Organizations strive to supply the right products in the right quantity at the right time, place, and cost to win and secure customers. Demand planning helps them gain and retain customers by effectively aligning their operations with demand.
Demand planning, a subset of sales and operations planning (S&OP), has a major impact on the entire value chain. It consists of a range of activities, from data collection and analysis to interacting with customers, sales, operations, and finance:
- Specifying a purpose: The objective of demand planning determines all of its later steps. It depends on the organization’s share and whether the plans are for the whole market or a section of it, and whether it’s for a product type or a particular brand.
- Defining a period: You can set demand plans for short or long periods. When planning demand for short periods, you can assume that many factors will remain relatively constant. In the long run, these factors may change significantly.
- Choosing a method: You can determine demand forecasting using survey or statistical methods. The survey method includes consumer surveys and opinion polls. The statistical method is based on systematic analysis of historical and cross-sectional data.
- Collecting data: Based on the forecasting method, you collect primary or secondary data. Data generally consists of shipment figures, orders, prior forecasts, promotions, unmet demand, etc.
- Estimating demand: After you choose the forecasting method and suitable tools, you must calculate demand estimates for the required period. The results, which are usually in the form of equations, are interpreted in easily understandable terms.
Demand planning is challenging because customer preferences, market conditions, and regulatory compliance could change by the time you implement it. The following factors make it more difficult:
- Raw data from multiple sources
- New and unfamiliar forecasting methods
- Use of old technology, such as spreadsheets
- Incomplete data or no knowledge of market conditions
- Uninformed decision-making
- Multiple informal versions of a demand plan
- No contingency plans
- Raised forecast accuracy targets
- Forecast based on prior sales, not current demand
- No correlation among the volume plan, S&OP, and financial and strategic goals
Moreover, inaccurate demand planning can cause many business issues, such as poor customer service, uncontrollable costs, and more.
You can gauge the quality of your demand planning by assessing people, processes, and technology, based on three broad maturity levels created by the Institute of Business Forecasting:
- Essential: Organizations at this maturity level use either outdated methods or new processes they have yet to master. They end up with weak and ambiguous demand plans.
- Next level: Although organizations at this level indulge in demand planning, it is not systematic. They have people or processes that encourage demand planning, but do not fully realize its importance.
- Vanguard: At this stage, demand planning is so well-ingrained in organizations that it creates immense value. They have dedicated, centralized demand planning teams who use synchronized, data-driven methods to estimate demand.
Organizations must understand past mistakes and rethink their existing demand plan to move it forward. Following are some best practices:
- Assess strengths and weaknesses regularly.
- Institute an executive-level team to convince key stakeholders of the necessity of clear, iterative demand planning.
- Collaborate with all departments, customers, stakeholders, and trading partners.
- Conduct a scenario analysis for a range of values, rather than forecasting based on a single point.
- Invest in innovative technology tools and implement them carefully.
- Base demand planning at the optimal time and frequency to achieve forecast accuracy, thereby eliciting maximum value and reducing waste.
- Ensure the right blend of under- and over-forecasting to minimize or prevent low sales, excess inventory cost, and spoilage.
- Introduce an exceptions mechanism to identify situations in which automation may not work.
Most organizations have various levels of demand planning activities scattered across different departments. They must integrate and standardize them, with apt technological support, to improve their forecasting and growth initiatives.