasting, resulting in on-time
Table 3: Top Challenges Faced by Different Levels from End
shipment rates by them above
Consumer 98%. We have benefitted as we
Product Complexity fill their demand based on our
Level Service Cost Demand joint forecasting process. For
1 28% 38% 40% 18% 38% all other customers, we
2 37% 30% 44% 4% 44% attempt to get quarterly
3 31% 36% 53% 11% 39% forecasts that we incorporate
4 30% 43% 57% 0% 29% into our statistical forecasting
Source: Aberdeen Group, May 2011 process.”
continued
~ CFO at Mid-Size Industrial
Equipment Manufacturer

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Aberdeen Insights — Challenges and Strategy Based on Proximity

to Customer

Table 4 shows the top strategic actions taken by different levels

(echelons) from the end consumer. The key takeaways are:
• Statistical forecasting is looked at as not a primary concern but
more of a secondary or tertiary concern across the board
• Demand shaping is more in vogue closer to the consumer
• Inventory placement and associated supply chain flexibility
becomes more important as we move away from end consumer

Table 4: Top Strategic Actions by Different Levels from End

Consumer

Statistical Forecast Inventory Demand

Level
Forecasting Collaboration Placement Shaping
1 28% 38% 40% 18%

2 37% 30% 44% 14%

3 31% 36% 53% 11%

4 30% 43% 57% 0%

Source: Aberdeen Group, May 2011

In the next chapter, we will see what the top performers are doing to
achieve these gains.

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Chapter Two:
Benchmarking Requirements for Success
The selection of demand management technology plays a crucial role in the Fast Facts
ability of organizations to respond to demand volatility, reduce supply chain
√ Sixty-six percent (66%) of
costs and meet customer service demands. In the case study to follow, we respondents indicate
will see the example of a company that has achieved significant business having the ability to
benefits through the usage of demand management technology. collaborate with internal
stake holders
Case Study — American Italian Pasta Company Hedges Demand
and Supply Variability through Effective Sales and Statistical √ Thirty-nine percent (39%)
Forecasting of respondents indicate
having the ability to
American Italian Pasta Company (AIPC) is the largest producer of dry collaborate with external
pasta in North America. AIPC produces pasta in four key areas - private stake holders
label, regional brands, foodservice and ingredient. AIPC has over 600 √ Twenty-six percent (26%)
employees with three plants in the US and one in Italy, producing over of respondents indicate
3,500 SKUs and nearly a billion pounds of pasta annually. AIPC’s business having the ability to
model is unique in that the private label business drives the need for a include causal events in
high level of accurate demand planning and supply matching in a highly demand forecasts
competitive environment. Pasta is a highly promoted category within the
grocery retail segment, resulting in significant volume swings. AIPC’s
customers include: Target, Walmart, Sams Club, HEB, and Kroger, each
expecting high service levels, low prices and the highest quality.
Key challenges facing AIPC include managing cost, operating using a
durum wheat – a commodity with significant pricing swings the last
several years, controlling inventory and capacity utilization in a private
label industry that is largely promotionally driven. Each of these areas
require laser sharp accuracy in demand and inventory management as
well as supply chain execution to control cost, minimize the impact of
commodity pricing and maintain the highest quality.
So what does AIPC do for demand forecasting? The key process change
that AIPC has made to improve demand forecasting accuracy is to involve
the sales person intensively as part of the S&OP process. In the past,
AIPC adopted the approach of a large scale sales meeting which resulted
in not so compelling participation. But when the approach was modified
into a monthly one on one sales meeting with each sales account
manager, there was greater participation from the sales team. The
participants in this meeting are the Director of the S&OP process, the
demand planner, the item coordinator and sales person.
continued

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Case Study — American Italian Pasta Company Hedges Demand

