The beverage alcohol industry isn't a one-size-fits-all market. It's a blend of channels, each with its distinct nuances and requirements.
- Distributors: These entities often have their forecasting models influenced by their market reach and customer base. Aligning with them means understanding their unique demands and constraints.
- National chains: Planning demand for national chains, whether on-premise (e.g., bars, restaurants, etc.) or off-premise (e.g., supermarkets, liquor stores, etc.), introduces an added layer of complexity. It's not just about understanding the chain's strategy; it's about ensuring that this demand aligns seamlessly with what you've planned with your distributor partners. Distributors hold inventory intended for multiple channels, not exclusively for a specific national chain. This interplay requires a holistic approach to forecasting, ensuring all pieces of the puzzle fit together.
- Direct-to-consumer (DTC): DTC offers great margin opportunities and strong customer loyalty potential but demands a strong understanding of consumer behavior, digital marketing trends, e-commerce dynamics, and consideration of the strategy behind the next release.
There's little room for error in this industry. A forecasting misstep can lead to overproduction, tying up capital and risking product obsolescence. On the flip side, underestimating demand can result in stockouts, lost sales, and damaged relationships with key customers. There is too much at stake not to invest time and resources into improving the forecast.
The importance of forecasting
Forecasting is the linchpin that holds the entire supply chain together. It clarifies production needs, guiding decisions on how much to make, the quantities to package, and the volumes to ship. This is crucial across industries, but in beverage alcohol, it goes a little further, and the cost implications are significant.
Two unique factors amplify the importance of accurate, long-term forecasting in this industry:
- The tie to agriculture: The beverage alcohol industry is deeply intertwined with agriculture. Whether it's the grapes for wines, the hops for beers or the blue agave for tequilas, these raw materials are at the mercy of nature. Seasonal variations, climate changes, and other unpredictable factors can impact yields. Accurate forecasting ensures that you can proactively identify any gaps in your long-term supply contracts, plantings, farming practices, etc.
- The aging process: Unlike other industries where products are manufactured and shipped out, many beverages in Bev Alc have an aging process. Whiskeys might need years in barrels, wines require time to mature, and tequilas need their aging period. If you’re not investing in producing an accurate long-term forecast, you’ll be tying up capital in your working inventory or not taking advantage of potential surplus deals that may come your way.
The fiscal year's finish line is in sight, and the office is bubbling with anticipation and anxiety. Each discussion and each review is charged with a newfound intensity. Those pivotal numbers, signifying success or setback, are now the center of everyone's attention.
In the high-pressure environment leading up to the fiscal year's close, there's a heightened risk of making hasty decisions.
- Missed opportunities: In the scramble to meet targets, the organization might overlook lucrative deals or partnerships. The urgency to push products out might lead to missed chances for better inventory positioning or advantageous deals.
- Tunnel vision: The intense focus on immediate goals can sometimes obscure the broader strategic vision. Decisions made in the heat of the moment might align with short-term objectives but could be detrimental in the long run. This short-sighted perspective can lead to misaligned strategies, resource misallocation, or even strained relationships within the supply chain.
- Employee burnout: The end-of-year rush isn't just about numbers. It's about the people who are working tirelessly to achieve them. The relentless pace, coupled with the pressure to perform, can lead to increased stress, reduced morale, and even burnout among team members.
There is hope…
The beverage alcohol industry is a puzzle with many moving pieces. While there are a lot of complexities, a balanced approach to methodical science and creative art can unlock its secrets.
- Robust forecasting: Begin with a foundation rooted in mathematics and analytics. A forecast isn't just about extrapolating past data but understanding underlying patterns, seasonality, and market trends.
- Advanced tools: Yes, you can use Excel, but I've already explained that slippery slope. As a small plug, consider tools like Claret's Forecast Workbench tailored to the beverage alcohol industry. These platforms can handle large datasets, provide insights, and offer predictive analytics to anticipate market shifts.
- Sales team's pulse: Your sales team is on the frontline, interacting with distributors, retailers, and sometimes end consumers. Their insights into short-term market dynamics, emerging trends, and immediate challenges are invaluable.
Forecast horizon recommendation: The sales team should own the forecasts from the current month to six months out.
- Marketing's vision: The marketing team, with its research and strategies, offers a bird's-eye view of the market. They can provide insights into longer-term trends, potential market disruptions, and evolving consumer preferences.
Forecast horizon recommendation: The marketing team should own the next seven to twenty-four months (or more!).
- S&OP process: A monthly Sales and Operations Planning (S&OP) process acts as the glue that binds various departments. It ensures sales forecasts are properly shared, production capabilities are known, and inventory levels (internal and distributor inventories) are agreed to. Regular reviews allow for timely course corrections, ensuring that the entire organization moves in harmony toward shared objectives.
