Not too long ago, in 2014, Walgreens had a $1 billion forecasting error that led to the exit of two executives. And before that, in 2001, Nike also had a demand planning blunder that led to a $100 million loss in sales. These examples show how imperative a proper process for demand planning and supply planning is to an organization’s overall health and profitability. And these incidents happened before an unprecedented global pandemic.
More recently, the economic fallout from the COVID-19 pandemic has illustrated how many organizations were not fully aware of their supply chain vulnerabilities to global shocks. Even industry leaders like Amazon were left scrambling as demand for certain items became overwhelming. The effects of the pandemic have brought to light the need to invest in advanced planning technologies to prepare for an uncertain post-pandemic landscape that depends on accuracy, flexibility, and speed.
Although both demand planning and supply planning deal with consumer demand, they also differ in their unique ways.
In simple terms, demand planning is about planning for and managing consumer demand. Demand planning consists of analyzing the products consumers want at various times and planning accordingly.
Whereas supply planning projects and manages inventory or supply to meet consumer demand. Supply Planning consists of estimating and forecasting the appropriate ways to fulfill the projected need found in the demand planning process.
Even though demand planning and supply planning are two distinct areas in the supply chain planning process, they are linked and impact each other in meaningful ways.
Connections Between Demand Planning and Supply Planning
Demand planning considers historical sales data and current sales, orders, shipments, and market data to predict demand patterns. Organizations can then make shrewd business decisions about inventory and production. The demand plan alerts supply planners about the future requirements for products and services. Supply planners can then determine how to meet these requirements best.
Supply planning includes distribution, manufacturing, and procurement. Supply planning is based on the forecasts that come from the demand planning process and is affected by capacity limits and material accessibility. Keeping optimum stock levels is critical to organizations to reduce overstocks and stock-outs.
Supply planners are not well informed enough to plan for optimal production and inventory without a proper demand forecast. And without a robust supply plan, organizations face production delays, inventory surpluses, and tension among stakeholders.
The Influence Demand Planning has on Supply Planning
Since both planning processes are inextricably linked, demand plans significantly influence supply planning systems by predicting future demand patterns, allowing planners to respond well to changing customer needs.
Accurate demand forecasts allows for better visibility and transparency for supply planners. Supply plans can be more precise regarding raw materials or parts and the times they are needed. The following are examples of ways in which demand and supply plans rely on the accuracy of each other:
- Suppliers/Vendors: Using the demand plan to calculate the number of supplies needed allows supply planners to warn suppliers and vendors who require longer lead times. The technique improves supplier relations and helps both parties negotiate favorable terms.
- Inventory: Information about the needed raw materials, parts, and finished goods reduces the chance of the supply chain experiencing a harsh bullwhip effect. Organizations can use the information in the demand planning process to ensure there are no out-of-stock or overstock situations without carrying high volumes of safety stock. Also, the less time inventory spends in warehouses, the fewer carrying costs. For example, after implementing Vanguard Predictive Planning™, Fountain Tire improved its demand forecast accuracy by 15%. This improved accuracy allowed Fountain Tire to reduce inventory levels across their network to eliminate excess costs associated with seasonal peak inventory storage issues.
- Production: With accurate planning, organizations can schedule production based on the current inventory on hand, availability of supplies, and the estimated demand. Effective planning leads to efficient capacity utilization and smart resource allocation. Also, accurate demand plans streamline supply processes, which help organizations manage challenging situations, such as new product launches, discontinuation of obsolete products, and even supply chain disruptions.
- Distributions and logistics: Supply planners with access to robust demand plans can efficiently deal with multiple orders and wide distribution networks. They can provide advanced information to transportation/shipping partners to avoid shipping delays.
- Customer service: Organizations can keep their customers satisfied by providing what their customers need when they need it. Demand plans help supply planners to understand customer demand patterns and plan supply accordingly.
- Profitability and value creation: Reliable demand and supply plans allow businesses to improve availability and stock fill rates and focus on customer-centric metrics. The improvements create immense value for customers, fulfill their demands, and generate more sales. The seamless meld of demand and supply ensures profitability overall.
- Overall performance: Businesses can set higher targets and performance standards based on demand and supply plans. Organizations are also working toward building more flexible supply chain processes, better collaboration between supply chain functions, and more reliable decision-making by setting higher performance standards.
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. To see how Vanguard Predictive Planning™ can align your demand and supply planning processes, schedule a custom demo.