and Supply Variability through Effective Sales and Statistical
Forecasting

The aspects which were discussed in this sales meeting are – sales
forecasts for each of the three to four accounts that each rep owns,
customer level forecast for the critical customers, transition items, new
items and slow moving or obsolete inventory. By having this detailed
meeting, the sales team is able to focus not only on the new sales but also
on ensuring that existing inventory is consumed and obsolescence is
reduced. The meeting typically lasts for only 15 minutes, thus minimizing
the impact on the sales teams schedule while maximizing the information
exchange between sales and operations.
AIPC produces a wide range of products, ranging from very low volume
items to healthy blends such as whole grain products and also highly
seasonal items. Because of this diverse portfolio, and the nature of
producing private label the product production cycle times can ranges
from three days to more than six weeks. Due to this variation in
production lead time as well as demand variation due to promotion
volume, a blended inventory strategy has been adopted. This includes
make to order and make to stock using supermarkets.
In order to help manage demand variability and match supply with
demand, a mix of technology solutions have been adopted. A demand
planning module from a best of breed solution provider has been utilized
to perform statistical forecasting and forecast collaboration. A supply
chain planning module from the same best of breed provider has been
utilized to perform inventory planning and supply allocation.
AIPC has reaped significant benefits due to the process and technology
initiatives. Their forecast accuracy at the SKU level has risen from 65% (at
a weighted MAPE level) to 75% in the last nine months. Driven by the
higher SKU level forecast accuracy and the additional focus on transitional
items through the newly implemented S&OP sales meetings, the
percentage of obsolete inventory has reduced from 18% to less than 2%
(as related to total inventory), and inventory turns have increased from
11 to 13 turns annually. Due to this initiative, AIPC has been able to
better manage demand variability, inventory, and service levels. Last, but
not the least, AIPC has been able to arrive at a single number forecast
allowing for cross functional collaboration and communication, this has
resulted in sales, marketing, finance, and manufacturing all marching to the
same beat.
According to the Director of S&OP at AIPC, “Supply chain disruptions
are going to happen, however we have set up our S&OP process so that
we can manage most exceptions within the supply chain without causing
the bullwhip effect.”

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Competitive Assessment
Aberdeen Group analyzed the aggregated metrics of surveyed companies to
determine whether their performance ranked as Best-in-Class, Industry
Average, or Laggard. In addition to having common performance levels, each
class also shared characteristics in five key categories: (1) process (the
approaches they take to execute daily operations); (2) organization
(corporate focus and collaboration among stakeholders); (3) knowledge
management (contextualizing data and exposing it to key stakeholders);
(4) technology (the selection of the appropriate tools and the effective
deployment of those tools); and (5) performance management (the
ability of the organization to measure its results to improve its business).
These characteristics (identified in Table 5) serve as a guideline for best
practices, and correlate directly with Best-in-Class performance across the
key metrics.

Table 5: Competitive Framework

Best-in-Class Industry Average Laggards
Ability to convert forecasts at product category / family level into product's forecasts at the
Stock Keeping Unit (SKU) level
76% 64% 33%

Ability to collaborate with internal stakeholders

75% 71% 53%

Ability to segment demand forecasts based on key product and customer characteristics
72% 56% 33%
Process
Create single demand forecast with inputs from multiple roles within the company
70% 70% 53%

Ability to include promotions and other demand shaping activities into demand forecasts
62% 44% 27%

Ability to forecast based on attributes (e.g., color, size, volume etc.)

61% 36% 27%
Ability to measure forecast accuracy at the SKU level
69% 66% 33%
Ability to measure end-to-end order-to-delivery lead-times
Performance 59% 51% 50%
Management Ability to measure the lead-time from inquiry to order
53% 31% 25%
Ability to measure the lead-time from inquiry to quotation
43% 34% 27%

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Best-in-Class Industry Average Laggards

Ability to get timely access to outbound supply chain partners' data needed for analysis /
decision making
Data 45% 39% 31%
Management
Ability to integrate trading outbound supply chain partner data into internal processes
29% 22% 21%
S&OP system
61% 59% 31%
Promotion planning
61% 36% 29%
Technology Demand analytics and reporting / business intelligence (BI)
Enablers 61% 58% 42%
Channel order management system
41% 27% 19%
Alert management
33% 26% 15%
Source: Aberdeen Group, May 2011

Capabilities and Enablers

Based on the findings of the Competitive Framework and interviews with
end users, Aberdeen’s analysis of the Best-in-Class demonstrates that it is
important to look at the capability maturity model in a significant amount of
detail across people, process and technology.

Process
The key differentiators from a process standpoint for demand management
are:
• Best-in-Class companies are 1.6 times as likely as all other
companies (the Industry Average and Laggards combined) to have
the ability to convert forecasts at the product category/family level
into product forecasts at the SKU level
• Best-in-Class companies are 1.4 times as likely as Laggards to be
able to collaborate with internal stakeholders
• Best-in-Class companies are 2.1 times as likely as Laggards and 1.3
times as likely as Industry Average companies to be able to segment
demand forecasts based on key product and customer
characteristics
• Best-in-Class companies are 2.3 times as likely as Laggards and 1.4
times as likely as Industry Average companies to be able to include
promotions and other demand shaping activities into demand
forecasts

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Case Study — Computer Hardware Provider Adopts New

