Demand Planning as a best practice developed from the Consumer packaged goods industry in the eighties. A lot of the impetus for the development of this practice came from the major retailers such as Wal-mart and Target. A lot was riding at stake for the retailers when they ran store promotions especially when shelf was out of stock. They needed a unifying and holistic model to communicate the demand from the consumer all the way to the manufacturer's supply chain so the product will be available at the right place, right time.
The CPG value chain includes the consumer, the consumer pantry, the retail channel whether Big Box or mom-and-pop retailers, the distributors and the CPG manufucaturer to their own raw material suppliers. The final consumer demand at the store level drives the entire CPG value chain. The consumers buying decisions are influeced by macro marketing promotions such as TV and newspaper ads besides the store level tactical promotions. Store level tactical promotions involve deep collabortion between the retailer and the CPG manufacturer's selling group. Typically most manufacturers have on-the-ground sales office that is closer to the retailer. The Unilevers of the world have a customer business office at Bentonville to service the Walmart needs. Similar outfits can be found at other retailer headquarters as well.
Store level tactical promotions for CPG include:
All of these tactical promotions involve demand lumpiness. Although demand is volatile, it is still predictable since it is premeditated and well thought out by the manufacturer's sales group. The macro marketing promotions may not result directly in lumpy demand, as these try to stimulate the demand over a period of time, but typically some of hte displays are planned to co-incide with the ad drop at the macro level.
In addition retailers may also decide to accumulate inventory in anticipation of the pick up from the macro promotions or just a signal based on general market condition. They may decide to ramp up inventory and hence place bulky orders to the manufacturer. This introduces unexpected volatility if such policy change is not communicated to the manufacturer.
Both inventory changes as well as organic consumer demand based on the POS data drive the customer orders placed on your distribution center. These in turn drive your CPG supply chain to drive procurement demand and production planning.
The customer base in CPG is classified into tthe broad major channels such as Mass, Clubs, Drug and Food and others. Typically these four class of businesses (COB) geenrate almost a majority of the customer business for a typical CPG manufacturer.
Mass channel is dominant with Wal-mart and Target increasing their share of the business. The Club channel is also a big player in this space. Club customers like SAM's and Costco drive demand for club size products which typically happen to be their own SKUs. This manifests itself in demand volatility and large and bulky orders. This is more the reason why we should have more collaboration with the Club customers so all volatility is planned for.
Drug and Food channels are also dominant in certain CPG sectors. For specific products like Over the counter pharmaceuticals, drug customers like Walgreen's and CVS can generage huge volume of business.
Customer based planning is increasingly important in CPG. This considers both POS demand as well as a variety of collaboration initiatives between the channel partners. A holistic Account based forecasting process will drive better results and forecast accuracy when it comes to the CPG supply chain.
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