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By Jo e S ko ru pa

Demand Forecast Modeling

Advanced demand forecasting tools move to the top of the retailers priority list
No one is stopping retailers from doing demand forecast modeling with spreadsheets or basic merchandising tools that arent designed to easily plug in data about marketplace dynamics, key causal factors, and external streams of intelligence. Nor for that matter is anyone stopping retailers from doing it by the seats of their pants, if thats their preference. But since every retailers budget and nancial plan is based on an estimate of future sales, it seems logical that using advanced demand forecasting and modeling tools is an essential ingredient in predicting and growing future prots. However, logic sometimes diverges from reality, and in point of fact there are a large number of retailers that have not yet invested in these advanced tools. As a result they are bleeding away sales and margin that is desperately needed in a slow-growth economy. One nal point: while improved accuracy is a big reason retailers use these tools, benets are not limited to the nancial department. Other benets include right-sized inventory to avoid over-stocking and out-of-stocks, optimized marketing spend to produce lift without over or under-spending, and lower inventory levels with faster turns. To benchmark how retailers are currently using these tools and nd out their future investment plans, we polled retailers at the end of March. What we found is that while many retailers may be behind the curve today, they are investing heavily in this technology and plan to catch up within the next eight months. Here are some highlights of the report: Only about a third (34.2%) of retailers today have some level of advancement in their forecasting and modeling tools. The rest have capabilities that are either basic or mostly basic. But not for long. Planned upgrades are underway to alter this status quo. Half say they are in the process of upFIGURE 1 FIGURE 2

FIGURE 5

What is your companys Maturity level for forecast modeling technology and capabilities?
28.9% 36.8%

What is your companys upgrade plan for forecast modeling technology?

23.7% 18.4%

Mostly basic with some advanced upgrades

Basic with critical limitations

Will start upgrade within 2 years Will start upgrade with in 2 years

No plan, not a priority

Mostly advanced but lacking some capabilities

26.3%
Advanced technology in place

26.3% 7.9%

26.3%

Upgrading now but not finished

5.3%

No plan, technology is up to date

FIGURE 3

grading now (26.3%) or plan to start upgrading by the end of the year (23.7%). Another 26.3% say they will begin upgrading by 2011. This is an unusually strong level of investment activity and indicates how high these tools have moved up on the retail priority list. Top hurdles retailers want to overcome are centered on technology and infrastructure limitations. Leading the list is lack of automation at 47.1%. Tied for second at 44.1% are three roadblocks: data reconciliation, difcult to build in more variables, and difcult to integrate with existing tools. Top three business functions are demand planning (66.7%), merchandising planning (63.9%), and pre-season planning (58.3%). Top three attributes or causal factors important to users are seasonality (71.4%), consumer segmentation (57.1%), and holidays (54.3%). Retailers strongly agree there are broad benets from using these tools including increased sales (85.7%), improving customer satisfaction (82.9%) and reducing excess inventory (80%). To get a complete view of charts and in-depth analysis about this study go to www.risnews.com to download a free copy in the Research section.

What are the most important benets of accurate forecast modeling capabilities?

FIGURE 6

How many campaigns does your company plan each year using forecast modeling tools?

What limitations does your organization have with your forecast modeling technologies and capabilities, if any?
Lack of automation Data reconciliation Difficult to build in more variables Difficult to integrate with existing tools Cant adequately forecast for multiple products Difficult to modify templates, scenarios Lack of global formats