Approaches to Demand Management

A large US-based computer hardware provider manufactures and sells

computer products, components, software and information technology
services. They have one internal manufacturing facility, otherwise they’re
predominantly outsourced.
Margins began to shrink after the end of the dot-com bubble. It meant
they had to be more cost focused, necessitating business process change.
By all accounts, the company was successful, but its success carried with
it some very typical issues. Chief among them, forecasting unit accurately
had become more difficult as its supply chain became more complex. In
addition there were several complicating factors which served to severely
limit unit forecasting accuracy.
The sales team had become very revenue focused – and while revenue is
likely the top metric for any salesperson (regardless of organization), the
sales team at this company had begun to lose sight of the profit margins
on their deals. All of the cost focus turned to worldwide operations, but
the sales organization remained revenue focused. Sales had lost sight of
the impact of their deals beyond the revenue.
In addition, groups had become more isolated in terms of process and
technologies. Over recent years, the sales, marketing and operations
groups had become increasingly siloed, to the detriment of KPIs, including
delivery performance. The company tried to be at the forefront of supply
chain technology, but they had become insular through the passage of
time. In particular their collaborative demand planning had grown weak.
Sales forecasting mainly focused on revenue, with unit volumes being a
secondary consideration. When it came to demand forecasting, there was
limited effective collaboration between sales, marketing and operations,
which often resulted in regular occurrences of over forecasting to cater
for product mix. The over-forecasting put unnecessary strain on the
supply chain. Suppliers were tending to independently reduce their
forecast requirements, to limit material liability, putting supply continuity
at risk.
The company sought to address their issues by enlisting a leading business
improvement consulting specialist, to assist in an S&OP process redesign.
While this process is on-going, the company is beginning to see
improvement in their ability to forecast down to the unit level.
continued

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Case Study — Computer Hardware Provider Adopts New

Approaches to Demand Management

Though there has been definite progress in improving unit forecast

accuracy, challenges still remain. Their demand planning system is very
good, but the challenge going forward is figuring out how best to use it
within the redesigned S&OP process. Coming to a company-wide
consensus around usage will be critical, but likely will be solved in the
process of redesign.
This case reveals that now, more than ever, companies need to focus on
how to make their demand network as flexible and responsive as
possible. A key element of enabling responsiveness is to eliminate
functional siloes at both the planning and execution stages.

If we look at whether the challenge of demand management has been solved

across the broad set of industries, the answer is no. Figure 4 shows that the
sales organization, when involved in predicting customer demand and
fulfilling it, has highlighted significant challenges. They are reporting
consistently inaccurate demand forecasts (56%), poor or late visibility into
channel sell through to the end customer (47%) and also channel inventory
“Driven by poor customer
is not staged accurately enough to meet demand (33%). satisfaction over delivery
performance in 2010, senior
Figure 4: Operational Challenges Faced on Sell Side management has recently
embraced the importance of
demand management and the
Consistently inaccurate demand
56% need to shape demand to
forecasts
better align with supply chain
capabilities in order to improve
Poor or late visibility into channel sell- the company's ability to satisfy
47%
through to the end customer customers. Capital funding has
been approved for the
Channel inventory is not staged acquisition of demand
33%
accurately enough to match demand management software and the
sales and operation planning
Poor or late visibility into channel process is being taken to the
inventories, especially after fulfillment of 32% next level. A full-time demand
purchase orders planning position has been
staffed for the largest business
0% 15% 30% 45% 60% unit and new management
Percent of Respondents, n = 157 information and KPI's have
Source: Aberdeen Group, May 2011 been created which are more
uniform across all three BU’s.
Companies no longer have the luxury of being able to expend significant The focus has been sharpened
resources to have a multi-phased demand management process and on forecast accuracy and supply
chain responsiveness.”
technology roll out. They need to be laser focused on selecting the right
mix of processes and tools that are suitable to their unique environment ~ Director of
and resolve the above challenges (Figure 4). The two key determinants are: Procurement/Purchasing at
type of supply chain and the planning window. Table 6 identifies the key Mid-Size Apparel company
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Demand Management: Bridging External Market Inputs
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Page 16

techniques that are necessary for companies that are present in one of the
four quadrants.

