Today’s Demand Processes Create Empty Shelves

Peaches in China. Baby formula shortages, and empty shelves currently for flu/cold medicines. What do they have in common? Empty shelves due to outdated processes.

Each story is a call to action to rethink demand processes, but organizations are insular. The inability to sense and translate demand at the speed of market demand is a core issue in each of these shelf shortages. The result is lost revenue and consumer frustration, but organizations are slow to change their processes, despite the availability of technology, to better translate demand to improve the shelf in-stock positions. Here we examine why.

Rethinking Demand

The root of the problem starts with the organizational design of demand planning. Within an company, each function thinks about demand differently (sales, marketing and supply chain) using different sources of data with differing latency (time to translate consumption data to a usable pattern in analytics). The processes of shelf planning, trade promotion and demand planning for supply are not synchronized. The simplistic thinker might say just integrate the processes, but this is not the answer. Each team operates in isolation with a different focus and set of goals.

The optimization within a supply chain team focuses on mining patterns of order shifts. The problem? Order visibility patterns are two-to-sixteen weeks delayed from the sales at the retailer. The reason? Demand must be translated through replenishment logic through retail stores, retail warehouses, distributors, and brand owners. The translation of demand in replenishment processes takes time, but time is of the essence when demand spikes.

In the marketing teams, the focus is on translation of syndicated data which has a three-week latency offset from market purchases. Within the marketing and sales teams, the focus is on trade-shelf planning and promotions/price. The planning data sets are at a higher level in the product hierarchies than the supply chain teams. Each department—sales, marketing, replenishment and order management—focus on their own goals without an understanding of demand latency and do not see the need for the synchronization of processes and data. No team focuses effectively on shelf replenishment.

A Closer Look at Shelf Outages

For example, in China faced with COVID lockdowns and rising risk of outbreaks, consumers purchased peaches to improve health. As social media over-hyped the health benefits of peaches, shelf velocity increased faster than replenishment process capabilities. The consumer data was available, but not used. The shelves emptied within days: much faster than supply could respond. With early warning, could peaches been sourced from alternate supply or sold at a higher price? We will never know.

In the United States at present, the purchase of flu/cold medicine is frustrating for the consumer, because it is not available. The reason? Manufacturers are basing manufacturing and procurement plans based on history. Last year’s flu season was very low due to mask wearing, so as the masks came off, the flu spread, and the over-the-counter drug companies attempted to react, but to no avail, by ramping up supply in manufacturing and procurement.

In January 2022, the first story on baby formula shortages became headline news. One supplier, Abbott, represents 43% of supply. The industry has concentrated supply with four companies in the U.S. manufacturing baby formula — Abbott, Nestle, Mead Johnson, and Perrigo. There are over 50 baby formula brands in the U.S.

By April 24, 2022, 40 percent of infant formula was out of stock in the United States. Abbott sells and manufactures the brand Similac and Mead Johnson’s product Enfamil had limited substitution with Similac (depending on the baby), but Mead Johnson did not respond quick enough missing an opportunity. The reason? A lack of focus on substitution through the use of market data.

Driving Change

The current design of marketing, sales and supply chain processes are self-serving and political using different and latent data. The teams are often like warring factions. None of the processes focus on shelf availability at the speed of purchase using consumption data.

Channel data is readily available, but companies are unwilling to shift from order and syndicated data sources to be more responsive to demand shifts. In the past, when demand variability was lower, demand latency of data and disparate data sets mattered less, but with today’s volatility, every consumer products brand company should gut their current sales, marketing and supply chain processes to use shelf data and align the processes to the consumer. The issue is that this shift makes the current technologies for Customer Relationship Management (CRM), Digital Marketing, Promotional Marketing, Shelf Planning, and Supply Chain Planning obsolete. It also requires unlearning the current processes and adopting new ones because the historic practices do not work in time of volatile demand.

Summary

Driving this change, requires leadership and a clear understanding of the problem of demand latency, demand translation, and the impact of the bullwhip impact, but it is needed. After all, how many headline news stories do we need to see the need for change?