July 2014 | Commentary | IT Matters

Forecasting Seasonal Surges Keeps Products on the Shelf

Tags: Logistics I.T., Retail, Supply Chain Management, Demand Planning, Transportation Management

Robert Byrne is President and CEO, Terra Technology, 203-847-4007 x104.

During busy retail periods, news of retail imports and spot transportation rates tends to grab all the attention. Less prominent, but more interesting, is the constant seasonal and promotional flux in domestic consumer packaged goods (CPG), and how manufacturers manage the resulting transportation surge.

For CPG companies, seasonal volume typically represents one-third of annual shipments, so managing these surges is essential to commercial success. Unfortunately, even with sophisticated planning tools, seasonal demand for finished goods is hard to forecast, with error rates about 40 percent higher than for non-seasonal products, according to Terra Technology's 2013 Forecasting Benchmark Study.

To make matters worse, seasonal items also have twice as much extreme error (when sales exceed or fall short of forecasts by more than double). This type of error is the most disruptive to the supply chain in terms of cost, return on working capital, and stress on staff who are forced to scramble to protect customer service. While it is easy to get one or two trucks at the last minute, it can be challenging and expensive to get 10.

For companies that rely on promotions to drive sales, the disruptive impact is magnified. Even though marketing departments plan promotions weeks in advance, logistics managers are often the last to find out—when the orders hit their desks.

Shippers must manage these surges. Excess freight not covered by contracts with preferred carriers goes to more costly secondary carriers or the spot market. Shippers that directly administer carrier relationships start "dialing-for-diesel" to secure additional capacity.

Desperate Measures

For companies using a single carrier for specified lanes, the carrier must reallocate assets or subcontract to third parties. In either case, cost premiums created by surges ultimately hit shippers in the form of higher immediate freight fees, or higher contract rates when it comes time to renew.

Shippers that collaborate by sharing lane-level transportation forecasts gain both competitive and cost advantages. Carriers naturally expect some degree of variability, which contract rates reflect. The higher the variability risk, the higher the premium. Visibility to reliable transportation forecasts lets carriers identify capacity gaps or surpluses in time to move vehicles and maximize return on assets. Advance visibility also helps reduce costs by cutting unproductive deadhead runs to move assets into a region—a clear win for carriers.

Manufacturers that reliably deliver better financial returns stand to become preferred shippers and negotiate more favorable contract rates. Preferred shipper status also brings an advantage as capacity continues to tighten, especially on challenging lanes. When carriers have to decide which loads to cut, it pays to be a shipper of choice.

Finally, visibility is a win for retailer partners. Manufacturers find that delivering goods by their preferred carrier means faster unloading, fewer non-compliance issues, and a distinct advantage on the customer service scorecard.

This ability to provide a joint win for shippers, carriers, and retailers is capturing attention. While many optimization programs simply shift cost from one part of the supply chain to another, access to reliable transportation forecasts enables new efficiencies to drive out costs and increase margins for all parties—and keep shelves stocked for consumers throughout the year.