What is Demand Planning and Why It is Important?

You may have come across the term demand planning with regard to inventory management and/or supply chain.

That is because it’s a process that is valid across functions, and helps fulfil customer demand for goods without disrupting the supply chain, and with little excess inventory.

This can help you increase revenues and keep your customers satisfied while improving overall efficiency.

What Is Demand Planning?

The demand planning process needs to be a continuous one – something that is an essential part of your business.

Thanks to technological advancements and the emergence of software like Tranquil, this is not just possible, but even easy.

It is necessary to analyze customer trends, historical sales data, and seasonal trends so that you can ensure that your business is capable of meeting customer demand very effectively.

For this, demand planning merges supply chain management, inventory management, and sales forecasting.

It makes use of data from inside and outside sources to forecast future demand.

This prediction can help you form your strategy for sales and operations, enabling you to plan how much to produce or purchase to be able to fulfil the demand.

What are the Elements of Demand Planning?

While there are several aspects to demand management strategy, the following three are the most important:

Product Portfolio Management

This refers to the management of the entire product lifecycle – from product launch to its life-ending.

Product lines are often interdependent; it is important to understand the way new products can influence the demand for other items, to get a clear picture of the product range you need to enjoy the lion’s share of the market.

Statistical Forecast

Statistical forecasts leverage historical data to generate supply chain forecasts with sophisticated algorithms.

Here it is critical to ensure model accuracy, understand conjectures, and pinpoint deviations and exclusions.

Seasonal trends can also be evaluated via statistical forecasts.

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Trade Promotion Management

One of the best ways to drive demand in the retail sector is through marketing events.

Trade promotions help brands to connect with their customers via promotions, giveaways, discounts, contests, etc.

Why Is Demand Planning Important?

Effective demand and supply planning drives profitability and boosts customer satisfaction as it helps businesses to attain the proper balance between fulfilling customer demand and adequate inventory.

This necessitates cross-organizational collaboration and is not an easy task.

As extra inventory ties up finances, and you run the risk of being stranded with dead or very low-value stock, it can have a significant impact on your business.

Or you may face severe disruptions in your supply chain, leading to a shortage of products, which could cause backorders or emergency purchases, which are always expensive.

Basically, with improper planning, you are likely to face delays and unhappy customers.

Demand Planning vs. Demand Forecasting

For predicting sales, businesses study both internal and external data; for this, first, a demand forecast has to be made.

These are all part of the inventory demand planning process.

Normally, demand is forecast for the near future – up to a maximum of 24 years; however, this depends on the industry as well as the product.

Businesses may need to make adjustments in the forecasts to reflect market conditions and customer trends.

The demand forecast forms the basis for the entire process of demand planning.

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Where Does Demand and Inventory Planning Sit Within a Business?

The process of demand planning necessitates inputs from multiple departments like purchase, production, operations, finance, marketing, supply chain, and sales.

They also need to collaborate well with each other.

Business strategy planners and product portfolio managers have to consider lead times for production and raw materials.

Demand and inventory planning involves several business functions, and so the employees handling the related tasks may be spread across departments, or be a separate group altogether.

However, to achieve the best results, demand forecasting is most accurate and successful when linked closely to marketing and sales.

7 Key Steps for Successful Demand Planning

Demand planning is multifaceted and complex, and becomes more so with business growth.

• It’s important to create a cross-departmental team with clearly assigned roles and responsibilities. Like purchase department is tasked with ensuring sufficient and timely inventory, and so on.
• The employees involved in demand planning have to reach a consensus on what data to include for creating a precise prediction. This will differ for each business, but some common elements are sales data per location and platform, inventory turnover, production times, lead times, out-of-stock rates, dead stock, and other KPIs. Marketing and sales teams can be consulted for price change timings, marketing campaigns, and more that could impact demand. Product teams should inform regarding new products, competitors’ products, and other factors that could affect the precision of the forecast.
• External data is critical and should be used for robust forecasts. Examples are suppliers’ delivery timelines, performance, consumer buying habits, and market conditions that could impact your sales.

