Only 22% of companies have a proactive supply chain.
This is a very disappointing figure when put against the forecast that the global supply chain market is expected to experience a CAGR of 11.2% from 2020 to 2027, which means an increase in market value from $15.85 billion in 2019 to $37.41 billion in 2027.
Considering this growth, and the increasing competitiveness, having proactive supply chain management is vital. This is because proactive supply chain management will ensure that the end-user is always able to address shifts in the demand or supply before they become critical.
Demand planning is a supply chain management process that will enable your company to project future demand and successfully customize company output - be it products or services - according to these projections. Thus, demand planning will help in having proactive supply chain management.
The main objective of demand planning is to achieve and maintain an effectively lean supply equilibrium. This is one in which your store inventories will contain just as many products as demand dictates and no more than that. This will help you control your business expenses while preserving your net working capital.
However, finding the perfect balance between sufficiency and surplus can prove to be especially tricky and is only made possible through the use of demand forecasting techniques that will help in predicting demand trends accurately. These techniques also carry added benefits like an increase in your company’s efficiency and customer satisfaction.
Thus, if you are seeking to have proactive supply chain management, thereby increasing your company’s efficiency and profitability, accurate demand planning is essential. To be able to do that, you need to first have a complete understanding of demand planning.
To help you with it, this article will cover the following topics:
- What is Demand Planning?
- Why is Demand Planning Important?
- Demand Planning vs. Demand Forecasting
- 4 Aspects of Demand Planning
- Where Does Demand Planning Fit Within a Business?
- 7 Key Steps for Successful Demand Planning
- Skills Required to be Demand Planners
- Best Practices of Demand Planning
- Benefits of Demand Planning
- Future of Demand Planning
- How Can Deskera Help You with Demand Planning?
- Key Takeaways
- Related Articles
What is Demand Planning?
Demand planning is a supply chain management process of forecasting, or predicting, the demand for products to ensure that they can be delivered, and thus keep your customers satisfied.
The primary goal of demand planning is to be able to strike a balance between having sufficient inventory levels to meet customer needs without having a surplus. Considering that there are a wide variety of factors like:
- Labor force changes
- Economic shifts
- Severe weather
- Natural disasters
- Global crisis events
And so on that can affect your demand, striking that balance is challenging.
Why is Demand Planning Important?
Considering that demand planning holds one of the keys to having an effective supply chain in your company, it serves two essential functions which make it doubly important for your business. These are:
- Businesses always have the fundamental drive to protect the sale and ensure that expected revenues are generated. However, if your retailers do not have a product in stock, then they will not be able to sell it. This will not only keep your customers dissatisfied, but also give them an impression that yours is a business that is unable to meet their demands.
This will discourage them from becoming returning customers, and might even lead to them going to your competitors.
With demand planning, you will be able to ensure that your retailers have exactly the right amount of inventory in the right place. This will help them avoid stock-outs, remain prepared for their next sales, and secure their revenue.
Additionally, poor planning can result in avoidable supply chain disruptions, leaving your company short on products which can result in backorders, stockouts, or costly scrambles for raw materials.
All of these will result in delays, thereby leaving your customers dissatisfied. These situations can be avoided with the help of demand planning as well.
- However, protecting your sales is no longer enough. You also need to ensure that your business is being run efficiently. Demand planning will assist you in making your business efficient by helping in managing your inventory space smarter.
With demand planning, you will successfully be able to avoid the dangers of overstocking - such as increased inventory carrying costs and financial situations that require the use of product discounts or other temporary measures to alleviate overstocking by selling inventory as quickly as possible.
Demand Planning vs. Demand Forecasting
While demand forecasting is an exercise to determine what is likely to happen, demand planning is the operationalization to make it happen. Demand planning involves using the demand forecast and the insights provided therein to ensure that each segment of the supply chain operates accordingly, with the most efficiency and least cost.
Demand planning thus uses the information provided through the forecast, and makes sure that required capacity is available, raw material orders are placed, inventory levels for the predicted production rates are optimized, and delivery of materials and finished goods can be achieved in the proper sequence and on time.
Today, there are software that facilitates demand forecasting by relying on historical and real-time data that reflects consumer behavior as well as market trends.
Thus, by working with the marketing, sales, and customer feedback data, demand planners can develop a forecast that predicts the demand within a reasonable range. This information is then used for resource capacity planning, and shop floor scheduling. It also helps in establishing safety stock and inventory reorder points.
