Think Different

An accountant and a former pig farmer would take the elevator and head to the 9th floor of an office building located at 2180 Yonge Street in Toronto, Canada. It’s fall, 1994. They’d make their way to a corner of the floor and be joined by a few other new teammates. A recent economics graduate, an operations research PhD candidate, an engineer from overseas, a former grocery IT analyst, and a person from a large multi-national CPG company with an educational background in history and geography.

There they’d meet their team leader – a dude that had worked in industry and in consulting and was self-described as “a bit of a maverick, who had little regard for hierarchy and was equal part genius, equal part buffoon”.

Their mandate?

Completely change the way product was planned and flowed in a retail supply chain, from factory to store shelf, for this $5billion Canadian retailer with more than 450 stores from coast to coast.

To say this team was unconventional was an understatement. As an example, every team was given the latitude to select their own furniture for meeting rooms and workspaces. After reviewing various options and costs, the team would decide that instead of a costly large meeting table they’d instead buy a ping-pong table and use it for working sessions. It was considerably cheaper, and at lunch and during breaks, they could play ping pong.

The introduction of a ping pong table as a work area became the stuff of legends. Lunch times were dominated with ferocious matches and the Senior Vice President of Supply Chain (the ultimate boss of this team) would famously have his ass handed to him one day during a match with one of the team members. No one worried about taking it easy on him. Both his forehand and backhand were weak and, as a result, he got what he deserved – crushed!

Work wise, the team would stutter and stumble. They’d take too long and get bogged down numerous times. They’d spend considerable time in stores, listening to store owners lament about poor product flows and shit service levels. Several ideas were documented, debated, and eventually scrapped.

One idea, though, would survive and the team continued to refine and improve it. Eventually, the idea of what we now call Flowcasting would be documented, and the team was certain the idea was simple, intuitive, and potentially game changing.

Unfortunately, the Senior Executive team didn’t concur. Several executives considered the idea a pipe dream and told the team, “Change the design since this will never work”.

Luckily the team leader was also a bit of a c*nt and was not too keen at being “told” to change the design, especially by speculators – no one knows if something will work before you do it, so how can anyone say, with certainty, that “this will never work”. Never is long time.

As it turned out, one of the technology team members would connect the business folks with Andre Martin and Darryl Landvater and they would reassure the team with the fact that they had already conceived and ran some pilots of this design idea a few years before. A turning point for the design and the Flowcasting concept in general.

They would help convince the Senior Executive team that arrival-based, integrated, time-phased planning (the foundation that Flowcasting is built on) would be a critical capability retailers would need to enable their supply chains to flow product and deliver. The design direction would be approved, and subsequently implemented from DC to supplier and the rest is history.

What was the secret sauce of that pioneering team from Canadian Tire?

Diversity.

There’s lots of talk today, and rightly so, about diversity. I think, however, many companies and especially teams are missing the real key to diversity – that is, cognitive diversity.

Are you looking for ways to inject fresh perspectives and innovative thinking into work?

Step forward, cognitive diversity.

Numerous studies have shown that people like working with others who think like them and have similar values.

The problem, however, is that it leads to groupthink, stifles creativity, and can limit the solutions that are proposed. Instead, you should embrace cognitive diversity, which means forming teams of people who are quite likely to disagree and bring widely varying perspectives and experiences to the table.

Look for people with different beliefs and/or personalities. Seek out colleagues with different educational backgrounds, widely different work experiences, from different parts of the world, or with different levels of risk acceptance.

The best teams, who deliver real and meaningful change, are ones with diverse perspectives and skills that complement each other. The best teams are cognitively diverse.

Think about many supply chain transformation initiatives. More often, the teams are composed of people with a similar background – type A personalities with a technical, mathematical, or engineering background. And what does that almost for certain guarantee? Groupthink and that the designs will be factual and logical.

Everyone who’s implemented something knows that logic plays a small role. Implementations are about people and people have feelings, emotions, wants and needs. They can, at times, seem quite illogical. A cognitively diverse team will have better understanding, wider perspectives, better questioning & listening skills, and more empathy – all ingredients needed for successful change.

So, the next time you need to recruit a new team member and you have a candidate that’s got pig farming (or other seemingly oddball experiences that don’t fit the standard mold) in their experience, my advice is to hire them.

You’ll be glad you did.