47.1% 44.1% 44.1% 44.1% 38.2% 35.3% 29.4%

To D o w n l o a d F u l l R e p o r t

V i s i t w w w. r i s n e w s . c o m

Forecasting is an Enterprise Opportunity

Backdrop Consumers have become more discerning and value-conscious in the economic conditions of 2008 and 2009. Value is more than just cost. It has become a unique blend of merchandise, service and price. Consumers are also more sophisticated technology users they know merchandise, your competition and prices. Technology is changing rapidly, with processing power continuing to grow and becoming more economical through cloud and grid computing. The opportunity for retailers to know their customers personally and create unique value is becoming possible with this horsepower and exible investment strategies. Learnings 2009 saw increased investment in forecasting and analytic solutions across retail and CPG. Although many retailers already use some form of forecasting softwareeither as part of an ERP solution, point solution or home grown spreadsheetsmost solutions fail to offer enough sophistication to accurately predict consumer trends. Unraveling the effects of promotions, marketing, pricing, and local demand, among other variables, on consumer behavior can be daunting. SAS recommends building an enterprise-wide analytics framework to provide a common view of the customer and the forecast in addition to automating the way accurate information is shared. Retailer Case See how Brooks Brothers and other retailers team with SAS to drive revenue, results and customer satisfaction: http://www.sas.com/ success/brooksbros.html
SAS 100 SAS Campus Dr. Cary, NC 27513 Ready to learn more? Call us at 1-800-727-0025.

FIGURE 4

What major IT applications or systems is forecast modeling technology deeply integrated within your organization?
Merchandise planning Financial planning Supply chain Marketing/promotions Labor

66.7% 33.3% 30% 26.7% 16.7%

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MAY 2010

RIS NEWS.COM

RIS NEWS.COM

MAY 2010

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The Demand Forecast Modeling Imperative

Advanced demand forecasting and modeling tools that deliver enterprise accuracy have shot up to the top of the retailer priority list
By Joe Skorupa No one is stopping retailers from doing demand forecast modeling with basic spreadsheets. Nor is anyone preventing retailers from using merchandising tools that are incapable of easily plugging in data about marketplace dynamics, key causal factors, and external streams of intelligence. Nor, for that matter, is anyone stopping retailers from doing forecast modeling by the seats of their pants, if thats their preference. Bit since every retailers budget and financial plan is based on an estimate of future sales it seems logical that using advanced demand forecasting and modeling tools is an essential ingredient in predicting and growing future profits. However, logic frequently has to face cold, harsh reality. In point of fact there are a large number of retailers that have not yet invested in these powerful tools. As a result they are bleeding away sales and margin that could desperately be put to use in a slow-growth economy. One final point: while improved accuracy is a big reason retailers use these tools benefits do not accrue just to the financial department. Other benefits include right-sized inventory to avoid over stocking and out of stocks, optimized marketing spend to produce lift without over spending or under spending, and lower inventory levels with faster turns. To benchmark how retailers are currently using these tools and find out their future investment plans, we polled retailers at the end of March. What we found is that while many retailers are behind the curve today, they are investing heavily in this technology now and plan to catch up within the next eight months. This is an incredibly short time span for deployment of any technology and indicates demand forecast planning has leaped to the retailer priority list. Present IT Maturity Level for Forecast Modeling Only about a third (34.2%) of retailers today has some level of advancement in their forecasting and modeling tools 7.9% with Advanced Technology in Place combined with 26.3% with Mostly Advanced Technology But Lacking Some Capabilities. The rest have capabilities that are either Mostly Basic Technology with Some Advanced Upgrades (28.9%) or Basic Technology with Critical Limitations (36.8%).

KC This means that two thirds of retailers are presently using either traditional situation?
methods or a hybrid model of traditional combined with some advanced software to run such critical operations as setting budgets, purchasing, creating merchandising plans, targeting sales and delivering margins. These companies are at a disadvantage to more advanced competitors, and a cross-tab analysis of sales leaders and laggards bears this out 40% of respondents that had sales decreases year over year have Basic Technology with Critical Limitations. This brings up the question: How many respondents with sharp sales increases of more than 3%) also had Basic Technology with Critical Limitations? Just 6.7%. So if you want to position your company to fall into the decreasing sales category the way to go it to make sure you have Basic Technology with Critical Limitations for forecast modeling. Successful retailers will go the opposite route.

Tell Me Something I Dont Know Our second datapoint shows that retailers are well aware of the limitations of their forecast modeling capabilities. Half say they are in the process of upgrading now or plan to start upgrading by the end of the year a combination of 26.3% now plus 23.7% by end of the year. Another 26.3% say they will begin upgrading by 2011.

This is an unusually high level of investment activity and indicates how sharply these tools have moved up on the retail priority list. By way of comparison by analyzing other studies about upgrade intentions, a response in the single digits is considered either a low level of interest or an emerging technology, one that has not yet been established as an essential tool for retailers. A response in the teens is considered either a strong level of interest in an emerging technology or a modest level of interest for an established tool. A response in the twenties is a strong level of investment interest for any technology category.

