Ask managers what causes them the most problems in the consumer product supply chain – choosing from any product, product group or area of operations – and the most common answer you’ll get is “promotion management”.
Ask them what the most difficult thing about promotion management is and as often as not they’ll tell you “everything!” Forecasting, delivering, tracking; they can all break supply chain managers out in a cold sweat. But don’t worry, the situation isn’t hopeless. It’s a little like the old joke – ‘how do you eat an elephant?’ – answer; ‘one mouthful at a time’. Promotion management is a step-by-step process and bringing together the right tools and the right approach should put an end to most, if not all, of your worries.
This whitepaper is about how to plan your promotions, and how to improve your demand forecasting and tracking. It also examines the requirements of the different development phases from an output data and operating model perspective. Store-replenishment-related issues are dealt with in a separate white paper.
1. Separate Promotion-related Sales from Normal Demand
Promotions still exist in an Excel-jungle, even though other key business processes have often been moved to ERP systems. The first step towards making your promotion management more efficient is to give promotion-related sales their own defined category in the ERP system.
Separating promotional sales from normal sales increases demand forecasting accuracy very significantly! Demand spikes generated by promotions skew forecasts for standard demand when the promotion has run its course. So configuring your system to separate out promotion data automatically allows you to forecast regular sales using regular sales data and to do it painlessly. It should be obvious, but not every ERP system allows businesses to do this. This simple step can make a big difference.
In practice this first step only needs you to do two things:
- Divide sales into two categories: ‘normal’ and ‘promotional’
- Generate an adjusted demand history, from which promotional periods have been filtered out, for regular forecasting
You can often find the information you need to categorize sales in historical data from your old system. If your promotion included price changes, those changes will have created its own data set that can be pulled from the ERP or Point-of-Sale system. Now you just need to know how to use this information for promotion forecasting.
2. Track the Impact of Promotions on Demand
When promotion-related demand is separated from normal demand, promotion tracking becomes much easier.
If normal demand is used to calculate forecasts, changes in promotion-led demand are easy to identify – just examine the difference between actual demand and the computed base forecast.
Using that differential you can identify promotion-related absolute added sales or the percentage of added sales. Promotion forecast accuracy can also be tracked by comparing forecasts prepared for the promotion with actual demand.
Data from systematic tracking helps to increase the demand forecasting system’s accuracy. The more information there is available from earlier promotions, the easier forecasting becomes for future promotions. Tracking the accuracy of forecasts accelerates learning – the more feedback that is received from promotion forecasts, the quicker it is to eliminate recurring problems, such as overly optimistic projections.
If the reporting tools you are using support this, you should track the promotion’s effects on demand for a whole product group, as well as its margins. This helps to identify promotions that really improve the profitability of the business, and also those that decrease its profitability.
For example: A retail store chain concluded that demand for a certain product group had decreased, because total sales for those products had decreased significantly. However a more detailed analysis showed that sales volumes had remained at previous levels. Instead promotional efforts had shifted demand towards promoted products with lower margins. So rather than increase demand the promotion had decreased the overall profit generated by the product group.
3. Utilize Quantitative Models for Promotion Forecasting
Creating one promotion forecast manually is fine, but what about when demand forecasts are needed for tens, or even hundreds of stores?
Generating centralized store-specific promotion forecasts manually is labor intensive and impractical. The typical solutions are either: 1) replenishment for all stores is based on a single centralized promotion forecast, or 2) the problem is passed on to each store, with the demand that they pre-order promotional products. Both ‘solutions’ clearly produce poor results.
A single demand forecast cannot reflect the individual profile of each store. Demographics, local competition, and a host of other factors mean that a promotion’s effect on demand may vary significantly from store to store. Even though the purchasing managers may have information on local conditions, they still lack the skill and time required to create accurate forecasts tailored for each store. This leads to orders being placed based on ‘gut feeling.’ Some stores even forget to order.
By using quantitative forecasting, it’s possible to achieve great results with promotions. Above all, quantitative forecasting models allow store-specific promotion forecasts to be generated efficiently!
In practice, quantitative promotion forecasting requires more than the simple categorization of demand into ‘promotion’ and ‘normal’ sales. Better results can be achieved when promotion data is combined with specific promotion profiles. Usually it’s enough to use simple categories. For instance television campaigns, magazine advertisements, as well as in-store promotions all have different effects and can be categorized separately.
It may be tempting to attempt to break down the promotions in minute detail once you start doing something about it. It is important to bear in mind that category information is only useful if it is kept up-to-date. The easier that information is to produce, the more likely it is that it will be kept up to date in the future. Remember the old saying – ‘the best is the enemy of the good’ – better to set up a workable system that produces good results than be forced to abandon an unworkable one intended to produce perfect results.
When you begin to collect categorized historical promotion data, store-specific promotion forecasts can be calculated based on store-specific demand changes for similar historical promotions. The more historical promotion data that is found for a product, the more accurate the results you will achieve with your supply chain optimization software. On the other hand, when there is no previous experience with a similar promotion, a reasonable base forecast can be computed by checking earlier promotion effects on the same product group’s products.
4. Analyze Factors Bearing on Demand and Use Them for Planning Promotions
When the data you need is available, use it for planning promotions.
Demand forecasting models can be used for selecting products to promote and types of promotion. When we understand how different promotion types work for different products or different product groups, we have a better chance of calculating in advance how best to execute promotions to achieve the desired end result.
The richer and more diverse the data, the more accurate the analysis we can perform. One key area of interest is the effect of price on demand. The impact of price changes can be created quantitatively within a model, for example, with regression analysis. In practice the available output data imposes certain restrictions. The actual application of regression analysis requires data from several executed price changes. If in addition to price research, we also want to research other contributing factors, such as the effect of presentation of available products, then the number of previous promotions from which data will need to be drawn increases. The more variables you include, the greater the pool of historic data you need to draw on.
The benefit of analyzing and forecasting retail sales is that the factors affecting demand, such as price, shelf space and store and media advertising, are known in advance. With regression models the effects of different factors on promotion sales can be identified. Regression models should be built carefully. When standardizing the use of, for example, price changes or marketing effects between different products and promotion channels, the models generally use significantly more data elements. This helps create well-functioning models. When calculations are forced to be made on insufficient data on a more granular lever, it is possible to make poor choices that reduce the clarity of the model and the accuracy of the forecast. This is why you need to invest sufficient time to develop your model and improve demand forecasting accuracy. Moreover, as the amount of data grows, and the market and competitive situation changes, you should check your existing models.
Reach Full Control of Your Promotions One Step at a Time
Promotions cause headaches for supply chain managers, but in many cases, promotion management can be significantly improved relatively easily. You can get great results simply by separating normal demand from promotion demand!
Developing promotion management requires long-term work. Raising your accuracy goals means meeting tougher requirements for collecting promotion data. Since there is not necessarily any data available at the beginning, you have to proceed step by step (just like with that elephant sandwich).
There Are Several Major Incentives to Improve Your Promotion Management:
- In phase one, forecasting accuracy for normal demand improves as soon as you separate out promotion-led sales
- During the second phase, increasingly accurate forecasts let you build more precise promotion forecasts and understand better which promotions work and which don’t
- By phase three, you’re able to generate more accurate promotion-demand forecasts on a store-specific level with less work
- In the last phase, a whole new level of reach can be attained for efficient promotion-inventory planning, which results in increased demand and improved margins