Additionally, demand forecasting can also access additional real-time tools such as available capacity, weather, and other variables to produce a reliable consensus forecast that the end users can rely upon. These forecasts can look forward by a week, month, quarter, or even year, with each range having an understood margin for accuracy.
Therefore, demand forecasts have become the foundation of the overall demand planning process, helping your business figure out how it can fulfill its expected sales, and therefore maximize its net profit.
4 Aspects of Demand Planning
While demand planning spans several aspects, the three primary areas of the same are:
Product Portfolio Management
Product portfolio management oversees the overall product lifecycle, starting with the introduction of a new product through to its end-of-life planning.
Several times, the product lines tend to be interdependent, making it essential to understand how new products may influence the demand for other products. This will help in understanding the overall product mix required to maximize market share, and consequently their expected demands.
Statistical forecasting creates supply chain forecasts with advanced statistical algorithms by using historical data. In this area, it is crucial to determine the accuracy of each model, identify the outliers and exclusions, and understand the assumptions.
Seasonal shifts like for instance, a spurt of holiday shopping that occurs between October and December for retailers, or the boost in yard equipment sales in spring months, can also be assessed with statistical forecasting. The insights from the same are crucial for effective and efficient demand planning.
Demand sensing uses a combination of new sources of data like infectious disease trends, government data, weather, and more, with historical trend data. This then applies AI to detect disruptions and demand influencers in near real-time, thus ensuring that you have accurate demand planning in place.
Trade Promotion Management
It is evident that marketing or trade promotion events will influence demand. This is especially true for the retail industry. This is because the primary goal of these events is to help your brand connect with its buyer personas and therefore potential customers.
This is often through an in-store giveaway, promotion, or discount, which ends up impacting the demand for a product. Trade promotion management works to ensure that such opportunities are properly executed and deliver all the expected benefits. It is thus an important aspect of demand planning.
Where Does Demand Planning Fit Within a Business?
Demand planning is a process that, to be carried out accurately, requires input from and coordination between several departments, including sales and marketing, purchasing, operations, finance, production, and supply chain.
Additionally, executives that are responsible for product portfolio management and overall business strategy, play important roles in demand planning. This is because they are the ones who take the lead times for components and production times into account during demand planning.
Considering that demand planning touches so many business functions, the location of the employees who are tasked with it can vary. Employees dealing with demand planning may be an independent group, or it may be integrated into one of the departments listed above, or it can be in the procurement or operations department.
However, some are of the opinion that demand planning, especially its demand forecasting component is most successful when it is linked closely to marketing and sales.
7 Key Steps for Successful Demand Planning
Demand planning is a multi-step process that can get even more complicated as the size and scope of your company increases, or as your company’s forecasting efforts grow. The 7 key steps for successful demand planning are:
Create a Team
One of the steps for having successful demand planning is ensuring 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 that your business acquires enough inventory, at the right time, to meet the demand forecast. Similarly, representatives from the finance group may be responsible for building the actual forecast.
Define and Aggregate Relevant Internal Data
All your employees that are involved in demand planning should agree on what data should be included to develop an accurate forecast.
While the relevant data may vary by company, it will always include:
- Sales data by channel and location
- Inventory turnover rate
- Out-of-stock rates
- Production times
- Lead times
- Obsolete inventory
- and other key inventory metrics.
Additionally, they should also check with the marketing and sales department about the timing of price changes, and the marketing campaigns and promotions that could affect demand.
They should also collect information from the product teams about new launches, retirements, and competitive offerings as this too will affect the accuracy of your demand forecast.
Enhance the Forecast with External Data
Another crucial input for effective demand planning is external data. External data 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 that you should consider is the overall economic conditions that may impact your sales and shifts in your market or for specific products that you sell. This will let you forecast your demand accordingly, and therefore ensure accurate demand planning.
Develop a Statistical Demand Forecast
All your employees involved in demand planning should collaboratively decide on the type of forecasting model or models that is the most appropriate for your business, and thus should be used.
Implementation of the decided model or models is done best through software as they have all the information integrated and streamlined from different departments, is time and cost-effective, and are free from errors.
Additionally, this information tends to be updated in real-time, making the demand planning even more accurate. Beyond company-wide forecasts, you may even want to build predictions by product or product line, or for specific customers or regions.