Whats interesting here is that we see a high level of interest in three categories upgrading now, upgrading by end of year, and plan to upgrade in 2011. To score a trifecta like this is a rare feat and bodes well for retailers that are currently bleeding away sales and margin. Necessity to Overcome Hurdles In an attempt to isolate the hurdles retailers are facing with current forecast modeling technologies we created a long list of limitations for respondents to choose from. And choose they did. A few retailers confirmed they have up-to-date technology in place by selecting None, but most felt obliged to check multiple obstacles. Leading the list is Lack of Automation at 47.1%, which means these retailers are using traditional methods that dont seamlessly communicate or collaborate with other systems, data bases or departments. Tied for second at 44.1% are three big roadblocks: Data Reconciliation, Difficult to Build in More Variables, and Difficult to Integrate with Existing Tools. As you look at the roadblocks cited above and go down the rest of the list you can see these are problems with answers, they are things that modern software is equipped to handle.
Data Engine related?

In other words, the solutions are not cultural or structural, requiring corporate reengineering of people and processes. The solutions are available from either software providers or internal IT developers and retailers recognize value in making the investment to fill in the gaps, which is why we see such a high rate of upgrade plans among respondents. People and Processes When we asked respondents to name business functions that use forecast modeling the top three out of four were high-level and strategic: Demand Planning (66.7%), Merchandising Planning (63.9%), and Financial Planning (44.4%). But forecast modeling tools also deliver specific benefits at the execution level that can be tracked to help make the case for ROI. The third ranked business function on the list is Pre-Season Planning (58.3%) and the fifth is In-Season Planning (41.7%). Improvements in these areas will help retailers avoid over stocking and out of stocks, and lower inventory levels by delivering faster turns.

A couple of interesting differences between successful retailers and laggards is found in cross-tab analysis. Forecast modeling is used for Pre-Season Planning by 62.5% of sales leaders and only 40% of sales losers. It is used for Supply Chain Planning by 50% of leaders and only 26.7% of laggards. The biggest delta of all is found in Labor Planning, where it is used by 62.5% of winners and only 13.3% of losers. Each of these divergences suggests that successful retailers are using forecast modeling technology to create an advantage over their less capable competitors. Inter-Operability It is clear that forecast modeling is considered a vital technology to improve accuracy in Merchandising Planning. Two thirds (66.7%) of respondents selected it as the application or system most deeply integrated with forecast modeling, which is double the second place option. As forecast modeling matures in retailing and rolls out through the mainstream other systems will also become deeply integrated, especially Financial Planning (33.3%) and Supply Chain Planning (30%).

do you think is the same case with KC? 3PL? Manufacturing?

Interestingly, Labor Planning again shows up as a differentiator in cross-tab analysis, where successful retailers are nearly four times as likely to integrate Labor Planning with forecast planning. Since the cost of labor is a large, controllable expense and scheduling staff is directly linked to sales, it is clear that successful retailers are achieving higher levels of productivity and labor savings by integrating forecast modeling to labor management systems.

Top forecast Modeling Attributes Drilling down more deeply into the top attributes that are important to users of forecasting tools we find three factors lead the pack by a wide margin over others. They are Seasonality (71.4%), Consumer Segmentation (57.1%), and Holidays (54.3%). With store sets running to more than 10 per year its not surprising retailers want automated functions for Seasonality and Holidays on their wish list. The fact that Customer Segmentation is so high on the list reveals a desire by retailers to move to a new level of sophistication, one that replaces broad-based averages with analysis that includes the size (total shoppers) in each segment and estimates total sales based on conversion rates.

Cross-tab analysis of study results uncovers one interesting insight worth noting: Successful retailers are three times as likely to use Weather as an important attribute in forecast modeling. Just 14% of laggards use Weather to help improve forecasting accuracy while 50% of winners add it to their forecast accuracy tool set. No algorithm or statistical model can predict weather a year in advance, but some experts and services have gotten good at determining the severity of a cold winter, for example, or wet spring with horizon lines 90 to 120 days out, and smart retailers are seizing on this information as a competitive advantage.

