Demand Planning
Demand planning is a cross-functional process that helps businesses meet customer demand for products while minimizing excess inventory and avoiding supply chain disruptions. It can increase profitability and customer satisfaction and lead to efficiency gains.
Demand planning should be a continuous process that’s ingrained in your business. Fortunately, advances in technology have made accomplishing this possible, not to mention easier.
Video: What Is Demand Planning?
What Is Demand Planning?
Demand planning requires analyzing sales as well as consumer trends, historical sales and seasonality data to optimize your business’s ability to meet customer demand in the most efficient way possible.
To achieve this goal, demand planning combines sales forecasting, supply chain management and inventory management. First, it uses data from internal and external sources to predict future demand. That forecast can then inform your sales and operations strategy so you can plan how much product to buy or manufacture in order to meet that demand.
Why Is Demand Planning Important?
Effective demand planning delivers both profit and customer satisfaction by helping businesses strike the right balance between sufficient inventory levels and customer demand. That’s not an easy goal, especially since it requires coordination across your entire organization. But the business implications are significant. Excess inventory locks up working capital, adds inventory carrying costs and increases the potential that you’ll be stuck with low value or obsolete inventory. Alternatively, poor planning can result in avoidable supply chain disruptions and leave a company short on products, which can result in backorders, stockouts or costly scrambles for raw materials. All of these issues can result in delays, which leads to dissatisfied customers.
Where Does Demand Planning Fit Within a Business?
The demand planning function requires input from and coordination between several departments, including sales and marketing, purchasing, supply chain, operations, production and finance. Additionally, executives responsible for product portfolio management and overall business strategy play important roles by taking into account lead times for components and production times.
Since demand planning touches so many business functions, the location of employees who handle this responsibility can vary: It may be an independent group or it may be integrated into one of the departments listed above, as well as the procurement or operations departments. Some believe that demand planning, especially the demand forecasting component, is most successful when it is closely linked to sales and marketing.
Key Steps for Successful Demand Planning
Demand planning is a multi-step process, and it can get complicated as the size and scope of the company or its forecasting efforts grows. Key steps include:
Create a team: Ensure that the members of the cross-functional demand planning team have clear roles and responsibilities. For example, representatives from purchasing and supply chain groups may be responsible for ensuring the business acquires enough inventory, at the right time, to meet the demand forecast. The finance team is often responsible for building the actual forecast.
Define and aggregate relevant internal data: The various employees involved in demand planning should agree on what data should be included to develop an accurate forecast. The relevant data will vary by company, but should include sales data by channel and location, out-of-stock rates, inventory turnover, lead times, production times, obsolete inventory and other key inventory metrics. Check with your sales and marketing teams about the timing of price changes, marketing campaigns and promotions that could affect demand. Gather information from product teams about new launches, retirements and competitive offerings, as all of those could impact forecast accuracy.
Enhance the forecast with external data: External data is another crucial input for effective demand planning. This could be metrics around the recent performance and delivery timelines of suppliers and distributors or the latest purchasing habits of your key customers. Other external information includes overall economic conditions that may impact sales and shifts in your market or for specific products you sell.
Develop a statistical demand forecast: Collaboratively decide on the type of forecasting model (or models) that makes the most sense for your business and then start building it. This is best done with demand planning software, though some businesses still use Excel or other tools that require more manual work and can be time-consuming and error-prone. Beyond company-wide forecasts, you may want to build predictions by product or product line, or for specific customers or regions.
Challenge the demand forecast: Review, reanalyze and refine the demand forecast with all key stakeholders. Add the most recent data to see if that has a substantial impact on predictions. Question any information that might be incorrect and perhaps remove unlikely outliers that could distort the overall forecast to understand the effects of doing so. It’s also a good time to double check that the demand forecast aligns with the company’s broader financial forecasts.
Weigh forecasts against inventory: Determine how much inventory is needed to fulfill the predicted demand (cycle inventory), including a buffer of “safety stock.” Identify the necessary vendors to meet this demand, and check in with them to make sure they can deliver the necessary products or services on your required timeline. Ensure transportation vendors can handle the volume and meet your schedule for moving goods between locations.
Measure results: Identify key performance indicators (KPIs) that enable you to measure the effectiveness of your demand planning and set targets for each. Your business may track sales forecast accuracy, inventory turns, fill rates, order fulfillment lead times or cost of goods sold (COGS), for example. Continually review performance against these targets and make adjustments as necessary.
