The survival and success of businesses depend on their ability to meet client demands and expectations. This requires a solid and always available product inventory. But what if a business can’t supply consumers with what they want when they want it? It’s simple – consumers will turn elsewhere, causing businesses to lose revenue and, potentially, customer loyalty.
Maintaining profitable client relationships may seem challenging, but applying the right demand planning techniques can help improve supply chains.
In this guide, we’ll explore demand planning, including what it is, why it’s important, and how demand planning and forecasting ensure businesses have enough stock to fulfill customer needs, keeping them happy while avoiding the burden of excess inventory.
What is demand planning?
Demand planning helps businesses manage supply chain processes by predicting consumers’ product appetites. Planners use these projections to balance having sufficient inventory in warehouses and generating a costly surplus.
However, this prediction may seem complicated because it typically involves supply chain planners analyzing historical and real-time sales data, plus current trends and circumstances, to make accurate demand predictions. In fact, they sometimes factor in the impact of external factors like labor disruptions, economic shifts, natural disasters, and global crises.
Once planners finalize their forecasts, they combine that data with information gathered from supply chain forecasting, operations planning, and inventory management to determine stock levels and organize logistics to deliver products to market.
Why is demand planning important?
Establishing a solid plan to meet market demand helps drive profits and maintain customer satisfaction. When combined with an optimized supply chain, demand planning helps prevent stockouts, reduces backorders, and ensures businesses meet client expectations while maximizing efficiency and improving their bottom line.
Avoid stockouts
Missing out on a sale because of a lack of inventory frustrates everyone. Consumers can’t locate what they want, so they look elsewhere, and retailers lose revenue. This way, businesses jeopardize their brand loyalty and future transactions.
Demand planning guides product replenishment, helping avoid stockouts by identifying how much inventory a company needs at any time. When done correctly, companies sustain a continuous flow of goods to retailers and fulfill customer orders accurately and on time.
Avoid warehouse surplus
Having too much inventory can be as damaging to company profits as too little. Surplus stock increases warehousing costs the longer they go unsold. And if those items are perishable, companies run the risk of expiration, contributing to lost sales and wastage.
Businesses in the planning phase should store only what they need to meet demand – no more, no less. Demand planning helps align actual with forecasted sales data to accurately predict replenishment, lowering overstocking risk.
Decrease backorders
When introducing a new product, businesses typically don’t have the historical data to predict demand, resulting in inaccurate forecasts. In this situation, backorders help avoid frustrated customers and redeem brand loyalty.
Backorders keep funds flowing by allowing consumers to continue ordering while companies replenish stock. But if the practice becomes chronic, it can lead to frustration and damage a company’s reputation.
Demand planning allows businesses to improve inventory management and reorder products at the correct levels and with enough lead time to prevent stockouts and backorders.
Fulfill customer expectations
Customers seek convenience, consistency, and customization from the companies they patronize. Whether through e-commerce or brick-and-mortar stores, they expect to find what they want and make a purchase seamlessly.
With demand planning, businesses can stock shelves, awaiting purchase and delivery. This way, they can ensure faster fulfillment time, satisfying clients and encouraging them to make another purchase.
Save money
There’s no denying demand planning helps improve business cash flow, prevent lost sales, and reduce surplus carrying costs. As a result, businesses retain a loyal customer base, increasing lifetime value (LTV).
In other words, decreasing overall spending while meeting customer demand is money in the bank.
What are the three aspects of demand planning?
Demand planning spans several disciplines, but there are three primary aspects.
1. Product portfolio management
Portfolio management oversees a product’s life cycle, from market introduction to end-of-life planning. Product lines are often interdependent, and understanding how one item can influence the demand for another helps establish the right product mix for optimal market share.
2. Statistical forecasting
Planners develop supply chain predictions using advanced algorithms to analyze historical data and statistical forecasts. They also assess seasonal demand shifts, such as the rise and fall of swimwear or snow shovel sales throughout the year.
Projection accuracy depends on understanding the assumptions established within the models and identifying outliers and exclusions.