Table 6: Prioritization of Demand Management Initiatives

Long-Term Demand
Management Horizon
Build to
Statistical Forecasting,
Stock
Promotion Planning
Build to Statistical Forecasting, Sales
Order Forecasting (collaborative
forecasting), Attach rate
forecasting
Short Term Demand
Execution Horizon
Statistical and probabilistic
forecasting, Price Optimization,
Inventory Optimization
Inventory optimization,
distributed order management
(dynamic sourcing strategies)
Source: Aberdeen Group, May 2010

Case Study —
Increasing Forecast Accuracy through Statistical Modeling

The perfect storm of rising supply chain costs, increasingly complex

supply chain, and more stringent customer demands, have placed
paramount importance on managing volatility of demand and optimizing
demand networks. A Large Industrial Equipment Manufacturer took this
message to heart and redesigned their demand management process to
great effect. “We really took a look at our organization and the way we
were handling demand volatility and we made sweeping changes. The
changes allow us to do a better job at understanding demand,” explained
the Product Manager at the Large Industrial Equipment Manufacturer.
The company took a two pronged approach to redesigning their demand
management process. First, the company designated one person to be
solely responsible for the forecast for each of the various product groups.
“We now have one person who owns the forecast in each business
division. Five divisions, five forecasts owners. Before this, we may have
had up to 30 people involved in creating and maintaining the forecast,”
explained the Product Manager. Our data for the demand management
survey supports this as a key capability. In fact, the survey reveals that
Best-in-Class companies are 68% more likely than Laggard companies to
have a clear owner of the forecast.
Next, the company looked inward with a research study of key internal
forecast contributors. This type of self analysis is important during a
process redesign as it ensures that old inefficient processes are not
carried over. The results of the research study were compelling. “We did
a study and realized our forecasts were less accurate with all of the
various inputs than a basic statistical forecast. As it turns out, we were
introducing tremendous amounts of bias into our forecasts. All the
contributors were overly optimistic when it came to their area of the
business,” said the Product Manager.
continued

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Case Study —
Increasing Forecast Accuracy through Statistical Modeling

The company chose a “back-to-basics” approach to the problem of bias

within their demand forecasts. “We start all of the forecasts with a basic
statistical model with a seasonality adjustment. This strips out the bias
entirely,” revealed the Product Manager. While a pure statistical model
would eliminate all bias within the forecast, the forecast would lack the
ability to anticipate upcoming changes and shifting market dynamics. So
the company has slowly brought in some qualitative elements to the
forecast. “We choose very specific qualitative elements to add into the
forecast like field sales assessments, and our dealer forecasts. These
elements are verified thoroughly and still remain a small part of our
forecast process,” asserts the Product Manager.
The results have been positive thus far. “We have reduced the amount of
effort involved maintaining the forecast and thus far our forecasts are
more accurate than they were prior to the changes. But the most
important improvement was the dramatic reduction in over-forecasting
which drained operating capital,” explained the Product Manager.

Organization
From an organizational perspective also, Best-in-Class companies have
gained significant advantages:
• Best-in-Class companies are two times as likely as all others to have
a clearly defined owner for the S&OP demand review process
• Best-in-Class companies are 1.4 times as likely as all others to have
demand forecasts created at the key customer level
• Best-in-Class companies are 1.5 times as likely as all others to have
single demand forecast with inputs from multiple roles within
organizations
As Aberdeen has highlighted in recent research, the role of a Chief Supply
Chain Officer is critical to organizations. This role is required to ensure that
there is clear ownership to the S&OP process. However, on the other hand
it is also critical to have organizational capability down to the staff level.
When we talk about demand forecasts created at the key customer level we
are highlighting the account manager role who works with specific accounts.
These roles are also referred to as account teams, sales reps, sales
executives, etc. in different companies. When we talk about the ability to
create a single demand forecast with inputs from multiple roles within
organizations, the demand planner role is involved. Thus organizational
capability should be looked at both the executive as well as managerial level.

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Performance Management
The following are the Best-in-Class differentiators:
• Best-in-Class companies are two times as likely as Laggards to
measure forecast accuracy at the SKU level
• Best-in-Class companies are two times as likely as all others to
measure the lead-time from inquiry to order
• Best-in-Class companies are 1.45 times as likely as Laggards to have
the ability to get timely access to outbound supply chain partners
data needed for analysis/decision making “Currently our demand
management improvement
In additional to traditional statistical forecasting capabilities, it is essential for efforts have centered on efforts
companies to invest in analytics capabilities as well. As we saw in the recent of the typical S&OP concept
Aberdeen report, Business Intelligence Command and Control Center for the which relies heavily on forecast
Chief Supply Chain Officer, May 2011, Best-in-Class companies demonstrate accuracy at the granular level.
15% to 25% more penetration in terms of process capability across the More recently we are coming
board. What this implies is that Best-in-Class companies look at the entire to the realization that our
life cycle of BI requirements from the Chief Supply Chain Officer (executive ‘cracked, crystal ball’ for
role) to the planner (task worker) who deals with completely different forecast based planning will not
granularity of processes. For example, demand management is an enterprise get fixed any time soon and a
better way needs to be found.
wide (or business unit wide) process which requires significant analytics
Since our business is heavily
capabilities especially to understand consumer demand. There is a separate promoted (ad-driven) and not
category of solutions called "demand signal repository" that performs the typical turn business we should
task of business analytics on top of consumer data. be able to be less granular and
more product-family oriented,
Technology as emphasized in Integrated
Business Planning (IBP) models
Figure 5 shows companies that are still leveraging spreadsheets to manage of planning. Our goal is to re-
their demand forecasts (68%). Fifty-six percent (56%) of companies indicate structure our product
the usage of integrated ERP modules and 21% indicate the usage of best of categorization and forecast
breed systems. As compared to other process areas, demand management based on information we know
is the highest level of technology penetration in the planning space. If we to be true as well as statistically
include execution, then warehouse management is the area of highest probable.”
technology penetration. So what are companies planning in terms of ~ Manager of Logistics at Mid-
technology enhancements? (Figure 6) size CPG Manufacturer

