Whether you are a seasoned demand planner or simply want to better understand the key concepts and terms, this blog is for you. This blog was written to help you both understand and grow in your demand planning knowledge. You will not regret taking the time to learn about demand planning and how it applies to you.
Demand planners occupy a unique position within a company, as their work ties into so many other departments. They also carry out one of the most important but least-understood functions: creating an effective demand planning strategy. This strategy needs to be both accurate and flexible to order to withstand external shocks such as weather-related or geopolitical events. What exactly does demand planning entail? Here we answer that and talk about some essential demand planning concepts that will benefit all supply chain professionals.
What is Demand Planning?
What industry professionals mean by the term “demand planning” can be both frustratingly broad yet remarkably simple. At its core, demand planning is the use of available information to predict demand. Companies can then take appropriate actions to ensure they’re able to meet their customers’ needs and grow. It seems straightforward, right? The demand planner’s job is anything but straight forward. Let’s face it, the demand planner needs to be able to juggle predicting and ultimately preparing for the future, while also making sure the company remains on track to achieve its long-term goals.
Demand planners need to keep their fingers on the pulse of:
- Their company’s short-term and long-term business goals
- All the products their company offers
- Where those products are in their life cycles
- Current inventory levels
- The typical demand patterns of each product
- The variability of the market
- What factors may influence demand
- How those factors are playing out in real time
One of the main functions of demand planning is to build an accurate consensus sales forecast and then ensure that the entire supply chain is ready to support the projected outcome(s). That requires a strong understanding of interdepartmental dynamics and motivations in order to account for and ultimately mitigate bias — which can often wreak havoc on your forecasts.
Why do you need a demand plan?
Would you rather be prepared or simply wait and see? Being prepared, you make decisions based on what an expert believes will happen. Alternatively, if you take a more passive stance, you are constantly putting out fires due to changes in demand. A demand plan that is data backed is a critical component of ensuring your S&OP strategies are effective. It offers a number of benefits, including:
- It can help you improve customer satisfaction
Customers don’t like to wait, especially when it’s for longer than they initially expected. Long lead times can frustrate customers and negatively affect brand loyalty. A demand plan helps you determine optimal inventory levels so that you can fulfill orders in an efficient and timely manner.
- It can help you avoid stock outs
Stock outs don’t just aggravate customers, they can also be costly, as you may need to expedite orders, pay your employees overtime, or outsource production. While there are a few tips to help you prioritize your remaining inventory, a demand plan will go a long way toward avoiding a bad situation altogether.
- It can help you reduce overall costs
While having some safety stock on hand is smart, overstocking results in higher-than-necessary overhead costs. Using a demand plan will help to ensure you’re not storing more inventory than you can sell. In addition, you’ll be able to make informed production-related decisions, such as the amount of raw material or labor needed at any given time.
What should your measurables be to ensure an effective demand plan?
The benefits of implementing solid demand planning processes will reverberate throughout your entire supply chain, but it’s sometimes challenging to determine whether you’re achieving maximum value. Performance should be regularly monitored and evaluated against key performance indicators (KPIs), a few of which are described below.
- Forecast accuracy — It may not always be possible to produce an accurate forecast, but it’s important to compare your forecasts to actual demand levels. The Mean Absolute Percentage Error (MAPE) is one widely-used metric, but we caution against this being the only metric you used. For additional context, look at bias and Forecast Value Add (FVA) as well.
- The length of your forecast cycle — Cross-departmental collaboration is critical, but can be time-consuming. Monitoring and reducing the time it takes to arrive at a consensus forecast will allow you to incorporate more recent and relevant information, thus making your demand plan more responsive overall.
- Inventory turnover — If your demand planning processes are effective, you should see that reflected in your inventory levels. This can be seen specifically in a reduction in stock outs and instances of overstocking.
- The length of your customer order cycle — When done right, demand planning should help decrease the amount of time it takes for you to fulfill and deliver a customer’s order. This, in turn, will improve overall customer satisfaction levels.
It’s important to note, however, that none of these KPIs can be examined in isolation. Supply chains can be extremely complex and involve many different people, both in and outside of your company. It’s only when taken together that these metrics can provide you with a more complete picture of whether your demand planning processes are optimized for success.
