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. Show
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. Demand Planning vs. Demand ForecastingDemand forecasting is part of the larger demand planning process and analyzes internal and external data to predict sales. Typically, forecasts cover the upcoming 18 to 24 months, but the forecast period can vary by product and industry. Companies may adjust those predictions frequently as they review the latest data and changes to market conditions. The demand forecast becomes the foundation of the overall demand planning process as the business figures out how it can fulfill expected sales. 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. 7 Key Steps for Successful Demand PlanningDemand 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:
Skills for Demand PlannersDemand planners need to have excellent analytical skills, with competency in statistical data analysis and modeling. In addition to their numerical skills, the most successful demand planners are also great communicators since they need to interact with many different departments. They also tend to be innovators that champion progress through automation, since tools such as demand planning software and supply chain management software can help the company improve its demand planning, ultimately saving money. Demand planners should be familiar with Enterprise Resource Planning (ERP) systems, since this will be the source of data, and eventually become expert users of demand planning software. Demand Planning MethodsAt the broadest level, there are two philosophies that have been applied to demand planning: push and pull. The push method, which was popular for most of the 20th century, assumed that “if we build it, they will come.” Businesses took the approach that building innovative products would create demand for them, so they manufactured products, made them available to customers and waited for sales to roll in. In practice, the success of this strategy was hit or miss. Sometimes demand exceeded supply and shelves were bare, meaning a business missed sales opportunities. Other times, inventory lingered unsold on shelves or in warehouses, increasing costs and hurting cash flow. Companies rarely achieve the perfect balance, even with markdowns and sales. Today, most demand planning processes use a “pull” philosophy. This starts with gauging customer demand and using that information to guide all other operational planning. The primary challenge of the pull approach is coming up with an accurate forecast of customer demand. Inaccurate forecasts result in the same problems as with the “push” method: missed revenue opportunities and higher costs. Common models for creating a statistical forecast in the demand forecasting component of demand planning are:
Businesses often use demand planning software in conjunction with these methods to automate certain aspects of modeling and forecasting. Software can also make for more robust and accurate demand forecasts. Demand Planning Best PracticesBecause the demand planning process is complex, best practices generally focus on increasing accuracy through collaboration. Some of these best practices include:
Another key best practice is to do your due diligence when choosing demand planning software. Software should automate tasks such as statistical analysis for forecasting, tracking KPIs and calculating optimal stock levels, allowing your team to focus on interpreting the results, collaborating with other groups and adjusting plans as necessary. Your software should be easy to use, intuitive and integrate with your inventory management and ERP systems. #1 Cloud ERP The Future of Demand PlanningAdvances in demand planning software continue to help companies increase the accuracy of their forecasts. For example, software can connect to point-of-sale data and may be able to pull information from suppliers and distributors, enabling businesses to incorporate real-time data into their planning and analysis. Internet of Things (IoT) devices can improve demand planning, as well, by allowing companies to receive up-to-the-minute updates on the status of raw materials and inventory. IoT technology can also monitor sales as they happen, so a business can quickly replenish stores or warehouses that are selling through items faster than expected. This visibility can help organizations that use a pull strategy optimize supply or inventory levels and limit the expenses and headaches that come with too much or too little stock. Additionally, demand planning software is increasingly using artificial intelligence (AI) and machine learning to process huge amounts of data and identify trends and patterns that a human might never identify. Demand planners can then use those insights to make adjustments on the fly. |