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• Create a statistical demand prediction after deciding which forecasting prototype is apt for your business. Demand planning software can help you do this accurately and quickly. You can also generate forecasts by regions, customers, and products in addition to organizational predictions.
• Evaluate and hone the demand predictions with the important stakeholders. Add the latest data to check if it affects the forecast significantly. Examine any info you feel is erroneous, and eliminate deviations that could alter the overall forecast. Make sure that the prediction is in tune with the wider financial predictions of your company.
• Compare the predictions with your inventory, check how much you need to fulfil the forecasted demand, and add a buffer to it. Find the suppliers who can meet this demand and ensure they are capable of delivering what you need when you need it. Also, ensure the transportation is able to handle the volume of product in the time you want.
• Lastly, measure the results so that you know how successful your strategy has been. It is important to review your performance regularly and make the requisite changes.

Demand Planning Tools and Methods

There are two broad approaches to demand planning – push and pull.

The push method assumes that people will come if you build something great – a philosophy that was used till very recently.

Businesses believed that to create demand it was enough to be innovative with products. So, they would manufacture products and wait for sales to happen.

But this strategy did not succeed always. Unexpected demands led to stockouts and missed opportunities for sales, or excess inventory piled up on shelves and warehouses, leading to expenses.

It was extremely difficult to strike a balance.

The modern method is the pull approach – here the business assesses consumer demand, and bases overall planning on that.

The main difficulty here is getting a correct forecast of consumer demand; with incorrect predictions, you may have the same negative effects of the push method.

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Today, to help overcome these problems, we have modern demand planning tools:

• Linear regression – puts prior demand levels into statistical models for sales forecasting. Also called the line of best fit, the model uses prior demand to plot a curve, and expands it to make demand forecasts.
• Moving average demand – believes that demand in the future will be an average of the past few sales periods.
• Sales forecast – generates an approximate future demand on the basis of sales opportunities and prospects discovered by the business for a specific period.
• Seasonal trends – makes demand forecast by evaluating historical sales in specific seasons, and is suitable for businesses with highly seasonal sales.
• Companies combine these methods with demand planning software so that predictions and modeling can be automated, and be more reliable and precise.

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What are the Best Practices of Demand Planning?

Demand planning is a complicated process; understandably, best practices concentrate on greater co-operation and accuracy.

• Get all the stakeholders on board, and hold them responsible, by leveraging forecasts and statistical modeling that extract data from multiple departments.
• Define the process model thoroughly to ensure clarity and a good performance from all.
• Ensure accurate inventory data and efficient inventory management for successful demand planning. Gathering and preparing data is crucial for demand planning. You need inventory movement visibility in real-time, and KPI reports that give a clear picture; you must also mine data and combine it to pick out areas to improve. This can facilitate agile processes.
• Make the initial prediction, and then perform demand sensing by considering factors like consumer purchase behavior, market movements, supply chain information, etc.
• Refine your forecast and finalize it.
• Leverage pricing, promotion, and marketing tools to shape demand.
• Use analytics and measure your metrics to check how you have performed

There are demand planners who design an initial plan version by leveraging descriptive analysis or historical data.

They make alterations as necessary, and have a team whose sole function is to make the plan, implement it, correct mistakes, and craft the execution plans.

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What Does the Future Hold?

Thanks to improvements in demand planning software, businesses are able to be more precise with their predictions.

The software can be linked to POS data, and extract information from vendors, allowing businesses to include real-time data in their planning and analysis.

IoT or the Internet of Things is capable of enhancing demand planning by enabling companies to get the latest updates on inventory and raw material status.

It can also keep track of sales as they take place so that the management can immediately stock more of the products that are selling faster than initially anticipated.

This kind of visibility can help businesses to ensure optimal inventory levels and minimize the panic and costs that occur with overstocking and understocking.

Furthermore, modern demand planning software leverages artificial intelligence and machine learning and is capable of processing mountains of data at high speeds.

It can thus pick out patterns and trends that human effort may easily miss.

This can help demand planning executives to make adjustments on the go.

Implement the Right Software

The most important thing you need to do is be diligent when it comes to purchasing demand planning software.

With dozens of ERP software solutions in the market, choosing the right one can prove daunting.

You need a reliable and capable tool that can handle forecasting, provide real-time reports, and is transparent.

Tranquil is a reputed ERP system with a robust inventory management module. It can automate difficult and cumbersome tasks like tracking your metrics, making forecasts with the help of statistical analysis, calculating the ideal inventory levels, and so on. This can help your team to concentrate on inferring the results, cooperating with other departments, and making the requisite adjustments. It is a user-friendly, intuitive software that helps to automate and streamline multiple functions in your business. Schedule a Demo with us.