Demand planners need to take actions now for Post-COVID-19

Editor’s Note: This blog article is a condensed version of “Demand planning in the COVID-19 Crisis,” which will appear in the September/October issue of Supply Chain Management Review.

While demand planning has become a relatively routine task for many planners, the COVID-19 pandemic triggered unprecedented demand shocks – both up and down the supply chain – and amplified volatility across many industries. This was (and still is) a stress test for demand planning processes in many companies.

As the virus spread across the globe earlier this year, many industries were hit by developments that were hard-to-imagine before. Lock-downs - first in China and later across the globe - forced many manufacturers and retailers to shut down operations, also affecting their suppliers and upstream partners. Goods like canned food, pasta or pain killers saw huge demand peaks due to panic buying at the start of the crisis that were often followed by demand drops below the pre-crisis levels a couple of weeks later.

On the other side of the spectrum, demand structurally increased, due to channel shifts from out-of-home to in-home or based on the higher consumption of organic food. An extreme case is the medical sector where products like hand sanitizer, face masks and other personal protective equipment saw demands that surged by a factor of up to 100, making it impossible for supply chains to cope.

Supply chain managers had to change their practices given the completely new challenges. In normal times, planning priorities have focused on increasing the accuracy of forecasts from high to very high levels while striving for automation that reduces planners’ workloads. This was difficult given the challenges imposed by poor data quality, changing product life cycle or frequent promotions.

In the COVID-19 crisis, however, planners are facing completely different and more fundamental challenges. As a result, the priorities of demand planning in the COVID-19 crisis shift significantly towards enabling forecasts that are good enough for reasonable scenario planning. For cost-intensive decisions such as plant openings, layoffs or sourcing contracts, it is now essential to have a realistic idea of the minimum and maximum demand with a range that is ideally as small as possible.

If demand is significantly higher than the maximum expectation, firms have to expedite shipments, need to find costly alternative suppliers and lose time training more workers. If demand is below the minimum expectation, excess inventories build up, orders must be canceled and staffing costs surge. To match supply to demand - at least loosely - supply chain managers must leverage all available resources and introduce new practices. We group these into seven action areas:

1. Change forecasting models: Many demand planning systems are configured to generate demand forecasts using statistical time-series models. However, the models need time to adjust to the new realities and typically lag real-world sales patterns. In contrast, modern AI systems generate forecasts with dozens of different algorithms and tune automatically to alternative models that currently work better. If this is not supported, manual overrides need to do the job.

2. Identify future demand drivers: To model structural shifts in demand, it’s important to build demand models that consider the factors that really drive the demand. For example, for a food manufacturer of professional products the opening and closing of different channels such as restaurants or canteens is key driver. In supermarkets, demand might shift from prior peak shopping days to be more evenly spread across the week due to customers’ time availability.

3. Understand supply chain dynamics: While many companies were directly and immediately affected by demand disruptions at the beginning of the COVID crisis, more upstream players, such as in the chemical or semiconductor industry, only saw effects on their demand over time. It’s therefore critical to establish transparency on the sale of the goods in which their products are used, and in the next step to estimate the downstream inventory levels and lead times.

4. Increase communication with customers: In the crisis, intensifying customer collaboration through frequent updates on order forecasts and downstream customer expectations about market developments can help to improve transparency. Establishing joint planning is particularly useful when a few key customers capture a large portion of the demand. However, it’s also essential to challenge any demand assumptions to avoid customers inflating their expectations.

5. Restructure S&OP processes: Well-designed and properly executed sales & operations planning processes have always been a key asset for successful companies. This is particularly true now: Companies that had already set up cross-functional teams, defined clear roles and engaged in scenario modeling often did not have to change much. These companies just increased the frequency of their S&OP meetings and ensured that any information was synchronized and updated before the meetings. Other firms have to learn the hard way.

6. Plan product portfolio: During the crisis, many firms streamlined their product portfolio in order to cope with surges in demand. They focused on A-products, standardized packaging for different countries and stopped producing products on the long tail. As a result, manufacturing processes could be simplified (both internally and at suppliers) and maximum output is increased. There are also planning advantages as demand is pooled across different SKUs and the challenge of correctly forecasting the SKU mix is greatly reduced.

7. Clean data for the future: Planners must prepare their data for the recovery. If a planning algorithm makes forecasts based on the “actual” data that was “distorted” during the crisis, automatic forecasts will not achieve the required accuracy. Therefore, planners need to define the right baseline data for the forecasting purpose. This could be the data from winter/spring 2019 that might be manually tweaked to link it to new products or other structural changes.

As the crisis continues, many demands will be less affected by COVID-19, but rather driven by overall economic developments. Many countries will go into recession and demand patterns will become more similar to those observed in previous crises. However, as managers prepare for demand planning in the “new normal”, they need to carefully consider embrace agility, review the capabilities and skills they need for the future, and think about the organizational structure of planning.

About the authors: Knut Alicke is a partner in McKinsey’s Stuttgart office and leader of the Supply Chain Management Practice in Europe. He holds a Ph.D. in logistics and an advanced degree in supply chain management from the University of Karlsruhe. Kai Hoberg is a professor of supply chain and operations strategy at the Kühne Logistics University in Hamburg. His research focuses on data-driven supply chain optimization, the impact of new technologies on supply chain management, and inventory management. They are frequent contributors to Supply Chain Management Review, and can be reached at [email protected] and [email protected]