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Forecast Optimization for Consumer Products Companies

The business problem
Consumer products companies introduce many new products and line extensions each year and most, if not all, of these introductions are supported by trade promotions run with their retail customers. In fact, these events account for approximately 40 percent of annual product sales for manufacturers. Unfortunately, accenture research and other studies reveal that retail level out-of-stocks increase significantly during promotions and new product introductions. This negatively impacts consumer uptake as well as manufacturer-retailer relationships. Consequently, it is critical to overcome the challenge of predicting consumer demand for these products during promotions to drive category and sales growth. Any consumer goods demandplanning process tends be complex because of the volume of data and analysis needed. To avoid such complexity some companies choose a suboptimal route that relies on historical analysis and segmentation and outdated statistical models, which reduces the complexity in the short term but results in poor replenishment decisions and service levels later. Manyif not mostconsumer products companies have implemented a planning solution. Both hierarchy development and forecast tuning receive a lot of time and attention during the implementation of a planning tool but less attention once the tool is in a production environment. Yet, continuous and ongoing tuning of forecast algorithms and parameters is actually needed to ensure that appropriate hierarchy and forecasting algorithms are chosen to best predict future demand. There are many reasons that fine-tuning is not done, but the primary reasons are fairly straightforward: historical processes are hard to break, new analytics are needed that may require third-party assistance raising both cost and confidentiality concerns, and the mindset that forecasts can be "fixed" if proven inaccurate. In fact, in many companies the planning organizations use manual overrides instead of statistical methodologies. Investment in new skills and tools would be required for most companies to perform the analytics needed and build robust forecasting processes that would yield more valuable information. Yet understanding the interplay between product characteristics and existing process characteristics is crucial to generating meaningful forecasts and accurate replenishment, and this cannot be accomplished by manual means.

The solution
Accenture's forecast optimization solution manages and optimizes critical forecasting processes. Drawing upon our direct client experience as well as our original High-Performance Business research in the consumer goods industry, the solution improves critical forecasting processes such as analysis of historical data, forecast algorithm selection, parameter finetuning, promotional impact analysis and external factor analysis. Accenture has specialists dedicated to understanding, developing and implementing proven refinements to these critical processes at consumer products companies. In addition, the forecast optimization solution has the benefit of using standard and reusable statistical tools to perform this analysis. As identified in Figure 1 below, our functional and process knowledge of forecasting has been applied to help clients achieve significant quantifiable improvements in many key processes. Accenture teams have helped client organizations reap benefits in the range of a five to 20 percent improvement in forecast accuracy, a 10-20 percent improvement in batch times and the same range of reduction in obsolescence because of improved life cycle management. Our specialists in inventory management processes report that many organizations reduce stock outs by five to 15 percent, which can

translate into millions of sales for global manufacturers or national retailers. On a qualitative level, Accenture teams aim to build client understanding of product group behaviors and promotional effects based upon historical trends, and also deepen understanding of the influence of external causal factors. When employed by consumer products companies, Accenture's forecast optimization solution can also improve relations with supply chain partners and retailing customers as all players in the value chain benefit from improved forecast accuracy, timely replenishment and supply chain efficiencies. Accentures deep industry expertise and process design experience allow clients to design and implement forecasting improvements that are mutually beneficial for their customers and supply partners, thus making the most of improved forecasting processes and capabilities. Accenture's forecast optimization solution addresses problems in the demandplanning and inventory-management processes faced by most consumer products companies and builds their analytic capabilities to make each process more efficient and effective. Contact Accenture today to discuss how our unique combination of industry expertise, functional knowledge and process insight can help your company begin capturing the benefits of our proven approach to optimizing forecasting.

Case study
A US-based retailer engaged Accenture to analyze its forecasting processes and issues that included a lack of accurate shortand mediumterm forecast availability for general merchandise products, existing forecasting techniques that were based upon overly-optimistic forecasts and quarterly averages, a lack of standardized replenishment processes, and planning activities that were highly tactical and order centric." The team used the forecast optimization solution to analyze the retailers forecasting processes and assess eighteen buying areas in general merchandise (toys, hard lines and soft lines) and eight million product location combinations. Accenture analyzed product clusters based upon velocity and product rankings and combined this with its industry expertise and insight to recommend forecasting models for the product clusters as well as the optimal parameters to support the recommended model. The functional and process specialists on the Accenture team collaborated with the client to develop documentation to support continuous improvement requirements in the forecasting function.

Contacts
North America Arjun Mukherjee +1 703 947 2344 arjun.mukherjee@accenture.com Joel Butler +1 720 359 5108 joel.t.butler@accenture.com Mohammed Hajibashi +1 512 732 5625 mohammed.hajibashi@accenture.com Europe Samuel Salvador +34 93 227 1000 samuel.salvador@accenture.com

Figure 1. Benefits of Accenture's forecast optimization solution

Typical consumer goods demand planning factors
Applying forecasting models based on history patterns Irregular tuning of forecasting models Forecasting for slow moving items Incorporating demand influencing factors Forecasting promotional lifts accurately Planning for new product introductions

Accenture's forecast optimization solution

Best practices for matching forecasting models for various history patterns Optimal fine-tuning of forecasting models Forecastability analysis and inventory strategy Casual factor modeling Promotional lifts estimation and modeling Utilization of forecasting models and best practices

Benefits of Accenture's forcast optimization solution

Better forecasts and reduction in overall forecast errors Better forecast accuracy leading to less variation downstream Optimal decisionreplenish to forecast or replenish to min -max Accurately model internal and external causal factors in shaping demand Greater visibility, planning when sharing information with retail partners Greater collaboration and planning with retail partners

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