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Figure 5: Technology Approaches Utilized by Companies

Spreadsheets 68% “The objective is to clearly

Integrated ERP modules
Legacy systems
Best of breed on-premise systems
Software-as-a-Service (SaaS) / on-
demand solutions
0%
On an average 25% to 40% of respondents are planning to implement new
technology within the next 12 months or beyond. This includes some of the
new areas such as demand signal repository and alert management.
Figure 6: Technology Investment for Demand Management
Currently Use
Statistical demand forecasting
Demand collaboration (for capturing
sales inputs into demand forecasts)
Demand analytics and reporting /
business intelligence (BI)
S&OP system
Promotion planning
define demand planning
horizons and time-fences, and
56% develop a culture, process and
system to enable consolidation
of aggregate, cross BU demand
23%
at a global level. Key challenges
are:
21%
1. Silo based approach to
decision making
11%
2. Performance measures and
reward culture which promote
20% 40% 60% 80% locally vs. globally optimized
Percent of Respondents, n = 157 decision making
Source: Aberdeen Group, May 2011 3. Multiple business systems
and processes for collection of
demand data
4. Lack of trust in data received
resulting in several
modifications of demand data
through the planning cycle
5. Delayed transmission of data
Plan to Implement within 12 Months through the supply chain
Plan to Implement beyond 12 Months resulting in late visibility of
demand signals
62% 23% 5%
6. Forecast accuracy, including
61% 24% 6% ownership, responsibility and
accountability for demand
53% 22% 12% forecasts
~ Director of Supply Chain at
50% 23% 11% Large Industrial Products
Manufacturer
39% 17% 13%

Pricing optimization 26% 22% 11%

Alert management 23% 25% 15%

Demand signal repository 13% 25% 15%

0% 20% 40% 60% 80% 100%

Percent of Respondents, n = 157
Source: Aberdeen Group, May 2011

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Some of the Best-in-Class differentiators in the area of technology are:

• Best-in-Class and Industry Average companies are 1.5 times as likely
as Laggards to have demand collaboration solutions in use (for
capturing sales inputs into demand forecasts)
• Best-in-Class and Industry Average companies are two-times as
likely as Laggards to have S&OP solution in use
• Best-in-Class companies are two-times as likely as Industry Average
and Laggard companies to have implemented promotion planning
solutions
• Best-in-Class companies are 1.5 times as likely as Laggard companies
to have implemented demand analytics and reporting (BI) solutions
Some of the key takeaways from this data are that Best-in-Class companies
focus equally on establishing the statistical forecasting baseline as well as
extending the solution into their customer base and improving the
collaborative processes.
Aberdeen Insights — Demand Management Technology Strategy:
Will Cloud Solutions Work?

Demand management is the area which is most mature in terms of

penetration of existing technology especially if the segments of statistical
forecasting and forecast collaboration are considered. So is this an area
where companies have figured out the ideal mix of process, people and
technology to make it work? Unfortunately, no.
Here are a few comments from the users we have gotten feedback from:
"We are implementing a new ERP system that will integrate all of our data
worldwide. It will also allow much easier access to the data. Transforming
our current processes to work with the new ERP system is proving
difficult. We will have to change the way we current capture data. We are
trying to make the data in our forecasting software as accurate and
automated as possible. We are having challenges with both. We need help
from our IT department and they have other things to do, too. And the
forecasting software we use isn't perfect. We ask them to make
improvements but they take time. And they don't agree to all of the
improvements we want," said the Manager of Supply Chain at Mid-Size
paper manufacturer
continued

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Aberdeen Insights — Demand Management Technology Strategy:

Will Cloud Solutions Work?

