A chilling tale of poor forecasts

Can supermarkets do more to help save the planet? Dr Andrew Fearne at Kent Business School, part of the University of Kent, believes so. He is heading a research project funded by the Department for Environment, Food and Rural Affairs (DEFRA) that is looking at how poor sales forecasting by retailers and supermarkets is driving up environmental costs in the chilled food sector.

According to Fearne, a lot of waste in the chilled foods sector is caused by poor demand management, with a consequent impact on the environment. The research, due to be completed next year, will calculate how much food waste, how much carbon dioxide and how much packaging waste is created by poor supermarket sales forecasts and ordering practices.

The aim, says Fearne, is to develop a model that enables companies to calculate not just the economic cost of overproduction, but also the environmental cost of producing too much.

One of the key findings from the research so far is that there is significant inefficiency and bad practice in supermarkets' demand management and order forecasting processes, says Fearne. "They are pretty poor at giving suppliers enough notice of the final order.

"We have also discovered that the algorithms widely used by supermarkets to calculate demand are highly aggregated and don't take into account the distinct differences in consumer purchasing behaviour at individual stores. So you end up with significant problems of over- or under-ordering at individual store level, which means stuff gets thrown out.

"The third point is that promotions such as buy-one-get-one-free (BOGOFs) cause spikes in demand and production. And then when the forecast response to a promotion is overestimated, what do you get? You get a lot of stuff left over. If it is baked beans you can rework it. But if it is chilled ready meals or bagged salads you can't." It gets chucked out, says Fearne.

Supermarket buyers don't have any appreciation, and therefore neither do their companies, of the implications of changing an order at the last minute, he says. A supplier could be working to a planned order for three months, and is then forced to change it the night before, he adds. "The buyer might have some idea of the economic cost of this to their supplier, but they will have no notion whatsoever of the environmental impact all this has."

There are fundamental business process inefficiencies at the retailer-manufacture interface which are creating significant amounts of waste, says Fearne. What his project will do is highlight these in terms of the impact on the environment, he says.

Fearne has already collected sales forecast and order data from suppliers and supermarkets. He now has a PhD student collecting data from manufacturers on how much energy is used in making additional orders so that when they are not sold, the amount of carbon dioxide emissions created by inaccurate forecasts can be calculated.

But part of the problem with the chilled food sector, argues Fearne, is that there is a distinct absence of brands. Most of the chilled food sector is own-label and the supermarkets - with the exception of Tesco, says Fearne - have got very poor data on who buys what. Everybody knows what sells, but they don't know who is buying and why. There is not enough investment in understanding better the consumer's response, he claims.

"We are not going to be saying that supermarkets are bullies and that BOGOFs and loss leaders are wrong. But what we will reveal is what percentage of waste in the chilled foods sector is caused by ineffective and inefficient demand management by retailers. We will come out with estimates of carbon dioxide emissions, packaging waste and food waste directly related to the fact that orders come in late or that the forecast uplift was excessive."

And Fearne believes supermarkets will take notice of this sort of environmental scrutiny. "Supermarkets are under pressure to show they care about the environment, so I think they will be more open to being told about the environmental impact of their demand management policies - especially from a DEFRA-funded project."

The answer, Fearne suggests, is for supermarkets to improve their demand management policies and to help their suppliers better understand the way consumers make decisions in supermarkets.

"They'll get better availability at lower cost - and they'll save the planet." FM