The Consumption Model – How to develop a demand plan for your “Big Box” Customer
Updated: Nov 17, 2022
It’s not sold until the consumer buys it! Shipments into the outbound supply chain that build inventory do not represent real demand unless they are sold through to a customer. If consumers don’t consume, there will be no need to replenish the supply chain there may even be returns from the channel resulting in negative sales.
With outbound supply chains where you are insulated from consumer demand by distributors and retailers, many of our clients find it difficult to sense actual consumer demand. This is typical of the “Big Box Store” supply chains but exists whenever there is channel inventory between you and the end consumer.
I first heard the term “Consumption Model” from Mark Ortiz at Lamplight. While the concept is not new I really liked the name Lamplight had given it. Other labels such as “Sell Through” or “Sales In/Sales Out” really don’t create the image that the prime demand driver is the end consumer’s consumption. Thanks Mark. Modeling demand based on forecasted and actual consumer demand, is becoming a standard demand planning approach for suppliers selling through an outbound supply chain. Let’s look at the following illustration:
Goods are shipped from the supplier’s factory to the two Big Box warehouses or distribution centers. These goods may be stocked at the distribution centers or simply cross-docked and shipped to the appropriate stores.
Typically goods will not be transferred between distribution centers or stores (this is not the case in the automotive dealership supply chain where dealers often access and sell other dealers’ inventory.)
To plan the demand on the factory, we need to look at the forecasted consumer demand, the inventory in the stores and the inventory in the distribution centers as all of these can impact the demand on the factory. The “Consumption Model” is designed to address this outbound supply chain planning. In this article I will briefly review the following key elements of this model:
Planning/forecasting consumer demand
Planning/forecasting channel inventory
Integrating this data into a factory demand plan
Planning and Forecasting Consumer Demand
The availability of Point Of Sale or POS data is a requirement for using the Consumption Model. The retailers provide their suppliers with consumption data on a regular basis expecting them to use it to plan their production.