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What is demand planning?

In supply chain management, demand planning is the process of forecasting the customers’ need—also known as demand—for one or more products for a specific period of time. With demand planned in advance, companies can plan, fulfill their goods supply, and satisfy customers.

The output of demand planning is the demand plan (also known as demand forecast). To compile demand plans, demand planners use predictions to determine the potential sales volume of products. Once it’s completed, the companies can move to the supply planning process, where supply planners use the demand plans to formulate supply plans, trying to match supply and demand.

In case you still haven’t got a clear grasp of demand forecasting and planning. Imagine that you are planning your birthday party. This year, you will be sending out 30 invitations to friends and family. Prior to the party you need to order the birthday cake, and you need to determine how much cake you are going to need. Following previous years’ parties, you know that some of your friends will arrive late, some will not show up, and some don’t eat cake at all. How much cake are you going to order? By predicting the consumption of cake for your party, you are predicting demand. In business, this process is called demand forecasting.

What are the time focuses of demand planning?

With demand planning, businesses aim to reach the optimal stock or inventory levels that suit customer needs without generating excess. Effective planning can benefit companies by reducing excess inventory, minimizing cost, and boosting profit growth.

Depending on the industry, businesses will need to determine planning time horizons and granularity—the extent of the detail plans need to have. Generally, this involves three time horizons, with different granularity for each stage:

  • Short-term: The primary purpose is to determine what products will be needed, and the required inventory available for near-future purchases (from one up to six months). This type of planning mainly predicts the demand for specific items up to weeks in advance at specific stores.
  • Medium-term: Through a more extended outlook, medium-term planning helps businesses understand what resources they will consume, so they can match supply with demand in the next six to 18 months. Companies will focus on product lines—groups of related products—and plan their demand for the following months at particular regions within the operating range.
  • Long-term: When it comes to planning more than 18 months and up to five years in the future, the process now involves long-term strategic planning. This stage is where planners predict and prepare to implement the company’s production line if needed. To do this, companies need to analyze their supply network’s ability to fulfill the expected demand for product groups for a considerable period within operating regions.

Main aspects of demand planning

To create demand planning efficiencies, three prominent aspects stand out for consideration: product portfolio management, trade promotion management, and base statistical forecasting.

  • Product portfolio management gives you a clear overview of the company’s products. You can study how product introductions or eliminations can affect other existing products’ performance.
  • Trade promotion management oversees marketing and campaign activities (i.e.sales, promotions, giveaways, etc.), so the Marketing department can coordinate with demand planners to determine future demand. Companies also analyze the impact of trade promotion activities on products’ demand to adjust the marketing tactics.
  • Statistical forecasting is the method that uses historical data and advanced statistical algorithms to formulate future demand forecasts. Companies use statistical forecasting to reinforce decisions, maintaining optimal stock levels, and minimizing waste or excess production.

Why is demand planning important?

Predicting demand volume is critical to a company; it paves the way for various other organization-wide planning processes, like supply planning or Annual Operating Plan (AOP) planning. Demand planning is one of the decisive factors of a company’s success: They can become more cost-effective, well-known, and trustful to customers. It also helps gain further competitive advantages that ensue market-leading position. All of these contribute to a healthy growth of profit. In contrast, failing to provide timely and accurate forecasts can delay the supply chain planning completely.

If a company fails to predict demand, supply will fall short. This will jeopardize the company’s reputation and profit. The longer this continues, customer demand will go unsatisfied; customers will move to competitors, and trust will be impacted.

On the other hand, when new products come out, they can cause a drop in old products’ sales, resulting in surplus stock. Companies then have to accommodate unsold inventory and excessive transportation costs, space costs, and production costs (regardless of product lifecycle or circularity). What’s more, the excess stock is either disposed of or ends up in outlet stores, affecting the brand’s image and profit.

These are the consequences of poor demand planning. Therefore, companies must progress their forecasting and planning capability at pace and stay responsive to market changes. Even better, stay proactive.

Who is doing demand planning?

People usually misinterpret the demand management process as a supply chain issue. To set up proper planning, it needs to be a joint effort between commercial and supply chain planning departments.

On the commercial side, it’s imperative to figure the approximate or optimal amount – the closer to exact, the better – of inventory that will make it to the customers. They then need to align with the manufacturing’s capacity to shore up and cater to the demand—supply chain planners’ domain. Failing to reach this harms company profit.

Many businesses plan their processes by aligning departmental objectives in separate compartments instead of collaborating. However, this is precarious and time-consuming, as it lacks transparency; and departments are unwilling to share their information.

For example, an apparel company’s commercial department predicts that 1000 pairs of shoes will be needed during back to school season, based on historical statistics. As a precaution, they inflate the forecast sent to demand planners by 20% to increase the possible availability rate and match the real prediction. This approach can meet 100% of customers’ demand, but on the flip side, it could create 20% stock excess.

The example shows a discrepancy between the commercial and supply chain department. This situation is not rare in the business world. This is why experts propose that the best practice is to have both sides work together in a collaborative system with high visibility.

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