“We have a poor MRP program. Most of our forecasts are based on sales
history and generated through spreadsheets. Forecasts and information
from marketing and product development is segregated and inconsistent,”
said the Supply Chain Manager at a Large Pharmaceutical Manufacturer.
Also when asked about the reasons why companies have not invested in
improved demand management, the top two reasons cited were: the
upfront cost of the solution is too high, and software integration is too
difficult/expensive.
Cloud solutions can help mitigate these challenges. In fact we identified in a
recent Aberdeen report (Enabling Supply Chain Visibility and Collaboration in
the Cloud; November 2010) about the rising importance of cloud solutions
across the supply chain. Demand management is an area that is ripe for
opportunities for both cloud as well as managed services (where in
addition to the hardware and software, the process is managed partially
externally).

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Chapter Three:
Required Actions
Whether a company is trying to move its performance in demand Fast Facts
management from Laggard to Industry Average, or Industry Average to √ Best-in-Class and Industry
Best-in-Class, the following actions will help spur the necessary performance Average companies are 1.5
improvements: times as likely as Laggards to
have demand collaboration
solutions in use (for
Laggard Steps to Success capturing sales inputs into
• Drive to a single operational demand forecast across the demand forecasts)
supply chain with internal collaboration. Fifty-three percent √ Best-in-Class companies are
(53%) of Laggard companies have indicated the ability to perform two-times as likely as
internal collaboration compared to 75% of Best-in-Class companies. Industry Average and
In order to resolve this issue, it is key to understand the needs of Laggard companies to have
different stakeholders within the organization like executive implemented promotion
management, manufacturing, sales and marketing - and to design the planning solutions
forecasting process based on satisfying the goals of each of the
above. The S&OP process is often the way by which companies
arrive at a single operational forecast.
• Create a baseline statistical forecast. Eighty-two percent (82%)
of Laggards use spreadsheets to manage their forecasts. This is a
low hanging fruit issue to resolve. It is important to tie the statistical
forecast accuracy to broader metrics such as profit margins and
inventory levels to ensure true ROI. Statistical forecasting allows
the organization to create a baseline which can help create visibility
to systemic problems like bias which can be masked when
judgmental forecasting is performed.

Industry Average Steps to Success

• Create supply chain flexibility to respond to demand. Best-
in-Class companies are two times as likely as Industry Average
companies to measure the lead-time from inquiry to order. In
addition Best-in-Class companies are 1.5 times as likely as Industry
Average companies to be able to respond quickly to changes in
demand through the manufacturing process. This data indicates that
there is a need for flexibility in both the planning as well as physical
supply chain process areas. This level of supply chain flexibility is
critical given the high levels of demand volatility that we see in
today's business environment.
• Create the ability to segment demand forecasts based on
key product and customer characteristics. Fifty-six percent
(56%) of Industry Average companies have the ability to segment
demand forecasts based on key product and customer
characteristics as compared to 75% of Best-in-Class companies. By
being able to perform pareto analysis on the customer base using

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Demand Management: Bridging External Market Inputs
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profit as the metric, the key customers can be identified. Their

customer service level requirements and the input of the account
management teams of these key customers can then drive the
customer level forecasts.

Best-in-Class Steps to Success

• Institute a sell side collaboration platform and integrate
with the demand management process. Forty-two percent
(42%) of Best-in-Class companies have the ability to accurately
(within internally accepted potential error margin) forecast
customer demand across multiple channels and tiers. In addition
only 29% of Best-in-Class companies have the ability to integrate
partner data into the sales collaboration process in an automated
process. This is an area of gap in the process especially when
demand changes within the execution window when manufacturing
lead-times are higher than the demand lead-time. A way to resolve
this is to enable supply chain flexibility by implementing a sell side
collaboration platform that can provide real-time or near-real time
visibility to changes in demand across a multi-tier demand-supply
network.
• Close the loop with supply and inventory. Demand
management is only the means to an end - namely balancing supply
and demand to maximize profitability. Instead of adopting a maniacal
approach to becoming 'demand driven,' diversify the approach by
focusing equally on supply related challenges, inventory management
related approaches, and finally enabling supply chain flexibility.
Aberdeen Insights — Forecast Accuracy versus Supply Chain
Flexibility

