Demand planning is gauging the demand for products or services and allocating resources to create and deliver them. It is based on timely, reliable, qualitative and quantitative information. It helps ensure that all business operations are efficient and cost-effective.
The success and efficiency of supply chains depends on the ability of businesses to forecast revenue and inventory accurately. Those two aspects are linked to demand planning, which makes it one of the most crucial and essential processes in supply chain management (SCM).
Need for comprehensive demand planning
Demand planning is often confused with being a simple value, which is more of a numerical estimation of products and services needed. Demand planning goes beyond this. It identifies, plans, and manages business demands.
The actual planning is connected to various other processes, such as sales and operations planning (S&OP) and material requirements planning (MRP). The demand planning function coordinates between departments and ensures that production is in sync with demand.
It plays a key role in balancing production flows and incoming sales. It is also needed to decide the quality and quantity of raw materials and other goods required for production. Overall, demand planning helps estimate and manage the demand for raw materials, products, manufacturing, and distribution-related capacities.
Following are common demand planning mistakes that businesses make:
- Lack of attention: Some businesses misunderstand demand planning and don’t pay enough attention to it. This could result in severe demand volatility that wreaks havoc on supply chains and causes significant issues like the bullwhip effect.
- Wrong method/tool: Some businesses offer a larger number of products and services. Some introduce new products frequently. Most new products have limited or no demand history and low and irregular demand. It is difficult to capture the nuances of demand for all of these products from customers whose preferences keep changing. However, businesses use outdated demand planning tools, which makes demand planning clumsy and inaccurate.
- Complete disregard: Some businesses base production on actual consumption and disregard demand planning altogether. This may eliminate or minimize static inventory, but the business would have to adopt a build-to-order strategy. This can be successful only if there is more lead time in customer orders than the lead time for purchase, manufacturing, and distribution combined.
However, with the rise of the Amazon effect, customer lead times are shrinking, and people expect products to be delivered in a matter of days, if not hours. Moreover, even if the manufacturing and distribution lead time is less than or equal to customer order lead time, businesses would need to forecast and procure parts and raw materials.
Demand can be unpredictable due to short product life cycles, frequent technology updates, and the introduction of new products. Unexpected events, such as price fluctuations, changes in distribution channels, natural disasters, and shifts in consumer behavior also increase demand variability and uncertainty.
Demand planning helps businesses by influencing demand or demand shaping in terms of pricing, selling, and marketing:
- Understand customer needs and expectations, and what compels them to buy.
- Reveal uncertainties associated with the demand forecast.
- Determine and prepare for what to sell and when.
- Manage actual demand as opposed to forecast demand.
- Check the changes in customer preferences and the reasons for them.
- Inform such needs, expectations, and changes to all stakeholders, which allows them to make necessary adjustments.
Businesses will face production delays, inventory issues, and tense relations across various departments if they don’t plan for demand. Demand planning achieves high forecast accuracy; creates ownership and responsibility; and fosters cross-functional collaboration. Therefore, it has an undeniable impact on the bottom line, as well as on long-term business success.
Successful businesses gain insight into customer behavior and sense demand proactively. They recognize the importance of demand planning and use the latest methods and tools to aid it.