Demand planning is a collaborative process that enables businesses to fulfill customer demand for their products while reducing surplus inventory and mitigating supply chain disruptions. It has the potential to enhance profitability, customer satisfaction, and operational efficiency.
To ensure effective demand planning, it is essential to integrate it as an ongoing practice within the organization. Thankfully, technological advancements have facilitated the achievement of this objective, simplifying the process.
Effective demand planning and forecasting involve the analysis of sales data, consumer trends, historical sales records, and seasonality patterns. This comprehensive examination empowers businesses to optimize their operations and efficiently meet customer demand.
Demand planning and forecasting integrates sales forecasting, supply chain management, and inventory management to accomplish its objective. The process begins by leveraging data from both internal and external sources to anticipate future demand. This forecast serves as the foundation for developing sales and operations strategies, enabling businesses to determine the necessary quantity of products to procure or manufacture in order to fulfil the projected demand.
Why Is Demand Planning Important?
By achieving robust demand planning and forecasting, businesses can simultaneously enhance profitability and customer satisfaction by striking the right balance between inventory levels and customer demand. However, this objective is not easily attainable and requires seamless coordination across the entire organization. The implications for businesses are substantial. Excessive inventory ties up working capital, adds costs associated with carrying inventory, and increases the risk of being burdened with low-value or obsolete stock. On the other hand, inadequate planning can lead to avoidable disruptions in the supply chain and leave a company with insufficient products, resulting in backorders, stockouts, or costly efforts to secure raw materials. These issues can cause delays and ultimately lead to dissatisfied customers.
The Role of Demand Planning and Forecasting
The demand planning and forecasting process necessitates collaboration and input from multiple departments, including sales, marketing, purchasing, supply chain, operations, production, and finance. Additionally, executives responsible for product portfolio management and overall business strategy play vital roles by considering lead times for components and production schedules.
Due to its intersection with various business functions, the location of employees responsible for demand planning may vary. It can either be a distinct independent group or integrated within departments such as sales, marketing, procurement, or operations. Some experts advocate for close alignment between demand planning, particularly demand forecasting, and the sales and marketing functions for optimal effectiveness.
Steps for Developing a Demand Planning Strategy
The initial phase of formulating a demand planning and forecasting strategy involves collecting data, which encompasses historical sales data, market research findings, and information about the competitive environment. This data serves as a fundamental basis for making well-informed decisions regarding production, procurement, and distribution within the business.
Following data collection, the subsequent step involves analyzing the gathered information. The analysis should concentrate on recognizing trends, patterns, and other insights that can guide the demand planning process.
For instance, the examination may unveil that sales of a specific product peak during a particular season or that a new competitor has recently emerged in the market. These insights gained through analysis contribute to making informed decisions in demand planning.
Develop a Demand Forecast
Subsequently, the demand planning and forecasting process entails generating a demand forecast using the gathered and analyzed data. This forecast should be formulated based on the most reliable and up-to-date information, taking into account various factors such as seasonality, trends, and prevailing market conditions. By incorporating these elements, businesses can generate a more accurate projection of future demand.
Determine Inventory Levels
Following the demand forecast, the subsequent step involves determining the optimal inventory levels for each product. This entails finding the right balance between the costs associated with holding inventory and the potential costs of stock shortages. By considering these factors, businesses can identify the most appropriate inventory levels that minimize costs while ensuring sufficient stock availability.
Implement Inventory Planning Processes
After establishing the appropriate inventory levels, the subsequent step is the implementation of inventory planning processes. This entails utilizing software or other relevant tools to monitor and track inventory levels effectively. Additionally, businesses need to establish streamlined procedures for ordering new inventory and implementing mechanisms for regular monitoring and adjustment of inventory levels as required. By putting these processes in place, businesses can ensure efficient inventory planning throughout their operations.
Evaluate the Demand Planning Strategy
The concluding step involves continuous evaluation of the demand planning and forecasting strategy. This evaluation primarily revolves around assessing the accuracy of the demand forecast, the effectiveness of inventory management processes, and the overall impact on customer satisfaction, profitability, and supply chain efficiency. By conducting regular evaluations, businesses can identify areas for improvement, make necessary adjustments, and ensure the demand planning strategy remains aligned with organizational goals and objectives.
Audit Your Demand Drivers
- Understand customer buying behavior and identify factors influencing demand.
- Review price elasticity of products, types of promotions, major calendar events, sales events, competitor promotions, and web/social media activities.
- Ensure reliable and consistent datasets capture these demand signals
Identify Key Decision Horizons
- Evaluate supplier locations and lead times to determine forecast horizons and relevant data streams.
- For short-term decision making (less than 3 months), explore demand sensing technology using additional data streams for accurate forecasts.
- For fixed decision making well in advance, focus on traditional forecasting approaches.
Determine Forecast Granularity
- Based on supply chain operations and planning decisions, choose the appropriate level of forecast granularity.
- Consider monthly, weekly, daily, or even hourly forecasts to support different planning processes.
- Highly granular forecasts are beneficial for short-term allocation decisions and products with short shelf life.
Selecting the Right Technology
- Utilize advanced machine learning techniques like demand sensing and modern forecasting.
- Use demand planning software capable of handling large datasets, providing scalable forecasts, and offering transparent explanations of forecast calculations.
By following these demand planning best practices, you can build an excellent demand forecast strategy that optimizes decision-making and improves overall forecasting accuracy.
About the Company
Fountain9 provides Kronoscope, an advanced demand planning software that utilizes artificial intelligence (AI) to precisely forecast potential inventory imbalances that can result in stockouts or wastage. Kronoscope offers recommendations on how to minimize the impact of these imbalances effectively.
Powered by cutting-edge demand sensing and pricing engine, Kronoscope considers various factors such as historical sales trends, seasonality, holidays, markdown events, and pricing changes to accurately predict future inventory requirements and optimize pricing strategies. The software aligns predicted inventory demand with supply-side data to identify optimal suppliers and replenishment quantities, reducing the risk of stockouts and inventory wastage.