The key outcome of the research study is this: there are, in fact,
diminishing returns on forecasting and the percentage of accuracy. Supply
chain flexibility and customer driven demand management are critical to
Best-in-Class success in metrics. On the other hand, it would be simplistic
to throw away statistical forecasting and say that it is not needed. As we
saw in the case study of a large industrial equipment manufacturer, they
had a huge bloated organization that was highly inefficient and resulted in
poor accuracy of forecasts. This organization was rationalized and a
statistical baseline forecast was instituted which resulted in improved
accuracy. This basic argument - the need to have a fact based forecast - is
applicable across multiple industries. Figure 7 shows this concept in a
diagram.
continued

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Aberdeen Insights — Forecast Accuracy versus Supply Chain

Flexibility

Figure 7: Approaches by Customer Centricity and Supply Chain

Model

Build to
Order

Industrial
Equipment Mfg

Computer
Equipment Mfg

Statistical
CPG Manufacturer
Forecasting

Build to
Promotion DSR
Stock
Planning

Customer Centricity

Source: Aberdeen Group, May 2011

The three companies highlighted here - industrial equipment

manufacturer, computer equipment manufacturer as well as CPG
manufacturer all have varying degrees of need for statistical forecasting,
sales collaboration, promotion plans, etc. But the safe place for all of
these companies is statistical forecasting because it helps create a baseline
and creates a framework for fact based decision making devoid of
opinions that may introduce bias.

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Appendix A:
Research Methodology
Between April and May 2011, Aberdeen examined the use, the experiences, Study Focus
and the intentions of 157 enterprises in the area of demand management in
a diverse set of manufacturing and distribution centric enterprises. Responding executives
Aberdeen supplemented this online survey effort with interviews with select completed an online survey
that included questions
survey respondents, gathering additional information on demand designed to determine the
management strategies, experiences, and results. following:
Responding enterprises included the following:
• Job title: The research sample included respondents with the √ What is the relative focus on
demand management versus
following job titles: CEO / President /General Manager (11); EVP /
other areas with the current
SVP / VP (8%); Director (19%); Manager (44%); Consultant (9%); macro-economic conditions?
Staff (9%).
• Department / function: The research sample included respondents √ What are the key pressures
from the following departments or functions: logistics/supply chain and strategic actions taken
by companies with respect
(54%); procurement/purchasing (12%); operations (13%); sales and
to demand management?
marketing staff (10%); and others (11%).
• Industry: The research sample included respondents from the four √ How frequently is demand
major industry segments - Process, Consumer, Discrete and High- forecasting processes
tech/electronics. Key demographics are: performed and, how many
iterations are typically
Discrete (21%): Aerospace/Defense (6%), Automotive/Other performed at enterprises?
Vehicles (2%), Industrial Product Manufacturing/Industrial
Equipment Manufacturing (13%) √ How is exception handling
Consumer (51%): Apparel (3%), Consumer Durable Goods/ performed by companies to
Consumer Electronics (10%), Consumer Packaged Goods bridge between forecast and
actual figures?
(14%), Food/Beverage (15%), Retail (3%),
Wholesale/Distribution (6%) √ How fast are companies able
Process (13%): Chemicals (4%), Metals and metal products/ to respond to changes in
Mining/oil/gas (4%), Paper/lumber/timber (1%), Pharmaceutical demand?
manufacturing (4%) √ Are companies doing
High-tech/electronics (19%): Health/medical/dental devices demand shaping and
or services (6%); high-technology/Computer equipment and differentiated pricing as part
peripherals (6%), telecommunication equipment (7%) of their demand management
• Geography: The majority of respondents (60%) were from North processes and if so what are
America. Remaining respondents were from the Asia-Pacific region the best in class companies
doing?
(15%) and Europe (19%). Rest of the world was 6%.
• Company size: Forty-four percent (44%) of respondents were from √ How are demand-sensing
large enterprises (annual revenues above US $1 billion); 36% were technologies being used by
from midsize enterprises (annual revenues between $50 million and companies?
$1 billion); and 20% of respondents were from small businesses
(annual revenues of $50 million or less).
• Headcount: Fifty-five percent (55%) of respondents were from large
enterprises (headcount greater than 1,000 employees); 34% were
from midsize enterprises (headcount between 100 and 999

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employees); and 11% of respondents were from small businesses

(headcount between 1 and 99 employees).

