What is Demand Planning?

Demand planning is a supply chain management process of forecasting and predicting the demand for products to ensure their timely delivery to customers. Its main objective is to maintain a balance between sufficient inventory levels and customer demand. It uses data from internal and external sources to predict the future demand for products and markets. This forecast can help the sales team plan strategies for the growth of the business.

Importance of Demand Planning

Effective demand planning is a crucial part of businesses as it ensures the smooth flow of the supply chain and increases customer experience. It helps the companies maintain coordination between sufficient inventory levels and consumer demands. It ensures that retailers have the right amount of inventory to avoid a stock-out situation. On the contrary, poor planning can result in supply chain disruptions and lead to backorders and costly scrambles for raw materials. It can also result in delivery delays, which impact the company’s reputation and increase customer dissatisfaction. 

Key Elements of Demand Planning

Demand planning requires coordination between several sectors, like sales, marketing, purchasing, the supply chain, operations, and finance. Its key elements are:

  • Product Portfolio Management: A comprehensive understanding of products and their life cycles is crucial for effective demand management. It offers complete detailing of a product’s life cycle, from its origin until its eventual phase-out. 
  • Statistical Forecasting: Statistical forecasting is based on the traditional concept that historical data is the best predictor of future performance. It uses complex algorithms and advanced mathematics to analyze past data and build supply chain forecasts. 
  • Demand Sensing: Demand sensing is based on the concept of using new data sources like weather, disease trends, government data, etc, with historical data and applying advanced mathematics and complex algorithms to detect demand quickly. 
  • Trade Promotion Management: Trade promotion uses special events like discount prices or giveaways to attract more customers. It ensures that opportunities are properly executed and provide all expected benefits. 

Key Steps of Demand Planning

Demand planning multistage process, and it will get complicated as the size and scope of the company grow. There is a general set of steps that every business must follow for successful demand planning:

  • Creating a Team: Every member involved in the demand planning team must have a clear role and responsibility, like the purchasing and supply chain team, which is responsible for ensuring that the business acquires enough inventory to fulfill customer demands. Similarly, the finance team is responsible for building forecast models. 
  • Define and Aggregate Relevant Data: It is crucial to choose the correct data set to develop an accurate forecast. The data can vary from company to company and depends on factors like inventory turnover, lead times, production times, and other key metrics. 
  • Enhance Forecast with External Data: External data plays an important role in effective demand planning. It includes data like the performance and delivery timelines of suppliers, the purchase habits of consumers, and other economic conditions.  
  • Develop a Statistical Demand Forecast: For successful demand planning, it is necessary to develop a statistical demand forecast. Businesses need to choose an appropriate forecasting tool to increase their growth. 
  • Challenge the Demand Forecast: It is important to review, analyze, and refine demand forecasts to increase their success rate. It is good to double-check the compatibility of these forecasts with the company’s financial forecasts. 
  • Weigh Forecasts against Inventory: Once the forecast is done, it is crucial to determine how much inventory is needed to fulfill the demand. Moreover, identifying necessary vendors ensures that the goods and services are delivered on the specified timeline. 
  • Measure Results: The key performance indicators enable businesses to measure the effectiveness of demand planning. Continuous review of performance and feedback on these targets is necessary.

Best Practices for Demand Planning

Demand planning is a process that relies on the right tools, information, and processes. However, there can be many blockers in the process, based on product positioning, inventory requirements, and organization goals. The best practices for demand planning are:

  • Implement the Correct Software: Implementing the right software is necessary for efficient demand planning. It is important to study the forecasting ability of a tool along with the provider’s reputation, reporting capabilities, and the authenticity and reliability of the forecast produced by it. 
  • Gather and Prepare Data: Gathering and preparing the correct data is crucial for managing demand planning. It can provide a clear picture and identify areas for improvement that will help in developing a more agile forecasting model. 
  • Define Process Model: A defined process model maintains stability in the demand planning cycle. It includes steps like the preparation of data, initial forecasting, incorporating market intelligence, considering sales goals and financial reports, delivering a final forecast, and monitoring based on real-time analytics. 
  • Implement and Monitor: It is important to use a combination of new data sources like weather, disease trends, government data, etc, with historical data to develop efficient forecasting models that will reduce error and bias. 

As discussed, effective demand planning is a crucial part of businesses as it ensures the smooth flow of the supply chain and increases customer experience. It is a multistage process, and it will get complicated as the size and scope of the company grow. It requires coordination between several sectors, like sales, marketing, purchasing, the supply chain, operations, and finance, for precise forecasting of future trends and increasing customer satisfaction.