Everyone loves a good deal and not just when they are feeling the pinch. The impact of price promotions on sales has become ever more important to the extent that they often play a dominant role in profit generation and really drive consumer behavior -which is exactly what they are designed to do, of course. However, the way promotions pump up sales volumes and have an impact on the sales of other lines puts great stress on the supply chain, especially on the forecasting and replenishment of fresh goods.
In this mini whitepaper we will review how to incorporate promotion forecasting and replenishment into your supply chain planning processes. The basic approach, with which we have achieved good results, is where our clients follow these steps:
1. Manage campaign information and forecast variables in the forecasting system
2. Include logistic information such as required presentation levels as well as preferred delivery dates for initial quantities including stock for presentation purposes
3. Let the system calculate the promotion forecast for consumer sales as well as the order forecast
4. Review the forecasts and compare with previous campaigns - and modify them, if needed
5. Collaborate with suppliers to ensure capacity and availability for fulfillment
6. Execute to plan and demand
7. Review success
Maintaining campaign information
Promotion forecasts are calculated based on the impact on sales of previous promotions. The basic calculation models we have found most useful are ‘promotion type’ based forecasting and ‘promotion variable’ based forecasting. Promotion-type forecasting separates out the promotion-related increase in demand from the estimated baseline sales and evaluates the impact of future promotions based on previous promotions of the same type. Promotion–variable based forecasting is arrived at by estimating the impact on sales of different variables within the promotion plan – such as the percentage discount, form that the promotion presentation takes, or shelf location. It is important to notice that to calculate the forecasts you need good historical data that includes all the variables necessary for the forecasting model.
Figure 1. Information on previous campaigns and drill-down to one particular campaign
Include pre-order information
It’s one of the hard facts of retail that goods generally have to be in store and on display to consumers in order for them to sell. It often takes some time to set up a promotion in a store, so the stock needed to build the promotion display needs to be delivered before the promotions starts. Our clients usually decide how many days before the presentation begins (1-3 normally) they want the goods to arrive, and set a presentation level (a % of forecast) with which they will to do the initial fill.
Let the system perform
When you have the promotion variables and the delivery plan in place, it is time for the system to do its work. For our customers we calculate an SKU-Store –level sales forecast for the goods on promotion, as well as a delivery plan at the same level. This can be then reviewed by the users, and the review is usually done at, for example, chain or store cluster level. Example of reviewing a chain level forecast is provided in the figure below.
Figure 2. Reviewing forecast for an upcoming campaign (shaded in green).
Review and adjust if needed
Forecasts are usually reviewed for two reasons; checking accuracy and ensuring capacity. The accuracy of the forecast calculations is checked by comparing the forecast at chain or store cluster level to previous promotions and commercial targets. The review is done at a higher level, usually chain or store cluster level. In the event that they need to be adjusted they are modified at this point at the higher levels, from which the modifications are cascaded down.
In a standard supply chain collaboration situation the order forecast is usually used to ensure the availability of supply chain capacity and products for the promotion. Sometimes the collaboration is extended to the promotion data itself – the sales impact of different promotion variables in different types of stores is reviewed in collaboration with business partners to together develop marketing that’s as effective as possible.
Promotion replenishment execution is based on forecast and actual demand as with normal replenishment. In case the campaign period is extended, it is important to update the campaign forecasts based on realized sales and also follow-up how the campaign replenishment performs.
Afterwards it is important to review how successful the campaign was and how well the supply chain coped with the demand. The key metrics used to assess how well a promotion went include:
- Operative supply chain KPIs. (How to improve supply chain performance next time?)
– Service levels - Forecast accuracy and bias
– Spoilage and end inventory
- Commercial KPIs
– Sales and sales increase by quantity and by monetary value (considering possible discounts)
– Gross profit
Typically KPIs are reviewed not only for individual campaign products but also for applicable product groups. Especially, for commercial KPIs it is crucial to consider the aggregated effects across a product group to assess whether the positive effects of a campaign were offset by reduced sales of other products.
The more important promotions are for your sales, the more important it is to include them in your forecasting and replenishment processes. As one of our customers put it – ‘improving promotion forecasting is a virtuous circle’. Better promotion forecasting leads to better planned promotions using better data, which helps forecast subsequent campaigns more accurately.
Best get started!