At the center of every business strategy for products and services is optimal supply chain management. A leak or inefficiency in the supply chain negatively impacts the company's end result. Supply chains are becoming increasingly complex with more variations in products, distribution channels, and material planning. Accurate demand and need planning are essential for optimal productivity and profitability.
How can a company achieve an optimal supply chain? It depends on how well a company can develop a demand plan. Demand is never linear and is rarely easy to predict. A planning team must have the right historical data for creating a statistical forecast, reach a consensus with stakeholders, and quickly respond to changing internal or external market trends. In this article, we attempt to define and discuss the elements of demand planning, analyze the costs of failure, and outline the steps to success.
What is Demand Planning?
Demand planning is a multi-stage process for predicting demand, improving forecast accuracy, and adjusting inventory to meet demand peaks and troughs. In other words, demand planning is the process of predicting demand for a product or service.
Successful demand planning is characterized by maintaining a balanced ratio between inventory to meet customer demand while minimizing inventory surpluses or deficits.
Here are the four key aspects of demand planning in order of importance:
- Product Portfolio Management – Product portfolio management monitors the entire product lifecycle, from the introduction of a new product to the end of its lifecycle. Maintaining and updating product data is key to statistical forecasting.
- Statistical Forecasts – Create a forecast based on past inventory data, sales data, and relevant product history to predict future data or trends.
- Trends (internal and external) – Integrate into your forecast an estimate of the random influences of internal and external trends. Internal trends include the seasonality of your products and talent hiring for scaling. External trends include unexpected economic crises, competition, socio-cultural, legal, and political forces.
- Events and Promotions – Once a forecast is created considering the above factors, events and promotions can be utilized to achieve your S&OP goals.
The aspects of demand planning go beyond the statistical components of a demand forecast. Demand planning utilizes accurate demand forecasts to create action plans for the company and is familiar with internal and external factors influencing supply at all levels of the chain and consumer demand.
Implementing demand planning is based on the analysis of product data and trade actions to achieve sales and inventory goals. Companies must be able to quickly respond and adapt to changing market conditions even after developing a demand plan.
Demand planning is a continuous endeavor to ensure optimal profitability management.
The Importance of Automated Demand Planning
Without introducing automated statistical forecasting and demand planning, it can lead to various problems such as missed deadlines, dissatisfied customers, inventory surpluses or deficits, or delayed response to market dynamics.
A delayed response means your company may lose a competitive advantage or fall behind the competition. If you're unable to quickly respond to disruptions in the supply chain, it has significant impacts on both revenue and profit figures, and you may end up losing market share to competitors. Below is a list of the impacts that foregoing automated planning strategies can have on your company:
Loss of Credibility
Loss of credibility means business losses. Inability to fulfill customer orders due to poor inventory planning leads to lasting damage to the trust customers have in your company. This affects future orders and inflicts significant damage to your brand image.
Wasted Resources
Overestimating customer demand for products results in significant waste of time, money, and personnel. When it becomes challenging to turn over inventory quickly, it affects your company's cash flow. High excess or obsolete inventory can lead to substantial financial losses.
To avoid high failure costs, companies must trust the numbers more than ever and implement a sophisticated demand planning strategy that utilizes data and market knowledge. The introduction of automated demand planning strategies leads to actionable forecasts.
Aspects of Demand Planning
If you understand what works within each element of demand planning, you can create the most accurate and up-to-date forecasts that better support your sales and operations planning (S&OP).
1. Product Portfolio Management
In many cases, past sales performance can be used to predict future sales performance. It is important to regularly maintain and clean product data. Relevant data includes inventory levels, stockouts, seasonality, sales, and consumer demand in peak and trough phases. The difficulty here usually lies in the number of systems that maintain these records as isolated transactions.
2. Statistical Forecasting
Forecasts need a reference point, namely historical data on sales, inventory, and demand. Basically, what was realized in the past can be a good indicator of future sales. But not all data is useful; old data is usually not as useful as more recent data since it may not correlate with future demand. The same problem occurs if you don't use enough data to create a forecast. The right amount is usually a look back at the last 24 months of the most recent data.
Example of weekly sales demand planning by item
3. Internal Trends
Internal trends refer to personnel issues at one level in the supply chain, seasonal demand due to the product type, frozen capital, slow turnover, stockouts, and general unpredictable sales fluctuations. Internal trends also affect the best-managed companies, which is why it's essential to consider these causal influences in the forecast.
4. External Trends
External trends are another form of causal influence but less predictable and generally more challenging to incorporate into demand planning forecasts. External trends usually force a company to a new forecast, whereas internal trends are less likely to lead to a new forecast. Companies that adjust their forecasts and respond to changing external trends such as an economic recession or shifting political climate are best positioned for success.
COVID-19 has disrupted most supply chains worldwide to an unprecedented extent. Amazon is probably one of the most well-known companies that made enormous efforts to reconfigure its supply chain prioritizing the shipment of essential items.
Against the backdrop of COVID-19, Amazon quickly shifted shipping priorities and product fulfillment to essential goods. The company scaled rapidly by pulling personnel and distribution resources from non-essential consumer goods and hired 175,000 new employees within two months.
Demand planners need to quickly identify factors that can affect demand, such as natural disasters, news events, internal and external unforeseen issues. To do this, a company must have a central repository for all information to create an accurate forecast and adapt to changing market conditions to meet customer demand.
5. Events and Promotions
A limited-time product promotion can lead to more sales in that time interval at a lower profit margin. Holidays like Black Friday and Christmas can bring more sales in those few days than in an entire month.
Once a forecast is created, there must be a consensus on the actionable plan resulting from the forecast. Part of this plan is leveraging events and promotions to achieve sales and inventory goals. You want a balanced ratio between inventory turnover and sales while reducing manufacturing costs and resource waste. Promotions and external sales initiatives can help you achieve this goal.
The Future of Demand Planning
With advances in technology and machine learning, demand planning is increasingly becoming digital. Demand planning software is being developed to enable companies to adjust and update forecasts in real-time better. More companies are now using CPM tools integrated into their ERP systems to create constantly updated and refined forecasts to estimate future sales.
Successful demand planning brings numerous benefits, including:
- Lower inventory costs
- Reduction of stockouts
- Reduction of waste (obsolete inventory)
- Increased on-time and complete deliveries
- Lower costs for express shipping
- Better price negotiations with suppliers
Contact Solver to Learn More About Demand Planning Software
Solver offers a flexible planning solution where powerful input forms are designed in Excel and deployed in the cloud. Solver is suitable for all business needs, from manufacturing companies looking to create a monthly sales forecast to retail companies wanting to create SKU forecasts based on historical data.
Solver's cloud CPM solution can be fully customized to your demand planning needs. Contact our team today or request a demo to get more information about our Corporate Performance Management tool.
December 14, 2021