An Ice Cold Bottle of Pay-for-Performance Forecasting

Chapter Three in Facing the Forces of Change®: Lead the Way in the Supply Chain predicts that manufacturers will use pay-for-performance programs to get more from their distributors.

I just read a great story about how a planning manager at beer-maker Heineken created a pay-for-performance plan that could be readily adopted by other manufacturers.

The original article was published in the Journal of Forecasting, but is not online. Supply Chain Digest published a good summary called Using Incentives to Drive Forecast Collaboration.

Beer Goggles

Heineken’s European-made beer is shipped to the U.S. based on orders from either its own distribution centers or orders from independent distributors. Unfortunately, Heineken was getting inaccurate and incomplete forecasts from its distributors in the Southeast of the U.S. (No, distributors did not create their forecasts after sampling products from the warehouse!)

This supply chain is fairly typical in many lines of trade. The manufacturer only sees orders from distributors. Distributors, in turn, only sees orders from their customers. There is no real-time visibility into the actual purchase or usage rate of the product by consumers, so this structure can create inefficiencies for both manufacturers and distributors. (See pages 32-33 of Lead the Way. One solution is to create a more demand-driven supply chain by sharing point-of-sale information.

Beer Games

A creative planning manager at Heineken developed a competitive contest for the individual forecasters at each distributor who created the most accurate forecast. Prizes included $500 gift certificates for the best two and four month forecasts. The best annual forecast won a $2000 gift certificate.

Guess what? Overall monthly forecast accuracy improved by 10% in one year. Another interesting dynamic was some friendly competition among distributors, although, although some distributors turned out to be better at forecasting than others. In other words, this program exposed previously hidden performance differences between distributors.

The benefits of improved forecasting to Heineken are not discussed in the article, but I’d guess that Heineken saw improved costs from better production planning and more stable production runs. They subsequently expanded the program to include other information, such as inventory reporting. If Heineken used the improved forecasts, then the program probably paid for itself.

Based on this story, here are two questions for manufacturers and distributors to ponder:

• What incentives (intended or not) are manufacturers creating for distributors with current discount and rebate program?


• How could a manufacturers use discounts/rebates/fees/marketing funds/prizes to get the attention of wholesaler-distributors and reward results?

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On a related note, beer and scotch guru Michael Jackson (a.k.a The Beer Hunter) recently passed away. I had the privilege of meeting Mr. Jackson in May, discussing a memorable bottle of scotch with him (The Macallan Gran Reserva from 1982), and getting him to sign my copy of Complete Guide to Single Malt Scotch. Check out his books and then raise a glass to Mr. Jackson's unique legacy.