HBR article included as chapter in upcoming book

We’re happy to announce that our recent Harvard Business Review article (A Better Way to Match Demand and Supply in the Retail Supply Chain) about Flowcasting was selected to be included as a chapter in an upcoming Harvard Insights Series book entitled, “Supply Chain: The Insights You Need from Harvard Business Review”. This book will outline the latest thinking, insights, case studies and leading practices in supply chain, from several authors.

Thank you, HBR, for including our piece in this upcoming book (due out in October in paperback and as an eBook) and for recognizing the strategic significance of Flowcasting and a consumer-driven, integrated inventory flow planning process.

Probabilistic Forecasting – One Man’s (Somewhat Informed) Opinion

A reasonable probability is the only certainty. – E. W. Howe

My, how forecasting methods for supply chain planning have evolved over time:

  • Naive, flat line forecasts (e.g. moving averages) were once used to estimate demand for triggering orders.
  • Time series decomposition type mathematical models added more intelligence around detecting trends and seasonality to enable better long term forecasting.
  • Causal forecasting models allowed different time series to influence each other (e.g. the effect of future planned price changes on forecasted volumes)

All of these methods are deterministic, meaning that their output is a single value representing the “most likely outcome” for each future time period. Ironically, the “most likely outcome” almost never actually materializes.

This brings us to probabilistic forecasting. In addition to calculating a mean (or median) value for each future time period (can be interpreted as the most likely outcome), probabilistic methods also calculate a distinct confidence interval for each individual future forecast period. In essence, instead of having an individual point for each time period into the future, you instead have a cloud of “good forecasts” for various types of scenario modeling and decision making.

But how do you apply this in supply chain management where all of the physical activities driven by the forecast are discrete and deterministic? You can’t submit a purchase order line to a supplier that reads “there’s a 95% chance we’ll need 1 case, a 66% chance we’ll need 2 cases and a 33% chance we’ll need 3 cases”. They need to know exactly how many cases they need to pick, full stop.

The probabilistic forecasting approach can address many “self evident truths” about forecasting that have plagued supply chain planners for decades by better informing the discrete decisions in the supply chain:

  • That not only is demand variable, but variability in demand is also variable over time. Think about a product that is seasonal or highly promotional in nature. The amount of safety stock you need to cover demand variability for a garden hose is far greater in the summer than it is in the winter. By knowing how not just demand but demand variability changes over time, you can properly set discrete safety stock levels at different times of the season. 
  • That uncertainty is inherent in every prediction. Measuring forecasts using the standard “every forecast is wrong, but by how much” method provides little useful information and causes us to chase ghosts. By incorporating a calculated expectation of uncertainty into forecast measurements, we can instead make meaningful determinations about whether or not a “miss” calculated by traditional means was within an expected range and not really a miss at all. The definition of accuracy changes from an arbitrary percentage to a clear judgment call, forecast by forecast, because the inherent and unavoidable uncertainty is treated as part of the signal (which it actually is), allowing us to focus on the true noise.
  • That rollups of granular unit forecasts by item/location to higher levels for capacity and financial planning can be misleading and costly. The ability to also roll up the specific uncertainty by item/location/day allows management to make much more informed decisions about risk before committing resources and capital.

Now here’s the “somewhat informed” part. In order to gain widespread adoption, proponents of probabilistic methods really do need to help us old dogs learn their new tricks. It’s my experience that demand planners can be highly effective without knowing every single rule and formula driving their forecast outputs. If they use off the shelf software packages, the algorithms are proprietary and they aren’t able to get that far down into the details anyhow.

What’s important is that – when looking at all of the information available to the model – a demand planner can look at the output and understand what it was “thinking”, even if they may disagree with it. All models make the general assumption that patterns of the past will continue into the future. Knowing that, a demand planner can quickly address cases where that assumption won’t hold true (i.e. they know something about why the future will be different from the past that the model does not) and take action.

As the pool of early adopters of probabilistic methods grows, I’m looking forward to seeing heaps of case studies and real world examples covering a wide range of business scenarios from the perspective of a retail demand planner – without having to go back to school for 6 more years to earn a PhD in statistics. Some of us are just too old for that shit.

I see great promise, but for the time being, I remain only somewhat informed.

Timing (is everything)

There’s an old saying that “timing is everything”. And while it may not always be true, more often than not, it is. Especially when it comes to implementing new planning approaches, like Flowcasting.

Even though implementing Flowcasting usually means implementing new technology, it’s got very little to do with software. It’s about changing the mental model and how organizations work, plan, and collaborate. As a result, these implementations are about change – helping people unlearn old ways, learn, and ingrain new ones.

And that requires time for change.

