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Demand Planning: What Is It and Why Do You Need It?Demand Planning
Estimating future demand is one of the most valuable activities your organization can undertake. A demand plan’s impact is felt throughout the business, from sales and marketing to manufacturing and distribution. When done correctly, demand planning can put you in an excellent position to deliver outstanding customer service while meeting your financial goals. Read on to learn more about how demand planning can improve the accuracy of your production process, and how technology can help you plan more effectively.
Demand Planning Defined
Demand planning is the practice of creating forecasts that predict the future need for your products. This demand might be external—in the form of customer orders or projections from marketing—or internal—such as the need for raw materials or components needed to create products.
Individuals who are responsible for demand planning gather information from the sales and marketing, operations, and finance departments to estimate how much of a company’s products customers will want to buy at various points in the future. They then create a demand plan to influence supply planning. For instance, if a demand planner spots a future need for a certain type of raw material, you can use this data point to plan to increase your hands-on supply of the product.
Effective demand planning allows companies to be more proactive and puts them in a better position to avoid last minute, costly surprises. Improved demand planning provides countless benefits including:
- Lower costs of inventory
- Reduction in stockouts
- Reduced waste (i.e., excess and obsolete inventory)
- Increase in on-time, in-full deliveries
- Reduction in expedited shipping fees
- Opportunities to negotiate better pricing or terms with suppliers
The Costs of Failing to Forecast Accurately
Failing to adopt an automated statistical forecasting and planning approach can cause serious problems, which can result in a wide range of issues including missed deadlines, disgruntled customers, and the need for expedited shipping. These issues drive up operating costs. Poor demand planning can also create too much inventory, which can lead to waste. Additional, less obvious costs include:
Delayed Responses to Market Dynamics
When you rely on labor-intensive spreadsheets or inflexible planning tools, you limit your ability to stay current with trends in your industry. You may fall behind in gaining insight about your competitors’ actions, as well as in managing disruptions within the supply chain.
A lack of a streamlined organization can impact the quality of customers’ orders. If a forecasting error causes your business to fall short on supply, you may not be able to meet key customers' needs on time and in full. This failure might cause customers to pull future orders and—even worse—can give your business a negative reputation.
If you overestimate customer demand for a product, due to lack of up-to-date knowledge on customer and market trends, you may find yourself struggling to turn over the extra inventory fast enough, which can hurt your business’ cash flow. In addition, if you are selling perishable products, such as food and/or beverages, you need to be cautious about overstocking and ending up with more product then can be sold before the end of the product lifecycle. Having high levels of excess or obsolete inventory can lead to significant financial losses.
Because of the hazards created by poor demand planning, businesses are increasingly adopting sophisticated demand planning strategies that leverage data rather than relying on gut instinct. Companies that continue to leverage spreadsheets or ill-fitting planning tools may fall short in developing up-to-date, actionable forecasts.
How Demand Planning Is Evolving
In the 20th century, companies used common supply-oriented, “push” strategies when managing their production process. This process was less about customer need and more about stocking shelves. Companies were merely creating inventory, versus producing inventory according to anticipated demand.
Today’s market emphasizes a more demand-focused, “pull” approach. This strategy is collaborative and data-driven. Supply chain operations are now able to produce and deliver products that are based on consensus-based plans. This new model ensures higher levels of service and operational efficiency, along with lower costs.
To keep up with rising customer expectations, supply chain teams are adopting purpose-built demand planning software that enable companies to process large data sets, spanning multiple years, using very sophisticated algorithms…a level of data processing that no human can accomplish using spreadsheets. Some of the major benefits of this technology include:
- Aggregating data from many sources
- Improving forecast accuracy
- Introducing a collaborative forecasting and planning tool across the supply chain
- Simplifying data visualization, creating a more user-friendly experience
- Identifying gaps between demand and the company’s ability to fulfill the demand
- Empowering employees to identify problems sooner to allow for proactive action vs costly reactive responses
When businesses incorporate demand planning technology in their daily operations, they provide their employees with a collaborative forecasting system that is accessible to individuals in all areas across the organization.
Three Steps to Successful Demand Planning
When you implement demand planning it’s important to take a few critical steps to ensure success:
#1 Be inclusive to expose risks and opportunities.
To deploy a successful demand planning process, be sure to include all the right players. This means collaborating with sales and marketing, operations, and finance and any other parts of the business that impact demand or the ability to fulfill demand (i.e., supply). Comprehensive demand planning is an excellent way to highlight risks and/or opportunities for growth. For example, an unconstrained demand plan may surface the need to expand capacity in order to meet increased demand for your products. Conversely, it may expose underutilized resources which can then trigger the need to increase marketing investments.
#2 Get the right software.
Planners using purpose-built demand planning tools accomplish more than those using spreadsheets. Advanced demand planning technology allows companies to process large data sets, spanning multiple years, using very sophisticated algorithms…a level of data processing that no human can accomplish using spreadsheets.
#3 Focus on continuous improvement to keep demand and supply in sync.
Planning technology is key but will only improve operations if data collection is repeatedly analyzed over time. Successful demand planners continually monitor the variance between forecasts and actual sales to determine what is needed to fine-tune their forecasts and safety stock levels.
Do You Need a Demand Planning Process?
You now know what can happen without an accurate demand forecast. If you do not use proper demand planning techniques, you risk sacrificing production accuracy and falling behind in completing orders. But you may be wondering if a new approach to demand planning can really solve your problems. When ASK Power, a top manufacturer of electrical power connectors, found themselves unable to provide a high level of service to the company’s top 100 customers without stocking excessive amount of inventory—they wondered the same thing.
Enter DemandCaster. The solution helped ASK Power boost on-time delivery to 99% by enabling the company to collect sales and order data from its ERP system and develop forecasts tailored to each individual business segment. With DemandCaster, ASK Power reviews available capacity, inventory, and scheduling, and then sets inventory targets and supply plans accordingly.
Curious? Learn more about ASK Power and other DemandCaster customers reaping the rewards of advanced demand planning technology today. Then check out DemandCaster’s demand planning capabilities that are part of the supply chain planning suite.