Demand planning is one of the most significant processes in the supply chain that focuses on estimating the customer demand so that efficient delivery of products can be ensured. It draws upon data analysis, market trends, and historical sales figures to aid businesses in making predictions about future needs. Effective demand forecasting helps companies to reduce stockouts, holding excess inventory, and customer dissatisfaction. In the fast-paced environment of the global market, demand planning, in addition to operational management, is key to sustaining competitive advantage and profitability.
At the British Academy for Training and Development, we understand that the supply chain is a critical factor in successful logistics operations. Our Importance of Supply Chains within Logistics Operations course equips professionals with the knowledge and strategies needed to manage demand and enhance supply chain processes.
What is demand planning?
Demand planning involves predicting and forecasting the demand for products in a supply chain management process such that products can be delivered and satisfy customers. Its objective is to balance the inventory levels to satisfy customer needs without being in surplus. Demands can fluctuate due to a plethora of factors: changes in the labour force, changes in the economy, weather events, natural calamities, or even global crisis events.
Why is demand planning important in the supply chain?
Demand planning is a precursor to a well-functioning supply chain. This process does not only optimise resource management but indeed helps to avert stockouts and overcome backorders in one sweep.
1. Optimises resource management
Demand planning helps direct consumer sellers align their inventory with all kinds of demand peaks and valleys. In short, demand planning makes it really easy to contend with fluctuations in demand, whether seasonal or in reaction to unprecedented shifts in DTC trends. This way, you get to keep stock levels exactly where you want them.
This kind of responsiveness means better resource management because then you are not going to be spending money on holding excess inventory just standing in your warehouse (but more on that later). Not only do demand planning processes save you lots of cash, but they also save you precious time.
All the time you spent figuring out how to deal with unsold inventory? That's time that can now go toward building your brand, developing new products, and creating wonderful customer experiences.
2. Preventing any stockout situations
It's safe to say that nobody likes a stockout situation. Stockouts annoy the customers (because they get frustrated they cannot complete their purchases), and they antagonise the supplier even more (because that means sales lost and money left on the table).
However, demand planning enables you to estimate how much stock you will need to meet future demand without generating surplus finished goods that just occupy space in your warehouse.
Such a process does guarantee that you will always order just what you need, just when you need it. Therefore, your stock will always be set just above the safety limit so that you do not need to run the risk of stockouts. Demand planning allows for a constant replenishment of inventory flow so that orders can be filled accurately and on time, thus benefiting customer satisfaction (and retention).
3. Minimises excess inventory
Too much inventory is just as bad as not having enough (sometimes, it’s even worse). That’s because the longer that excess inventory goes unsold, the more carrying costs you’ve got to pay. Even worse, if your products are perishable or time-sensitive (like holiday decorations), they could expire before they’re sold. Needless to say, this deadstock means lost revenue and a lot of waste.
You would ideally order just enough inventory at just the right time. Nothing more, nothing less. No earlier, no later. Demand planning encourages this by aligning your sales and forecast data. That way, you can make smarter inventory replenishment decisions that lower your risk of overstocking.
What are the Aspects of Demand Planning?
Demand planning spans several aspects, with the three primary areas being:
1. Product Portfolio Management
Product portfolio management encompasses the entire life cycle of a product, from appliance introduction to end-of-life planning. In many cases, product lines are interrelated, and understanding how new products might affect the demand for other products can assist in forming a better idea of the overall product mix required for the company to gain maximum market shares.
2. Plan Creation
With your new forecasting mode underway, you are now on to plan creation. After that, it is the demand planners' responsibility to ascertain the amount of inventory needed to satisfy demand in the ensuing months. Once you have developed a plan for your product lines, you would also want to check the forecast around your current inventory.
Put simply, you want to make sure the forecasted inventory needs correlate against what you have already in stock. You may find that you are forecasting too much replenishment for a low-selling SKU already close to being overstocked. Or that, if all goes wrong, your potential for a stockout is serious. Such demand planning errors generally tend to accumulate over time.
Let's say whatever error in forecasting just goes by sight. In that case, your brand may have gone from a little over ordering on every PO to outright overstocking on that SKU (because you are accumulating way too fast as opposed to selling through that product).
For products that are always at risk of stocking out, safety stock may be included in your plans. If customers place orders for more than expected, or if there is an unforeseen delay in the supply chain, this stock acts as a buffer. Afterward, you can be assured of not overordering in the next purchase order to compensate for lost sales.
3. Statistical Forecasting
Statistical forecasting involves advanced statistical algorithms to create supply chain forecasting from historical data. In this area, model accuracy, outliers and exclusions, and understanding assumptions are very important. Cyclical changes (such as the holiday shopping bustle between October and December for retailers or increased sales of yard equipment in the spring months) can also be forecast statistically.
4. Trade Promotion Management
Trade promotions or marketing events can create demand, especially in retail. Trade promotion is intended to connect a brand with a consumer, usually through an in-store free giveaway, discount, or some promotion, and such activities can convey demand for a product.
The Future of Demand Planning in the Supply Chain
Like many business needs, supply chain and demand planning are going digital. Advances in applications of machine learning within the supply chain are making it possible to adapt and update forecasts in real time, allowing inventory to run leaner, without missing the mark on demand.
For supply chain professionals, understanding how to use digital enterprise architectures and implementing artificial intelligence and machine learning programs that can help optimise a lean, agile and data-driven approach will reveal new ways to cut costs in operations, boost revenue and offer a greater competitive edge.
A better-connected supply chain means demand planning can be conducted even more in the moment. When implemented well, demand planning can be a pivotal process in boosting a supply chain’s profitability.