Here’s a beautiful view of change management, highlighting the critical importance of timing:

About 25 years ago we were blessed with a dose of shit luck. We were working as employees at one of Canada’s most iconic and successful retailers, designing and implementing what we now call Flowcasting. As luck would have it, two former Oliver Wight planning pioneers would somehow emerge from the wilderness and join the party. They would ingrain the project team with an implementation approach, called the Proven Path – aptly named given thousands of successful implementations of integrated planning over several decades.

Over the years we’ve retail-ized the approach but the basic principles and fundamentals have endured.

At the heart of the approach is early and repetitive education for executives, management, planners, and suppliers. The diagram above nicely outlines the importance of engaging people early – teaching them how the new process will work, what’s different and why it will be better.

We’re often asked why start educating and engaging people so early. It’s simple, yet instructive. People really don’t like to be surprised and they need time to think. The term we use is “soak time”. The sooner people begin to understand the change, the longer time they can think about it, question it, challenge it, even improve on it. Of course, education is not a one-time event and constant and refresher education happens throughout the change.

It’s why we typically follow up educational sessions with process prototypes – where people, who are now more knowledgeable, can “test” the new approach in a guided, lab-like environment.

And what does that do? It gives people time to experience the new process and more time to “soak” in the new approach and thinking. Helping the change effort considerably.

The reason the diagram above is so instructive is that it reflects the difference between super successful implementations and successful ones. Many teams view these implementations from a technology lens. You’re installing new software to improve things. With a view like that, typically teams scrunch the change effort much closer to when the software go-live will be. And, almost always, it’s too much, too fast for people and the implementations suffer.

In contrast, if you understand that the implementation is about changing people’s behaviors and corresponding mental models (throughout the extended organization, including suppliers) then the importance of starting early should be apparent.

To drive the point home, years ago the Oliver Wight team surveyed over 1000 companies regarding how successful their implementations of integrated planning were. The results were enlightening. The companies that started the change program early, with early and ongoing education, realized an average Return on Investment (ROI) of 200%, compared with 30% for the companies who thought they were installing software.

I suppose if you’re looking for a super successful implementation and a big, fat, juicy ROI then timing is, indeed, everything.

Bread and Butter

Man shall not live by bread alone. – Matthew 4:4

“Make sure you focus on the bread and butter items!”

Anybody who’s worked for a retailer – particularly in supply chain – has either heard or said these words at least a dozen times. And everybody knows what those “bread and butter” items are: The fast sellers. The products that customers take out of the stores by the cartload. If you were ever stocked out on one of those items, the damage to your brand would be catastrophic.

Hence the perceived need to make sure your people in charge of replenishment are watching those items like a hawk.

Here’s the thing though: Fast selling items with continuous demand in every store are precisely the ones that require virtually no effort whatsoever. They turn so quickly and the volumes are so well established that they basically manage themselves on autopilot. In most cases, these are the items that your competitors also sell (and potentially consider “bread and butter” items themselves).

The reality for most brick and mortar retailers is that they are in one of the following two categories:

  1. You’re competing with Amazon, or;
  2. You will soon be competing with Amazon

Unless you’re Walmart or Costco, you really do need to be a category killer to overcome the perceived advantages while exploiting the weaknesses that “endless aisle” retailers like Amazon provide to customers. Yes, you need to have an online presence and offer as many channels to the customer as possible, but that won’t be enough.

You can drive to Walmart right now and get a pack of wood screws, but are you sure will they have the size you need?

You can order the exact wood screws you need from Amazon, but will they be easy to find and can you get them right now if you need them?

If you’re like me, you don’t even ask those questions. The moment you identify a need for a particular size and type of screw, you jump in your car and go straight to Home Depot or Lowes and march straight to the aisle that has every type of screw and fastener you can imagine, confident that you’ll find what you need.

Sure, there’s a lot of slow selling dog crap in there when you look at the assortment SKU by SKU, but if you only pay attention to the fast selling items, then you’re competing head to head with Walmart and Costco – probably not a winning strategy.

It’s a broad assortment of those long tail items that really make you stick out in the customer’s mind. They’re the key differentiators that can automatically and subconsciously disqualify your competitors when people are in the market for what you’re selling.

There’s your real bread and butter.

Doctor’s orders

In years past companies have focused on demand side forecasting accuracies. SC managers are realizing the big gain is on supply side management.”