Table 7: The PACE Framework Key

Overview
Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities,
and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as
follows:
Pressures — external forces that impact an organization’s market position, competitiveness, or business
operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive)
Actions — the strategic approaches that an organization takes in response to industry pressures (e.g., align the
corporate business model to leverage industry opportunities, such as product / service strategy, target markets,
financial strategy, go-to-market, and sales strategy)
Capabilities — the business process competencies required to execute corporate strategy (e.g., skilled people,
brand, market positioning, viable products / services, ecosystem partners, financing)
Enablers — the key functionality of technology solutions required to support the organization’s enabling business
practices (e.g., development platform, applications, network connectivity, user interface, training and support,
partner interfaces, data cleansing, and management)
Source: Aberdeen Group, May 2011
Table 8: The Competitive Framework Key
Overview

The Aberdeen Competitive Framework defines enterprises In the following categories:

as falling into one of the following three levels of practices
and performance:
Best-in-Class (20%) — Practices that are the best
currently being employed and are significantly superior to
the Industry Average, and result in the top industry
performance.
Industry Average (50%) — Practices that represent the
average or norm, and result in average industry
performance.
Laggards (30%) — Practices that are significantly behind
the average of the industry, and result in below average
performance.
Process — What is the scope of process
standardization? What is the efficiency and
effectiveness of this process?
Organization — How is your company currently
organized to manage and optimize this particular
process?
Knowledge — What visibility do you have into key
data and intelligence required to manage this process?
Technology — What level of automation have you
used to support this process? How is this automation
integrated and aligned?
Performance — What do you measure? How
frequently? What’s your actual performance?
Source: Aberdeen Group, May 2011

Table 9: Relationship Between PACE and the Competitive Framework

PACE and the Competitive Framework – How They Interact
Aberdeen research indicates that companies that identify the most influential pressures and take the most
transformational and effective actions are most likely to achieve superior performance. The level of competitive
performance that a company achieves is strongly determined by the PACE choices that they make and how well they
execute those decisions.
Source: Aberdeen Group, May 2011

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Demand Management: Bridging External Market Inputs
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Appendix B:
Related Aberdeen Research
Related Aberdeen research that forms a companion or reference to this
report includes:
• Integrated Demand-Supply Networks: Five Steps to Gaining Visibility and
Control; March 2009
• Multi-enterprise Manufacturing: The Role of Visibility and Collaboration in
Driving Responsiveness; July 2009
• Cloud Logistics: Solution for Enabling Multi-Enterprise, Cross-Channel
Logistics Networks; May 2010
• Supply Chain Intelligence: Adopt Role-Based Operational Business
Intelligence and Improve Visibility; Feb 2010
• Sales and Operations Planning: Strategies for Managing Complexity within
Global Supply Chains; July 2010
• Strategic Supply Chain Planning: Priorities of the Chief Supply Chain
Officer; September 2010
• Enabling Supply Chain Visibility and Collaboration in the Cloud;
November 2010
• Business Intelligence Command and Control Center for the Chief Supply
Chain Officer; May 2011
Information on these and any other Aberdeen publications can be found at
www.aberdeen.com.

Author: Nari Viswanathan, Vice President / Principal Analyst, Supply Chain

Management (nari.viswanathan@aberdeen.com)
For more than two decades, Aberdeen's research has been helping corporations worldwide become Best-in-Class.
Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide
organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That's why
our research is relied on by more than 2.5 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of
the Technology 500.

As a Harte-Hanks Company, Aberdeen’s research provides insight and analysis to the Harte-Hanks community of
local, regional, national and international marketing executives. Combined, we help our customers leverage the power
of insight to deliver innovative multichannel marketing programs that drive business-changing results. For additional
information, visit Aberdeen http://www.aberdeen.com or call (617) 854-5200, or to learn more about Harte-Hanks, call
(800) 456-9748 or go to http://www.harte-hanks.com.

This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies
provide for objective fact-based research and represent the best analysis available at the time of publication. Unless
otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be
reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by
Aberdeen Group, Inc. (2011a)

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Featured Underwriters
This research report was made possible, in part, with the financial support
of our underwriters. These individuals and organizations share Aberdeen’s
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no cost. Underwriters have no editorial or research rights, and the facts and
analysis of this report remain an exclusive production and product of
Aberdeen Group. Solution providers recognized as underwriters were
solicited after the fact and had no substantive influence on the direction of
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Demand Works provides demand and supply planning solutions that deliver
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solutions include comprehensive capabilities in the areas of forecasting,
demand management, production, inventory and procurement supply
planning. Demand Works serves hundreds of corporations throughout the
United States, Canada, Latin America, Europe and other parts of the world.
Customers include manufacturers and distributors of well-known household
brands as well as other industrial or manufactured goods. The company's
principals are respected leaders in the sales and operations planning area
and the solutions reflect their innovative thinking.
For additional information on Demand Works:
Demand Works Co.
PO Box 627
West Chester, PA 19381
Telephone: 484.653.5345
www.demandworks.com
info@demandworks.com

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