Introduction
We’ve written quite a few articles on specific aspects of demand planning, but we’ve never written an introductory piece for beginners or those looking for a refresher course. So here is an overview defining demand planning and how it differs from demand forecasting, discussing its importance, outlining the process, touching upon the impact of AI, and ending with a section on choosing demand planning software. We plan to do this for sales and operations planning (S&OP) and some other areas of supply chain planning as well.
What Is Demand Planning
Within the realm of supply chain management, demand planning is the process of forecasting and managing customer demand so that organizations can make appropriate decisions about future procurement, production, inventory, distribution, hiring, and capital investment. It involves systematically predicting demand based on historical data, market trends, and forward-looking indicators to anticipate customer needs accurately. The desired output is an accurate understanding of demand that enables a company to deliver the products customers want when and where they need them. The demand planning process not only aims to meet customer demand effectively but also strives to do so in the most cost-efficient manner, minimizing waste and reducing costs associated with overproduction or stockouts. (Note that in some companies, particularly those with mature S&OP processes, the demand plan is integral to product, sales, marketing, financial, and corporate strategic planning processes, but this article will focus primarily on the supply chain domain.)
How Does It Differ from Demand Forecasting?
The terms demand forecasting and demand planning are sometimes used interchangeably, but demand forecasting is actually a subset of demand planning. Demand forecasting uses quantitative methods to predict demand levels and variability as a starting point for coming up with a demand plan. Demand planning builds upon demand forecasting by involving many different stakeholders in an organization, enabling them to view, analyze, and modify forecasts, modify demand to meet sales and profit goals or to accommodate supply limitations, and finally, reach an enterprise consensus plan.
The Importance and Value of Demand Planning
The importance and value of demand planning for an organization cannot be overstated, as it plays a pivotal role in ensuring the efficiency and effectiveness of the entire supply chain. Effective demand planning offers a multitude of benefits that directly contribute to the operational and financial health of an organization.
First, demand planning significantly enhances customer satisfaction and service levels. By accurately forecasting customer demand, companies can ensure that the right products are available at the right time and place, thereby reducing stockouts and missed sales opportunities. This reliability in meeting customer demand not only boosts customer loyalty but also strengthens the brand’s reputation in the market. In today’s competitive landscape, the ability to consistently satisfy customer needs is a critical differentiator that can lead to increased market share.
Second, demand planning contributes to inventory optimization, striking the perfect balance between too much and too little inventory. By accurately predicting demand, companies can maintain optimal inventory levels, reducing the costs associated with excess inventory, such as storage, insurance, and obsolescence, while also minimizing the risk of stockouts. This optimization leads to significant cost savings and improves the organization’s overall financial performance. It enables companies to allocate resources more effectively, investing in inventory that has the highest turnover rate and profitability.
Furthermore, demand planning facilitates better supplier and stakeholder relationships. With a clear understanding of future demand, companies can communicate their needs more effectively to suppliers, leading to improved collaboration and partnership. This can result in more favorable terms, improved supply chain responsiveness, and reduced lead times. Effective demand planning ensures that all stakeholders are aligned with the company’s objectives, fostering a more cohesive and efficient supply chain.
Demand planning also enhances organizational agility and resilience. In an ever-changing market environment, the ability to quickly adapt to shifts in demand is crucial. Demand planning provides the foresight needed to make swift adjustments in production, procurement, and distribution, allowing companies to respond effectively to market volatility, economic shifts, or unexpected events. This agility is a key factor in maintaining competitive advantage and sustaining business growth in the face of challenges.
Lastly, demand planning drives strategic decision-making and long-term planning. By analyzing trends and forecasting future demand, organizations can make informed decisions about capacity planning, capital investments, and market expansion strategies. Demand planning provides the data and insights necessary for setting realistic sales targets, budgeting, and financial planning, ensuring that strategic initiatives are grounded in accurate and actionable intelligence.
In essence, demand planning is a critical strategic process that offers a host of benefits, from enhancing customer satisfaction to improving financial performance and fostering organizational agility. Its role in optimizing inventory, improving supplier relationships, and supporting strategic decisions underpins the operational efficiency and market competitiveness of an organization. As such, investing in robust demand planning processes and technologies is indispensable for any company looking to thrive in today’s dynamic and complex market environment.
For a deeper dive into the value of demand planning and forecasting, see our blog What’s the Value of Demand Forecasting.
Strategic vs. Tactical vs. Operational Demand Planning
Demand planning can be segmented into three distinct levels: strategic, tactical, and operational, each with its own focus areas, planning time horizons, granularity in terms of products, locations, and time, as well as the frequency of planning cycles. Understanding these levels is crucial for businesses to align their demand planning activities with their overall objectives and operational capabilities.
