Demand Planning as a best practice developed in the Consumer packaged goods industry in the eighties. A lot of the impetus for the development of this practice came from major retailers such as Walmart and Target. A lot was riding at stake for the retailers when they ran store promotions especially when the 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, at the right time.
The CPG value chain includes consumers, their pantries, retail channels (Big Box or mom-and-pop retailers), distributors, and CPG manufacturers with their suppliers. Consumer demand at the store level drives the entire chain. Buying decisions are influenced by macro marketing promotions like TV and newspaper ads, along with store-level tactical promotions. Retailer and manufacturer collaboration is crucial, often facilitated by on-the-ground sales offices closer to retailers, like Unilever’s customer business office in Bentonville for Walmart’s needs and similar setups at other retailer headquarters.
Store-level tactical promotions for CPG include:
- Displays – Floorstands, endcaps, etc.
- Store Tabs – Store flyers that feature the retailer’s product with or without a coupon
- on-the-shelf coupon
- Product package promotions such as BOGOs
- Store demo samples
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 the displays are planned to coincide 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 conditions. 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 at 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 the broad major channels such as Mass, Clubs, Drug and Food, and others. Typically these four classes of businesses (COB) generate almost a majority of the customer business for a typical CPG manufacturer.
The mass channel is dominant with Walmart and Target increasing their share of the business. The Club channel is also a big player in this space. Club customers like SAM 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 Walgreens and CVS can generate a 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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