Benefits Are Key to ROI When retailers build business cases for upgrading their forecast modeling tools what benefits do they focus on? The top three are broad-based benefits: Increasing Sales (85.7%), Improving Customer Satisfaction (82.3%) and Reducing Excess Inventory (80%). Who can argue with these choices like these? All are important to successful retailers and laggards alike. However when we look at cross-tab analysis an interesting picture emerges. Successful retailers are much more targeted and sophisticated in how they define the mission for using accurate forecasts. For example, while 100% of laggards chose Increase Sales as a top benefit only 66.7% of winners chose it. Why? Because increasing sales isnt targeted enough. It should be the mission of every technology or business process to increase sales, or why else do it?

Already Similarly 80% of laggards chose Reduce Out of Stocks, while only 50% of improving successful retailers chose it. The reason is twofold: One is that successful IQR ! retailers have already executed on a plan to reduce out of stocks and have minimized it to an acceptable level. Also, there is only so much improvement one can make. At a certain point the amount of money and effort thrown at the problem is not worth the investment.

And the second reason is that solving out of stocks involves more than accurate forecasts. It is a complex problem that involves multiple departments and operational processes beyond the scope of forecasting and modeling. Instead of focusing on out of stocks, successful retailers focus on Reducing Excess Inventory (83.3%), because this is an area where forecasting tools can have a direct impact on the bottom line. Only 66.7% of laggards chose Reducing Excess Inventory. This is a large number but sharply lower than successful retailers, which indicate there is clear divergence between the two groups. Number of Campaigns Per Year For how many campaigns per year do retailers use forecast modeling tools? A better question might have been how is too many?

Nearly half of respondents (47.1%).report they run more than 10 campaigns per year, so the importance of having advanced forecast modeling tools to improve a core function is clear. Something else thats clear the next time we ask the question we will have to break out More than 10 into smaller groups of 10-15 and More than 15. More is the operable word --- retailers continue to add more campaigns to their promotional plans each year. Respondent Profile Here is a breakdown of the 39 qualified retail respondents.

What is KC thinking about? Tools? Needs of justify the purchase?

Current Situation

Conclusions Key takeaways from the forecast modeling study include: Two thirds of retailers are presently using either traditional methods or a hybrid model of traditional combined with some advanced software to run such critical operations as setting budgets, purchasing, creating merchandising plans, targeting sales and delivering margins. These companies are at a disadvantage and cross-tab analysis of sales leaders and laggards bears this out 40% of respondents with sales decreases have Basic Technology with Critical Limitations. Retailers are well aware of the limitations in their forecast modeling capabilities. Half say they are in the process of upgrading now or plan to start upgrading by the end of the year a combination of 26.3% now plus 23.7% by end of the year. Another 26.3% say they will begin upgrading by 2011. This is a remarkably high level of upgrading interest and show s up high up on the priority list forecast modeling technology has become. Leading the list of obstacles in current forecast modeling capabilities is Lack of Automation at 47.1%, which means retailers are using traditional methods that dont seamlessly communicate or collaborate with other systems, data bases or departments. Some noteworthy differences between successful retailers and laggards: 62.5% of leaders use forecast modeling for Pre-Season Planning compared to only 40% of laggards, 50% leaders use it for Supply Chain Planning compared to only 26.7% of laggards, and 62.5% of leaders use it for Labor Planning compared to only 13.3% of laggards. Two thirds (66.7%) of respondents selected Merchandise Planning as the application or system most deeply integrated with forecast modeling, which is double the second place option. Successful retailers are three times as likely to use Weather as an important attribute in forecast modeling as laggards. Just 14% of laggards use Weather to help improve forecasting accuracy while 50% of winners add it to their forecast accuracy tool set. Instead of focusing on Out of Stocks, successful retailers focus on Reducing Excess Inventory (83.3%), because this is an area where forecasting tools can have a direct impact on the bottom line. Only 66.7% of laggards chose Reducing Excess Inventory. This is a large number but sharply lower than successful retailers, which indicates there is clear divergence between the two groups. Nearly half of respondents (47.1%).report they run more than 10 campaigns per year, so the importance of having advanced forecast modeling tools to improve accuracy of a core function is clear.