Challenge the Demand Forecast
To have successful demand planning, it is important to review, reanalyze and refine your demand forecast with all your key stakeholders. You should add the most recent data to see if that has a substantial impact on your predictions.
You should also question any information that may be incorrect, and try to remove unlikely outliers that may be distorting the overall forecast.
Both of these steps will help you understand the effects of doing so, thereby giving you deeper insights into your next steps.
In fact, you should also double-check that your demand forecast is aligning with the company’s broader financial forecasts or not.
Weigh Forecasts against Inventory
Your next step to have successful demand planning is determining how much inventory is needed to fulfill the predicted demand (cycle inventory), including a buffer of “safety stock.”
You should also identify the necessary vendors to meet this demand, and check in with them to ensure that they will be able to deliver you the necessary products or services on your required timeline.
Lastly, you should make sure that your transportation vendors are able to handle the volume, and will also be able to meet your schedule for moving goods between locations.
In order to measure the results of your demand planning, you should identify the key performance indicators (KPIs) that will help you measure its effectiveness, as against the targets set by you for each of the KPIs.
Your business may track sales forecast accuracy, fill rates, order fulfillment lead times, cost of goods sold (COGS), inventory turnover ratio, and other such metrics which are relevant to your business.
Once you have decided on your KPIs and set targets for each, you should continually review performance against these targets and make adjustments as and when required.
Skills Required to be Demand Planners
The skills that are required to be a successful demand planner are:
- Demand planners need to have excellent analytical skills, with competency in statistical data analysis and modeling.
- Demand planners also need to be great communicators as they need to interact with many different departments.
- Demand planners tend to be innovators that champion progress through automation. This is because tools such as demand planning software and supply chain management software will help the company to improve its demand planning, ultimately saving money.
- Demand planners should be familiar with Enterprise Resource Planning (ERP) and Material Requirements Planning (MRP) systems as these will be the source of data, as well as where the demand forecasts and demand planning will then be done.
Demand Planning Methods
Push and pull are the two philosophies that have been applied to demand planning at the broadest level.
Popular in the 20th century, in the push method, it is assumed that “if we build it, they will come.” Businesses following this philosophy believed that building innovative products would create demand for them. This meant that they manufactured products, made them available to customers, and waited for the sales to roll in.
However, when practiced, the success of this strategy oscillated between being a hit or miss. Companies rarely achieved the perfect balance, even with markdowns and sales.
This is because sometimes the demand exceeded the supply, causing situations of stockouts, leading to the business missing sales opportunities. At other times, however, inventory lingered unsold on shelves or in warehouses, increasing operating costs and hurting the business’s cash flow.
Today, most of the demand planning processes use the “pull” philosophy. This means that they start with gauging customer demand and using that information to guide all their other operational planning.
However, as it might be evident, the primary challenge of the pull approach is coming up with an accurate forecast of customer demand. Inaccurate forecasts end up creating the same problems as in the push method - missed revenue opportunities and higher costs.
Some of the common models for creating a statistical forecast in the demand forecasting component of demand planning are:
- Moving average demand - This method assumes that the future demand is the rolling average of the last few sales periods.
- Linear regression - This method takes the previous demand levels and puts them through a lead-square regression statistical model to predict future sales. Sometimes, this model is called the “line of best fit” as it plots a curve based on previous demand and then extends that curve to predict future demand.
- Seasonal trends - As implied by its name, in this method, future demand is predicted based on historical sales during particular months or seasons. This method is therefore most appropriate for those companies whose sales are highly seasonal.
- Sales forecast - In this method, the future demand is estimated based on the sales opportunities and probabilities identified by the company for an upcoming period.
The most successful way of doing demand planning and ensuring its accuracy is by using demand planning software in conjunction with these methods so that certain aspects of modeling and forecasting are automated. This conjunction will lead to a more robust and accurate demand forecast and therefore demand planning.
Best Practices of Demand Planning
Demand planning is a complex multi-step process that is dependent on the right tools, information, and processes. Some of the things that you should take care of to lay the foundation for accurate and successful demand planning are:
- Get buy-in and demand accountability from all stakeholders by relying on both statistical modeling and collaborative forecasts that pull in data from various departments.
- Have accurate inventory data. You will not be able to have successful demand planning without efficient, accurate inventory management.