3. Trade promotion
Marketing and demand planning work in tandem, meaning when a brand connects with consumers through in-store promotions, discounts, or giveaways, there’s enough supply to meet the demand.
Demand planning process
Creating a demand plan helps determine inventory amount, type, and location to best meet customer needs. Here’s how to follow the process:
1. Convene your team
Gather a cross-functional demand management team with clearly defined roles and responsibilities to effectively coordinate the process.
2. Define and gather internal data
Determine relevant sales data, inventory turnover, lead times, and other statistics to predict demand.
3. Integrate external data
Gather additional qualitative and quantitative data from customers, suppliers, and other external sources to improve your forecast’s accuracy.
4. Choose planning methodology
Decide your planning method based on your company’s needs. You can refine the projections by applying multiple techniques if you require further insight.
5. Leverage demand planning tools
Demand planning calculations are complex, and you don’t want to conduct those by hand. Take advantage of tools like business intelligence, enterprise resource planning (ERP), and project management software to ensure accurate results.
6. Generate demand forecast
Select your preferred demand forecasting model for your business and adapt it to your needs.
7. Perfect your projection
Request a stakeholder review of your forecast to analyze the results further for accuracy by adding new data to the predictions. Then, refine the data according to the test outcomes.
8. Evaluate inventory levels
Review stock to determine if you have enough inventory to meet the forecasted demand, including a little extra to act as a buffer. Identify retailers who’ll help you address market needs and ensure timely delivery.
9. Measure results
Using key performance indicators (KPIs), track the plan’s effectiveness and adjust as needed.
4 types of demand planning methods
As mentioned, there are various demand planning methods available. The one you choose for your business depends on the availability of previous sales data and whether you have the resources and time to dedicate to the process.
1. Historical data
This method examines previous sales numbers to predict how much product you need to keep up with future demand. The accuracy of your forecasts and projections depends on your historical data’s reliability.
Pro: Historical data is accessible, easy to understand, and grounded in real-world experience.
Cons: The methodology doesn’t account for stockouts, seasonality, or demand surges from a new product launch. It also doesn’t consider competitor actions.
2. Market research
This technique relies on insights gathered from customer surveys to determine future inventory levels. You can collect data based on demographics, opinions, and other factors.
Pro: The methodology lets you identify future trends you might otherwise miss.
Cons: This method is labor-, time-, and resource-intensive, meaning maintaining efforts continuously is impossible. In addition, the information is self-reported, making it inherently biased. Just because someone claims they’ll purchase in the future doesn’t guarantee follow-through.
3. Econometric
If you’re looking for a purely mathematical approach to demand planning, the econometric method combines sales data with influencing factors that drive or inhibit purchase decisions, such as personal debt levels, income rates, and other external factors.
Pro: This technique incorporates past sales data and external factors that could impact customer demand.
Con: Calculations are time-consuming and challenging to perform by hand. The complexity of the analysis could result in human error that skews the result.
4. Algorithm-based tool
Instead of relying on spreadsheets and calculators, algorithm-based planning software helps automate forecasting efforts, streamlining the process to make it faster and more efficient. It also allows you to incorporate real-time sales data in case of supply chain disruptions and crises.
Pros: The method generates projections using demand planning software and actual data from various sources – including historical data, consumer trends, and demographics – making the results more reliable. In addition, the platform leverages machine learning to ensure accurate results and improve forecasting.
Con: Investing in a demand planning tool has a high upfront cost, which you can offset thanks to improved inventory management and demand planning efficiency.
Strategic roadmap templates
Once you’ve finished predicting future demand for your projects, it’s time to implement a plan to capitalize on those forecasts. That’s where Tempo Capacity Planner software and Strategic Roadmaps Templates can help.
Tempo Planner helps centralize and fast-track the demand planning process, letting you leverage shifts in the market to sell more products. Strategic Roadmaps Templates provide visibility to your operational plans, align supply chain management with marketing activities, and review the product portfolio for interdependencies to optimize profitability.
Let Tempo’s software suite take the complexity out of demand planning so you can take care of ensuring your customers are satisfied.