For example, you may notice that your forecasts are more accurate, but that your customer order cycle time isn’t budging. This may mean that you need to work on integrating your demand plan with your inventory management workflows. In this case, ask yourself if your inventory turnover rate is increasing. If it is, perhaps something else along your supply chain needs improvement.
What are some best practices?
The last thing any company should do is implement demand planning processes that are ineffective or not scalable. Yet many companies fail to take the steps necessary to ensure long-term success.
Following these best practices will set you up to reap the benefits of your demand plan for years to come.
1. Confirm your data
This may seem obvious, but it’s also easy to overlook. Starting with inaccurate or incomplete information is a recipe for disaster, as it’s impossible to trust what the data may be telling you. So take the time to go through your records and confirm your numbers first. Then implement a data collection process that will instill confidence going forward.
2. Define your business goals and roadmap
You need to know what you want to achieve in order to know what to measure and how to measure it. The level of segmentation or the forecasting model chosen are dependent on your priorities. Actions taken because of this information should be aligned with your specific goals after make sure you’ve defined what those are.
3. Settle on a segmentation method
There are many different ways to segment your supply chain: by product channel or family, by customer grouping, or even by business unit. Once you’ve determined your business objectives, settle on the type of segmentation and level of analysis you plan to use going forward. This will provide consistency when comparing data sets over different time frames.
Statistical baseline forecasts and historical data may provide the foundation, but demand planning goes beyond looking at what happened in the past. Demand planners need to be able to draw upon real-time data and insights from many departments as well as your suppliers. Regular communication and collaboration should be encouraged every step of the way.
5.Have a clearly-defined process
When working with so many stakeholders — all with their own responsibilities and priorities — it’s important that each and every person have real-time visibility into the process. Everyone involved should understand what is required of them to produce an effective demand plan and be empowered to take the necessary steps.
6. Use technology to your advantage
Too many companies rely on spreadsheets and manual, labor-intensive processes. If you want a competitive edge, make sure you’re not one of them. Learn about the technological advancements that are changing the demand planning and supply chain management landscape. Invest in software that incorporates automation and advanced machine learning features, as these will streamline your processes.
Above all, these guidelines emphasize the importance of providing your people with the right tools and environment to make data-backed decisions that will propel growth. However, it’s up to you to build upon this foundation and tailor these best practices to fit your unique demand planning challenges and goals.
What kinds of tools will help?
We mentioned how important technology is in creating an effective demand plan. But let’s get more specific. In addition to some fundamental questions to keep in mind, there are a few critical features that you need in order to build successful demand planning processes.
First and foremost, you need something easy to use and built for collaboration. The learning curve for operating a new software system can be steep but with so many stakeholders, you’ll benefit from a user interface that’s intuitive and designed to support multiple users.
Secondly, look for something that prioritizes automation. The goal is to reduce the time being spent on data collection and analysis so that you can focus on making strategic decisions. This also reduces delays in the data collection process and lowers the possibility of errors caused by human intervention.
Lastly, your demand planning software should offer robust reporting and analytics features in addition to sales forecasting features. That way, you can compare possible outcomes, implement your demand plan, and then continually evaluate its success.
Consider also that as you move from taking a reactive approach to one that’s more proactive, you may want to start incorporating advanced demand strategies, such as demand sensing and shaping. It’s important that your planning tool can evolve with you and support these initiatives.
Nevertheless, remember that software isn’t a solution in and of itself. It’s only when you combine advanced software with the right people and processes that you start to reap the benefits of demand planning on a company-wide level.
Demand planning is a never-ending process.
Having the right software and following best practices is imperative if you want to bring your demand planning capabilities to the next level. However, the most important thing to remember is that creating a successful demand plan is a process. It’s not something you are ever truly finished with, but rather something that evolves as your company grows. You will need to continually monitor your demand planning processes and evaluate their effectiveness as they relate to your business goals and priorities.
Furthermore, you will need to ensure that you are incorporating new demand planning strategies and technologies efficiently. Without a doubt, this can be overwhelming when you also have to stay current on everything going on in your own industry.
That’s why it’s important to partner with experts who specialize in demand planning. We at John Galt make it our priority to know the ins and outs so that you don’t have to. We have helped countless companies implement efficient demand planning solutions that have a tremendously positive impact on their bottom line.
Do you want to find out what demand planning benefits you are currently missing out on? Optimize your demand planning strategy for success by scheduling a free consultation appointment with one of our Forecast Xperts today.