- Include information from the supply chain, whether it is market shifts and consumer buying behavior, weather events and natural disasters, etc, they should be added to your forecasts. This process is sometimes referred to as “demand sensing.”
- Actively shape demand with marketing, promotion, and pricing tools.
While there often can be unique nuances in the process, based on product positioning, inventory needs, and organizational goals, some of the best practices to keep in mind are:
Implement the Right Software
When choosing an ERP or an MRP system for your business, there are a vast number of options available in the market, making it tricky to choose the right one.
Thus, when you are considering a particular software solution, you should examine its ability to handle forecasting nuances, as well as the reputation of its provider.
Additionally, you should also consider its reporting abilities as well as the transparency and reliability of the forecasts it produces.
The software that you choose should be able to automate tasks such as:
- Statistical analysis for forecasting
- Tracking KPIs
- Calculating optimal stock levels
This will allow your team of demand planners to focus on interpreting the results, collaborating with other groups, and adjusting plans as necessary.
Lastly, your software should be easy to use and integrate with your inventory management, ERP systems, or any other software where you have your data.
Gather and Prepare Data
Data is the driver of demand planning. Thus, having real-time visibility into inventory movements, along with metrics reports that paint a clear picture, and data mining and aggregation that can identify areas for improvement or reaction, will help in creating more agile process modeling.
Define Process Models
One of the best practices to follow in demand planning is to have a defined process model. A lack of the same leads to chaos. A common confusion is between process and information, wherein information is simply a set of widely known facts about an organization.
However, information makes it difficult to hold anyone accountable, which ends up hurting the overall performance.
For most companies, the steps in the demand planning process are:
- Preparation of data
- Initial forecasting
- Incorporation of market intelligence
- Consideration of sales goals and financial reports to reconcile bottom-up forecasts with top-down financial and sales forecasts
- Refine a final forecast
- Performance monitoring based on real-time analytics
Implement and Monitor
Usually, successful demand planners design a pilot version of the plan using historical data, or descriptive analytics, as a basis. Additionally, they also make regular adjustments and have a team of people dedicated solely to:
- Devising the plan
- Implementing the plan
- Reducing error and bias
- Designing processes for execution
Benefits of Demand Planning
When your demand forecasting and demand planning are able to work together, there are several benefits that will be realized by your company. These include but are not limited to:
Better Financial Control
With accurate demand forecasts, and therefore data-driven demand planning, you would be able to improve your cash flow, optimize your inventories, meet customer expectations on a just-in-time basis, and maximize your revenue and net profit ratio.
Better Operations Planning
With accurate demand forecasting and well-executed demand planning, you will be able to help your company plan its operations better. This includes labor utilization, repairs and maintenance scheduling, and capacity planning, all of which will benefit greatly from a sound demand plan.
Better Marketing Strategies
With the use of the insights provided by demand forecasting, demand planners will be able to offer sales and marketing teams better information and leverage to target sales that match the demand curve.
These teams will thus be able to make their marketing strategies and their consequent marketing objectives as well as sales targets accordingly. This will also help in managing workplace stress while keeping your company prepared for those sales.
Minimizes Excess Storage Costs
When demand planning is done inefficiently or poorly, it can lead to a company purchasing and storing more inventory than what is desired by their customers.
This can lead to additional expenses for storing items as the storage costs include things like equipment maintenance, warehouse utilities, chances of product expiration, and so on.
But by accurately forecasting demand, and therefore having accurate demand planning, your company will be able to ensure that it is purchasing and storing the right amount of inventory to meet the demands of your customers.
This will also help you in minimizing excess storage costs, and therefore prevent any additional pressure on your working capital.
Increases Efficiency in Production
For every step of the production process, manufacturers tend to have deadlines. If your company is unaware of the expected demand, then it will not be able to plan its production schedule, including shop floor planning accurately.
This will require your company to adapt to the demand at a moment’s notice, which can lead to disruptions and disorganization during the production process, thereby even leading to an increase in cost of goods manufactured.
Improves Customer Service
In order for your customers to be able to trust and continue to purchase from your company, they should be able to rely on you that their products are going to be in stock.
If the product that they are looking for is out of stock or takes longer than expected to arrive, then there is a strong possibility that your customer will shift to an alternative company.
Through demand forecasting, followed by demand planning using the insights from the same, your company will be able to ensure that it has enough products in stock to be able to meet the requirements of your customers. This will improve customer retention and even lead to positive brand awareness.
