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The Plight Before Christmas

Companies have learned some useful lessons about demand planning, but will improved forecasting techniques guarantee happy holidays?

For the first few months of this year, the U.S. economy was moving steadily toward recovery. The Credit Managers’ Index (CMI), a key indicator of corporate economic trends, registered a rise each month from August 2009 until April 2010, and other benchmarks gave cause for optimism.

Then came May, with the BP oil leak, worries about European sovereign debt, disappointing employment data, and a sudden drop in the CMI index. Talk of a double-dip recession resumed, and CFOs were torn: Should they ramp up for growth or once again batten down the hatches?

The dilemma as to whether to reduce inventory if another downturn is coming or gear up for a resumption of growth is particularly acute now, as companies debate how to prepare for the holiday shopping season.

“No one is confident that they should buy up into this fourth quarter in a significant way, but, by the same token, they don’t want to miss opportunities,” says Bryan Eshelman, a retail and consumer products specialist with business advisory firm AlixPartners. “So it’s really investing in the capability to react quickly that will help those that are most successful this fourth quarter.”

Fortunately, the Great Recession prompted many companies to reevaluate their methods of demand forecasting and planning. Companies now test the market more frequently, assessing customer intentions via such means as dipping into markets tentatively before plunging into huge inventory orders. Merchandising methods, dubbed “hold-and-flow” and “delayed-distribution,” are increasingly helping managers to look before they leap.

At the same time, corporate forecasters have grown more cognizant of the role companies themselves play in sparking or dampening demand. Rather than rely solely on such venerable prediction metrics as same-store sales, they are attempting to gauge how their own pricing, advertising, and sales practices affect customer behavior and how they can refine those practices to boost sales.

For these practices to succeed, some experts say, CFOs will need to begin linking sales predictions to production planning, instead of allowing the two functions to operate separately. At Coach, a maker of luxury handbags and other wardrobe accessories, CFO Mike Devine says that his role is “to make sure the organization maintains discipline in having our production forecasts line up with our sales forecasts.” Rather than enforcing preexisting production, inventory, and sales plans, finance chiefs must be able to make quick adjustments as conditions change.

Before the recession, CFOs typically approached forecasting and planning “on a strategic basis,” says Charlie Chase, business enablement manager for software company SAS Institute. “Now they need to do it on a tactical basis,” he says. Think of it as an early Christmas present the company can give itself.

Going with the Flow

The recession schooled finance chiefs on the inherent risks of placing large inventories in a supply chain. Previously, companies typically made or bought products and distributed them to stores in bulk because that was the cheapest way to do it. Until, that is, demand dried up and companies had to take big write-downs and unload the goods at deep discount, if at all.

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