New forecasting study released on leading consumer packaged goods industry

A new report produced by Terra Technology identifies forecasting trends based on activity from one third of the North American Consumer Packaged Goods (CPG) market. It also includes insights about performance during promotions and new product introductions.

The Terra Technology 2011 Forecasting Benchmark Study, which spans the 2009-2010 period, encompasses more than 7 billion physical cases that represent more than $200 billion in sales from nine leading multinational consumer products companies.

“One major takeaway here is that companies are on a journey now to becoming more strategic, and sensitive to long-term response,” said Robert F. Byrne, President and CEO, Terra Technology.

In an interview with SCMR, he added that the “Ground Hog days” of doing business are behind us.

“It shouldn’t be necessary for practitioners to relive an event every 24 hours,” he said.

Results show that weekly forecast error for Demand Planning systems remains high in CPG, at almost 50 percent, with bias remaining positive at 5 percent. Results also show that Demand Sensing provides a major improvement in forecast accuracy across all companies, reducing weekly error by 40 percent. Improving forecast accuracy is key to an efficient and cost-effective supply chain since demand uncertainty is the number one driver of safety stock.

“We believe this study is the most comprehensive examination of forecasting performance for the CPG industry,” said Robert F. Byrne, President and CEO, Terra Technology. “It is unique because it provides a truly comparable benchmark for manufacturers to evaluate demand planning performance against their peers. It also shows the potential of Demand Sensing to improve forecast accuracy, supported by real-life performance figures from leading manufacturers whose supply chains are among the most respected in the industry.”

Findings and insights from the analysis include:

• Demand Planning weekly forecast error remains almost 50 percent in the CPG industry, despite the effort and expense invested in implementing Demand Planning systems. The 5 percent bias may be indicative of the optimistic nature of Marketing.
• Promotional volume jumped more than 75 percent in 2010 as companies sought to drive sales by offering consumers additional value. Contrary to conventional wisdom about promotions, individual items are forecast as accurately when promoted as they are when not promoted. However, bias is more than five times higher during promotional periods.
• High expectations and the absence of prior sales history make new product introductions particularly hard to forecast. In 2010, new items accounted for 13 percent of the volume and experienced weekly Demand Planning error rates of 65 percent over their first year compared to 46 percent for existing products.
Demand Sensing provides a consistent step change in forecast accuracy across all aspects of the business, including promotions, new products, fast-moving and slow-moving items. The 40 percent reduction in overall error provided by Demand Sensing confirms the benefits of an automated mathematical approach which harnesses real-time demand signals throughout the supply chain to improve forecast accuracy.

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