Helps with Logistics Planning
If your company knows what is the demand for its products, then it will be able to deploy the right amount of trucks, or other transportation means for its transportation. This will help in avoiding unnecessary transportation costs.
For instance, if your customers are demanding 1000 goods, but your company’s vehicles can ship only 900 goods, then it can become a problematic situation, which can even cause severe delays, additional expenses in finding alternative transportation, or loss of customers.
Conversely, if there are only 900 goods that are required by your customers, but you ship 1000, then you have ended up wasting a lot of money on transportation expenses and other hidden costs.
Accurate demand forecasting and thus demand planning will hence be able to help you with logistics planning.
Improves Human Resources Management
One of the other benefits of accurate demand forecasting and thus demand planning is that your company would know how many employees are needed to meet the demand and if you need to hire more within any part of your supply chain.
This is an important insight, because even if you have all the necessary materials, goods, and capabilities, not having enough workers to fulfill orders can lead to delays in getting your products to your customers, thereby decreasing their satisfaction.
Conversely, having too many workers will result in you spending an excessive amount of your money on wages, leading to an increase in the ratio of operating expenses to operating income.
Future of Demand Planning
Like several business needs, supply chain and demand planning are going digital. Advances in applications of machine learning within the supply chain have made it possible to adapt and update forecasts in real-time, thus allowing lean inventories without them missing to meet the demand.
Thus, if the supply chain professionals are able to understand how to use digital enterprise architectures and implementation of artificial intelligence and machine learning programs, they will be able to identify new ways to cut costs in operations, while also being able to boost revenue, and have a greater competitive edge. This is because these programs can help you optimize a lean, agile, and data-driven approach.
In fact, the increasing use of artificial intelligence and machine learning by demand planning software to process huge amounts of data has led to the identification of trends and patterns that a human might have never been able to identify. Demand planners can now use those insights to make immediate adjustments, and have the most accurate results.
IoT devices have played a huge role in improving demand planning as well. This is because they have allowed companies to receive up-to-the-minute updates on the status of raw materials and inventory.
In fact, IoT technology can also help you monitor sales as they happen, thereby letting you quickly replenish stores or warehouses that are selling items faster than expected.
This in-depth visibility will help your company to use a pull strategy such that it optimizes supply or inventory levels while limiting your expenses, and also the challenges that come with too much or too little stock.
All of these advancements will help you get a better-connected supply chain. This will help you undertake demand planning even more in the moment, ensuring that your supply chain’s productivity and profitability are maximized.
How Can Deskera Help You with Demand Planning?
As a manufacturer or retailer, it is crucial that you stay on top of your manufacturing processes and resource management.
You must manage production cycles, resource allocations, safety stock, reorder points, and much more to achieve this.
Deskera MRP is the one tool that lets you do all of the above. With Deskera, you can:
- Track raw materials and finished goods inventory
- Manage production plans and routings
- Maintain bill of materials
- Optimize resource allocations
- Generate detailed reports
- Create custom dashboards
And a lot more.
It is also possible to export information and data on Deskera MRP from other systems. Additionally, Deskera MRP will give you analytics and insights to help you make decisions.
So go ahead and book a demo for Deskera MRP today!
Demand planning is a supply chain management process that will enable your company to project future demand and successfully customize company output - be it products or services, according to those projections.
The main purpose of demand planning is to achieve and maintain an effectively lean supply equilibrium, such that there exists a perfect balance between sufficiency and surplus of your inventory. This will help in ensuring that your customers are satisfied, your cash flow is well-managed, your revenue and profits are maximized, and you have a successful business.
Generally, the key steps of demand planning are:
- Create a team
- Define and aggregate relevant internal data
- Enhance the forecast with external data
- Develop a statistical demand forecast
- Challenge the demand forecast
- Weigh forecasts against the inventory
- Measure results
Some of the benefits of demand planning are:
- Better financial control
- Better operations planning
- Better marketing strategies
- Minimizes excess storage costs
- Increases efficiency in production
- Improves customer service
- Helps with logistics planning
- Improves human resource management
Considering the vastness of data involved in demand planning, and all the complexities involved in this process, one of the best ways to carry this process out while ensuring its accuracy is through the implementation of MRP systems like Deskera MRP.
This will also save your team from investing extra resources in terms of time, for instance, thereby letting them focus on other tasks that cannot be automated.