The Effects of Demand Planning and Supply Planning

Line Art

Although demand planning and supply planning both deals with consumer demand, it is a bit different in their own ways. In simple terms, demand planning is all about planning for and managing customer demand. It consists of analyzing the products customers want at various times.

Supply planning is about planning and managing the inventory supply to meet customer demand. It consists of estimating the ways to fulfill the projected demand, using various supply modes. While they are two distinct areas, they are linked in important ways.

Correlation between demand planning and supply planning

Demand planning considers historical sales data, current sales, orders, shipments, and market changes to predict demand patterns, helping businesses to make shrewd decisions about inventory and production. The demand plan tells supply planners about the future requirements for products and services. Supply planners then determine how to best fulfill these requirements.

Supply planning includes distribution, manufacturing, and procurement. It is based on demand forecasts and affected by capacity limits and material accessibility. Keeping optimum stock is critical to businesses. Too little stock could drive customers to buy from others; too much could mean high inventory carrying costs.

Without proper demand planning, supply planners are not able to plan for optimal production and inventory. If there is no robust supply plan, businesses face production delays, inventory surpluses, and tensions among stakeholders.

Influence of demand plans on supply plans

Businesses are slowly realizing that demand planning and supply planning are inextricably linked. Demand plans exert a major influence on supply systems by predicting future demand patterns, so that they respond well to changing customer needs.

Accurate demand planning brings demand visibility and transparency. It helps the supply plan to be more precise in terms of raw materials or parts and the time at which they are needed. Following are many of the ways in which demand and supply plans depend on each other:

  • Suppliers/vendors: Supply planners can calculate the supplies needed, based on the demand plan. They can forewarn suppliers, who require long lead times, about it so that they can easily arrange supplies. This improves supplier relations and helps both parties negotiate favorable terms.
  • Inventory: Information about the needed raw materials, parts, and finished goods reduces the bullwhip effect across supply chains. Businesses can optimize inventory levels to ensure that there are no out-of-stock and overstock situations, and they don’t carry high volumes of safety stock. The less time inventory spends in the warehouse, the less the carrying costs.
  • Production: Businesses can schedule production based on current inventory, availability of supplies, and estimated demand. This leads to efficient capacity utilization and smart resource allocation. Also, accurate demand plans streamline supply systems and processes, which helps businesses handle challenging situations, such as new product launches, discontinuation of obsolete products, and even natural disasters.
  • Distribution and logistics: Supply planners who have access to robust demand plans can easily deal with multiple orders and wide distribution networks. They can provide advance information to transportation/shipping partners to avoid shipping delays. They can also negotiate with transporters for better pricing.
  • Customer service: Businesses can keep their customers satisfied if they provide them exactly what they ask for. Demand plans help supply planners to understand customer demand patterns and plan supply accordingly.
  • Profitability and value creation: Good demand and supply plans allow businesses to improve availability and stock fill rates and to focus on customer-centric metrics. This creates great value for customers, fulfills their demands, and generates more sales. The seamless meld of demand and supply ensures profitability in the long run.
  • Overall performance: Based on demand and supply plans, businesses can set targets and performance standards for employees. If employees don’t perform well during pressure situations, such as demand volatility, they can work towards fostering flexibility, collaboration, and better decision-making.

Supply planners should understand demand plans well and prepare for all contingencies. When supply planning is well-aligned and unified with demand planning, supply chains run seamlessly, leading to a positive effect on all other business operations.