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A compromise is the art of dividing a cake in such a way that everyone believes he has the biggest piece.
– Ludwig Erhard (1897-1977)
Last week, I had the chance to catch up with a good friend and colleague of many years. His name is Ian and he is the VP of Supply Chain at a mid-sized retailer (with vast prior experience at a large retailer).
After a couple of beers, he asked me point blank: “Forecasting and Replenishment. One job or two?”
Without hesitation, I responded “Two!” Then I proceeded to describe the differences in skill sets, business relationships and aptitudes between a Demand Planner and a Supply Planner.
“Okay”, he said. “Who does the Demand Planning group report to?”
That’s a very interesting question indeed.
The goal of the demand planning process is to create a sales forecast that is as accurate and unbiased as possible. In retail, the process of coming up with a forecast is typically a “joint effort” between the Category Manager and the Supply Chain Planner.
The Category Manager is measured primarily on sales. Therefore he/she has a tendency to make optimistic projections and bias the forecast upward, knowing that a higher forecast will buy more inventory, thereby (theoretically) reducing the likelihood of lost sales.
The Supply Chain Planner is measured primarily on inventory turns. Therefore he/she has a tendency to “keep the forecast lean” to avoid carryover inventory after a promotion or selling season.
Therein lies the rub. If you give control of the forecasting process to the Merchandising group, Supply Chain feels like you’re “putting the fox in charge of the henhouse”. If the forecasting process falls under Supply Chain, Merchandising feels like they have no control over one of the key inputs that drive their businesses.
So should the Demand Planning function reside within Merchandising or Supply Chain?
Think about it. Neither group can be faulted for exhibiting behaviour on which they are rewarded. The problem is that they have competing objectives and the biases on either side can have a direct negative impact on the P&L.
That’s why the Demand Planning function needs to report to someone who has accountability for the entire P&L – either the CEO or, more practically, the CFO.
Remember the goal for the sales forecast: As accurate and as unbiased as possible. By having Demand Planners report into Finance, they can be effective mediators between the competing groups and would have “a seat at the table” when matters relating to the sales forecast are discussed (promotions, product launches, safety stock policies, etc.)
Their job would be to chair S&OP meetings with their Merchandising and Supply Chain counterparts and hear both sides of the story with an objective ear. Without either group having the direct ability to impose their biases on the forecast, they must instead make a convincing case to the Demand Planner to support their view.
As a consequence, the current “blurred lines” of accountability are made clear once and for all:
Merchandising: Stimulate demand and be accountable for sales and gross margin.
Demand Planning: Forecast demand and be accountable for forecast quality.
Supply Chain: Optimize supply and be accountable for inventory turns and availability.