In this post, we’ll review demand management in supply chain planning, what terms mean and why they matter, and lay out some best practices for the demand planning process. These are things we’ve identified in our two-plus decades of supply-chain technology development. NOTE: This article is the first in a multi-part series on supply chain domains, so be sure to check back for forthcoming posts.
Demand Management in Supply Chain: The Backstory
Across industries, sectors, and functions, management teams struggle to keep pace with business growth. The challenge extends well beyond bigger volumes. You’ve got increasingly complex supply chains to manage – more variation in products, distribution channels, sourcing requirements, etc. That’s a tough slog in and of its self, and more so when the tools and processes in place are not able to scale. In such cases, capacity constraints, stockouts, or excessive inventories outstrip the benefits of revenue growth. At this point, management must retool with better processes and technologies to meet demand in a manner that is cost-effective and sustainable. Herein is the basis of forecast-driven Demand Management in Supply Chain, or what I call Demand Planning 101.
What is Demand Planning 101?
Demand Planning 101 is a multi-step process within supply chain management that planners use to forecast demand, improve the accuracy of their forecasts, and align inventory levels with the peaks and troughs that occur in the demand cycle. In essence, your Demand Plan coordinates inventory with the sales forecast – your expected customer demand. Generally speaking, the primary objective is to carry as little inventory as possibly without stocking out. When well executed, Demand Planning does just that: improve operating efficiency through lower inventory and emergency costs, and improved margins and profitability across product lines.
Why We Need Demand Management in Supply Chain Planning
Demand planning 101 is critical to your ability to see where your business is headed and to take the necessary steps to meet demand, both operationally and financially. Senior managers might rely on the Demand Plan to communicate with lenders and other stake holders. Sales teams rely on it to set performance benchmarks, allocate resources, and define territories and pipelines. Operations teams rely on it to purchase and ship raw materials, schedule production, set inventory policies, and refine distribution schemes.
The Forecast is the Cornerstone
However you apply the Demand Plan, one thing is constant; it all starts with the forecast. As I mentioned previously, Demand Planning 101 is a process. It loops together supplier activities and customer activities, as well as upstream and downstream communications and protocols for responding to change. But at its core is the one thing that makes everything else possible – the forecast.
Accurate, statistical forecasts help you decide not only what to make, but where and when to make it. They give you the ability to scientifically predict the raw materials and other resources you’ll need for production. Again, all of this is critical to operating efficiency: your ability to shorten lead times, improve delivery rates, and reduce excess inventory. When you look at it this way, forecast accuracy is the most fundamental part of your investment for any Demand Planning process.
And Speaking of Process
Allow me to offer a few tips for successful Demand Management in Supply Chain Planning, based on what we’ve seen from a long line of manufacturing, distribution, and retail customers:
- Take inventory of the full scope of your business: what you sell, to whom, when, where, and how. Analyze and understand that landscape at the product level, brand level, distribution level, etc.
- Determine what kind of data structure you need to improve your view of all parts of the organization, up close, in aggregate, and in real time. You’ll need a more complete picture to improve planning, decision making, and responsiveness in a constantly changing environment.
- Designate a responsible party, or parties, to own and execute the Demand Planning process. We call these people owners because they are accountable for the accuracy of the Demand Plan. That could be for a particular product, a product family, or the entire offering. Owners should have clear benchmarks, targets, and responsibilities to make adjustments (including an audit of changes). Most importantly, owners must develop a shared understanding of enterprise success, one in which top-level goals drive individual and team objectives, not the other way around.
- Segment demand. Many successful organizations break down demand by region, customer attribute, channel (direct vs. indirect), product style, or SKU. The categories can range greatly depending on the nature of the products you sell.
- Scrub your historical data before plugging it into any time-series forecast method. This might seem like a no-brainer, but too many companies don’t do it and the results are not pretty. Clean, accurate data is critical to the ability of advanced analytical models to identify trends, correlations, and anomalies.
- Collaborate. The forecast is the tip of the spear; the primary data used throughout the organization. Therefore, Sales, Finance, Procurement, and other groups must be involved in the Demand Planning process.
- Use transparency and visibility to drive performance (and performance management). Spotlighting performance metrics, wins, and losses is key to the successful implementation of any Demand Planning process.
- Set goals; too many organizations overlook this crucial piece. Track improvements in forecast accuracy, and reductions in stockouts and excess inventories (or elimination of dead inventory). Look at percentage changes as well as hard numbers. Too many organizations want to purchase technology before setting in place the processes and cultural values needed to fully leverage that technology.
Choosing a Software Partner
You’ve got your process and culture in place, now it’s time to look at tools. There are plenty of out there that can markedly improve your forecasting and planning outcomes. When choosing a software partner, consider the following:
- Make sure your software partner demonstrates financial strength and stability, and has a record of marketplace success. Ask for referrals from sector- or domain-specific companies that are relevant to you. Your provider must be able to support you on an ongoing basis, without service disruptions.
- Choose a provider that can deliver a complete set of advanced analytic tools. If you’re coming from a spreadsheet environment, this alone will blow the doors off of your current forecast accuracy. Even if you’re already using a statistical forecasting tool, outcomes can improve dramatically with an advanced system that makes it easy for users to leverage baseline statistical forecasts with their own foreknowledge of customer and marketplace activities.
- Ensure that the software you choose has a user interface (UI) and reporting capabilities that people can easily navigate and understand. Management should be able to view and understand the business at all levels, consolidated, drilled down, sliced and diced, in dollars, units, or margins, and across currencies and languages. You might not need to buy all capabilities up front, but you should invest in a system that will scale with your business.