                                                    – Chris Barnes

An article I co-authored with George Stalk, Jr., “A Better Way to Match Supply and Demand in the Retail Supply Chain” was recently published by Harvard Business Review.  A colleague, who happens to go by the handle of “Supply Chain Doctor” made a profound comment on the underlying premise of the article.  He said… 

“The future of SCM is here. In years past companies have focused on demand side forecasting accuracies. SC managers are realizing the big gain is on supply side management. Whatever you can do to help your suppliers will pay dividends to your company. Not as glamourous as omni-channel distribution, but without strong supplier relations, omni-channel won’t really matter much.”

Loyal readers will understand that we’re talking about using the Flowcasting process to only forecast where it counts (i.e., the final point of sale) and to calculate all other inventory flows from consumption to supply.  This, of course, culminates in sharing planned shipments with suppliers – a concept referred to as supplier scheduling.

The concept of supplier scheduling has been standard practice in manufacturing for decades – that is, sharing a projection of future required product needs to help a manufacturer’s suppliers plan and deliver.  Flowcasting allows retailers and their manufacturing partners to leverage the same concept.

The planned shipments are the demand plan for the supplier for this retail customer – indicating how many units of each product will need to be shipped, when and where. This eliminates the need for the supplier to forecast demand for this customer.

From a supplier perspective, their major retail customers can provide them with calculated demand, rather than having to forecast it themselves.  Most CPG manufacturers would only require a handful of supplier schedules from their large retail customers to provide 70+% of their total demand.  They can forecast the balance. 

The projected requirements have all retail, supply chain and inventory flow constraints/rules incorporated, specific to each retail customer.  If a Retailer Customer was experiencing increased sales or had decided to change the shelf inventory requirements at a future date, the supplier schedule would reflect this in the planned shipment quantities. 

The Flowcasting model is based on a fundamental principle – a valid simulation of reality.  If the retailer and trading partners know the future will be different than the past, then these insights are factored into the forecast and resulting inventory flow plans, culminating in the supplier schedule. 

The impact of retailers embracing Flowcasting and supplier scheduling is significant.  It obsoletes a significant amount of non-value-added forecasting and, even more significant, effectively eliminates the bullwhip effect.

Perhaps we should listen to the Doctor’s orders.

Just In Time… For What, Exactly?

I have noticed that the people who are late are often so much jollier than the people who have to wait for them. – E.V. Lucas

The time-phased, arrival based planning logic that underpins Flowcasting has frequently been described (sometimes disparagingly) as “pull-based, just in time”. Depending on your definition of “pull-based” and “just in time” (do any two people actually agree on what these terms mean?), there’s more truth to that than fiction.

The “pull-based” part is easy. The retail supply chain hasn’t finished its job until a customer has made a purchase. While it’s possible to encourage a stronger customer pull with promotional offers, pricing and markdowns, you can’t push unwanted stock into a customer’s shopping cart and force them to pay for it. This is true for every saleable item in every retail store.

The “just in time” part is what can sometimes make people (particularly buyers) a little queasy. The term evokes images of stock running almost to zero just before the perfectly executing supply chain delivers more stock. There seems to be a pervading fear that such approaches will cut inventory to the bone in a blind bid to increase stock turns at a all costs.

While it’s certainly possible to run your supply chain (including the stores) super lean, it’s definitely not necessary – nor recommended. A store with just enough stock to cover anticipated demand and variability for every item will look like it’s perpetually going out of business.

“Just in time” doesn’t mean “just enough to support sales”. It means just in time to prevent the stock level from dipping below a minimum floor that you decide

Do you want to maximize turns with minimal safety stock? No problem!

Do you want to have a nice, full looking display with at least 5 facings, 3 deep on the shelf at all times? Go for it!

(Same item, same store, same sales forecast).

Do you want to augment the normal shelf stock with secondary promotional displays for a few weeks? Nobody’s stopping you!

Would you rather have a minimum of 4 weeks of supply in the store at all times? Sure! Why not?

Just in time isn’t about stock levels, it’s about stock flow. So long as you can articulate what minimum stock holding you require for each item/location and when (and can justify it to Finance), a proper just in time planning approach does what it’s told and flows in stock to ensure you never fall below that level.

Merchants and space planners rejoice and be glad! You’re not slaves to just in time planning. Just in time planning is a slave to your merchandising needs.

Harvard Business Review article about Flowcasting

Our article, “A Better Way to Match Supply and Demand in the Retail Supply Chain” co-authored by Mike Doherty and George Stalk, Jr., published by the Harvard Business Review. The basic thesis of the article is that Flow-casting can address the most insidious problems in the retail supply chain – out of stocks, overstocks, and the bullwhip effect.

To read the article, click HERE.