Understand distributor dynamics
- Beyond contracts: While contractual agreements between supplies and distributors lay the groundwork, the real dynamics with distributors often revolve around relationships, trust, and mutual growth objectives. Recognizing the motivations, pressures, and priorities of distributors can lead to more collaborative and fruitful partnerships.
- Incentives and motivations: Distributors might have their own targets, incentives, and challenges. Aligning with them requires understanding these dynamics and crafting strategies that create win-win scenarios.
- Blending data with intuition: While data offers a clear picture of the past and present, intuition, experience, and market insights help anticipate the future. A successful forecast marries both these elements, ensuring decisions are grounded in facts but also account for the unpredictable nature of the market.
- Supply chain partnership: Building a forecast isn't a solitary endeavor. Engage with supply chain partners, from raw material suppliers to distributors. Understand their perspectives, challenges, and strategies. This collaborative approach ensures that the entire supply chain is synchronized, reducing inefficiencies and maximizing opportunities.
Let’s spend a few words on inventory before we continue. When dealing with the Bev Alc supply chain, it is important to understand some fundamentals. Every node (supplier, distributor, retailer, etc.) in the supply chain has a demand and a supply. In addition, there is some level of inventory. From a finished good standpoint, inventory exists for two reasons:
- Cover demand variability over replenishment lead times. Referred to as “safety stock”.
- The amount of stock coming in from a supply replenishment. Referred to as “cycle stock”.
Now consider the different nodes in the Bev Alc supply chain, and each has its own supply, demand and inventory. Just to know the sales forecast isn’t enough when you are the supplier (winery in the below illustration). You at least need to have a handle on the distributor inventory. This will impact your shipments.
OK, before we continue, I have to mention this, and this is probably the biggest takeaway from this post:
If you push more supply to your distributor than they need to hit a shipment/revenue target, you are mortgaging your future. I get it. This is the game. But if you play that game while paying more attention to some of these supply chain principles that I’m outlining here, your business and your distributor partner’s business will be better off.
A step-by-step approach to improved Forecasting in the beverage alcohol industry
1. Acknowledge the dual realities of forecasting:
- Understand that forecasting isn't just about numbers. It's a blend of quantitative data and qualitative factors.
- Recognize the importance of a numbers-based approach and the influence of non-data-driven factors.
2. Collaborative analysis:
- Foster a collaborative environment where teams can discuss the mathematical side of forecasting and the external pressures that might affect the "agreed to numbers" with your distributor partners.
- Encourage open dialogue between departments to ensure a holistic view of the forecasting process. Cough cough… S&OP.
3. Identify leverage points:
- Determine which aspects of the forecasting process can be adjusted or optimized to improve accuracy and efficiency.
4. Re-evaluate days of inventory calculation:
- Review your current method of calculating days of inventory.
- If you're basing it on a historical run rate divided into the inventory, reconsider this approach. This doesn’t properly account for future seasonal patterns.
- Instead, adopt a method based on depletion forecasts. Calculate how many days in the future the inventory will satisfy the depletion forecast. Have a look that the illustration below.
How long will 600 cases on hand last me?
5. Collaborate with distributors:
- Dive into collaborative planning with your supply chain partners.
- Aim to reach a consensus on the depletion forecast with your distributor.
- Understand that distributors have their forecasting methods. Engage with them to understand how they determine their replenishment orders (shipments). Know their inventory strategies!
6. Avoid shortcuts:
- Resist the temptation to focus on "fast movers" or high-demand items to meet targets. This approach needs to be revised and may lead to issues.
- Instead, develop a "hit list" of items. For instance, focus on those with projected inventory days on hand that align with desired inventory levels and also have a significant volume. You don’t want to push something that already has a lot of days on hand at the distributor, even if it is a high-volume product.
- Also, give yourself some time to pull together the data and continually update it. Don’t wait til the last minute. This doesn’t give you time to process the data and provide other insights.
Forecasting in the beverage alcohol industry is a complex dance, more intricate than in most other CPG companies. With diverse channels like wholesalers, DTC, and national chains, each presenting unique challenges, the stakes are sky-high. Missteps can erode margins and result in lost revenue. Moreover, the industry's connection to agriculture and the aging process of products like wine and whiskey further puts even more importance on building an accurate forecast well into the future.
Yet, there's a path forward. By blending advanced tools like Claret's Forecast Workbench with insights from sales and marketing teams and fostering collaboration across the supply chain, companies can navigate this challenging terrain. Regular S&OP processes and understanding distributor dynamics are key, ensuring that both data-driven decisions and intuitive insights guide the way.