With forecasting, it’s easy to get carried away with the technical, the theoretical, or just plain get lost in the weeds. I often see practitioners who zero in on specific facets of forecasting and demand planning, and in so doing, lose the complete and holistic approach that can deliver measurable business improvements.
In thinking about the big picture, I believe we all need to keep in mind that there are real and significant consequences to getting demand planning and forecasting right or getting them wrong. This story in the WSJ was a critical reminder. Dean Foods announced that first quarter earnings are down 43%.
The CEO said that they are facing increased pressure from private label products, which might handicap growth and profitability into the future. The most troubling aspect to me? No real numbers regarding how much of a handicap, nor any clues as to a competitive response – in other words no substantiated forecast detailing the competitive response and supporting the credibility of Dean’s future value.
Dean Foods Co.’s first-quarter earnings fell 43%, and the company’s chief executive warned Monday that some business may not bounce back as retailers use private-label products to lure customers.
Chairman and Chief Executive Gregg Engles said gains by private-label producers are accelerating, noting that in some regions, a half-gallon of Dean Foods milk costs more than a gallon of an unbranded product. Retailers routinely use discounted milk and bread to drive foot traffic, and private-label food products gained share as consumers traded down during the recession.
I’m bringing this up not to kick dirt on Engles and his team, but to highlight some very specific implications of forecasting. A more comprehensive approach to a forecast would have revealed these icebergs much earlier and given them the insight to effectively react.
Better data, process, and technology
I posit that there are three things that could have kept them out of this stew: appropriately use of data (Comprehensive point of sale from retailers, demographics etc.), a better process (having sales people and account managers contributing market intelligence) and an appropriate technical platform. (My advice on the technology is obvious, but it looks like they’re stuck with a big German solution.)
More time to control expectations
Earlier detection would have allowed Dean’s to alert analysts and investors to the trend and the potential hit to their earnings. It also would have prepared them for a competitive response — critical to maintaining credibility with the investor community.
Did I mention better technology?
Appropriate software would have alerted Dean’s to the trend and allowed for comprehensive “what-if” analysis of plausible responses — as well the margin impact of each potential response — so that the company could have quickly coalesced around a competitive strategic response.
Dean’s is struggling, and I would argue a large portion of it is due to lack of a sufficiently robust capability around demand planning and forecasting which as we know is really the tactics behind understanding the market and your customers. The impact is real: their stock lost 25% of its value in the early hours of trading today. More importantly, what is their response? What are the options? Will they be profitable? Will the retail customers respond? Critical questions for the Dean Foods team in the days to come…