Strategic Demand Planning
Strategic demand planning is concerned with the long-term direction of the business, focusing on periods ranging from one to many years ahead. This level of planning is less about the specifics of individual customer orders and more about overall market trends, growth opportunities, product lifecycle management, and capacity planning. The implications for strategic planning include a broader product and location granularity, as it deals with product lines or families rather than individual SKUs, and may focus on regional or global market demands rather than specific locations. The planning cycle frequency at this level is typically annual or bi-annual, aligning with the organization’s strategic review and business planning cycles. Strategic demand planning sets the foundation for tactical and operational planning by defining the long-term goals and parameters within which they operate.
Tactical Demand Planning
Tactical demand planning bridges the gap between strategic intentions and operational execution, focusing on the medium term—usually from a quarter to a year. This level of planning refines the broad objectives set at the strategic level into more actionable plans, detailing which specific products will be offered in which markets and the required resources. The granularity here is finer than in strategic planning, with a focus on individual products or SKUs and specific locations or market segments. The planning time horizon is shorter, requiring more frequent adjustments to reflect changing market conditions or organizational priorities. The planning cycle frequency at the tactical level often occurs quarterly or monthly, allowing for adjustments to supply chain strategies, inventory levels, and production schedules based on updated demand forecasts and market analyses. Note that S&OP, which typically plans with a time horizon of months 4 through 24 (but of course varies from company to company), straddles the tactical and near-term strategic levels of demand planning.
Operational Demand Planning
Operational demand planning is the most granular and immediate level of planning, concentrating on the short term—typically weeks to a few months ahead. This level deals with the day-to-day management of demand, focusing on specific products, individual locations, and short time frames. Operational planning is concerned with fulfilling customer orders, managing inventory levels, and scheduling production on a daily or weekly basis. The granularity is at its highest, with planning often down to the individual SKU level and specific stores or distribution centers. The planning cycle frequency is much higher, often weekly or even daily, to respond rapidly to immediate demand fluctuations and operational issues.
Implications for Businesses
The differentiation between strategic, tactical, and operational demand planning has significant implications for businesses. It requires a coordinated approach that aligns long-term business goals with medium-term strategies and short-term operational actions. This alignment ensures that resources are optimally allocated, inventory levels are managed efficiently, and customer demand is met effectively.
- Planning Time Horizon: As planning moves from strategic to operational, the focus shifts from years to weeks, requiring different data sets and forecasting methodologies.
- Product, Location, and Time Granularity: Granularity increases from strategic planning’s broad market trends and product lines to operational planning’s specific SKUs and locations.
- Planning Cycle Frequency: The frequency of planning cycles increases as the focus moves from long-term strategic planning to short-term operational planning, reflecting the need for more frequent adjustments at the operational level to respond to immediate market and supply chain dynamics.
By understanding and effectively managing these different levels of demand planning, organizations can ensure that their strategic objectives are translated into actionable tactical plans and operational activities, enabling them to navigate market complexities and meet customer needs more effectively.
The Demand Planning Process
Demand planning is a complex process that involves multiple steps to ensure that a business can meet future customer demand effectively while aligning with its strategic objectives. Here’s a breakdown of the major steps in the demand planning process, from the perspective of operational and tactical demand planning:
Collect and Prepare Data
The first step involves gathering historical sales data, market and macroeconomic data, and any other relevant data that can impact demand. This data must be cleaned and prepared for analysis, ensuring accuracy and consistency. Data collection is not limited to internal sources but may also include external data, such as industry sales figures, to provide a comprehensive view.
Analyze Market Trends
Understanding market trends is crucial for accurate demand planning. This step involves analyzing market research, industry trends, economic indicators, and competitor activities to gauge how external factors might influence demand. This analysis helps in anticipating market shifts that could impact product demand.
Incorporate Product Plans
Product lifecycle management plays a significant role in demand planning. Information about new product introductions, planned discontinuations, or changes to existing products must be integrated into the demand planning process. Special forecasting techniques are needed to predict the demand for new products, which by definition have no sales history, and the declining sales of products that are being discontinued.
Incorporate Marketing Plans, Especially Promotions
Marketing activities, such as promotions, advertising campaigns, and pricing strategies, significantly affect demand. These activities need to be factored into the demand planning process, as they can lead to temporary spikes or drops in demand.
For consumer packaged goods companies and retailers, trade promotions are particularly important and often account for a large portion of annual volume (sometimes more than half, depending on the category). Therefore, it’s critical to include promotion plans in the demand planning process. For more on the impact of trade promotions, see our Demand Planning Primer.
Incorporate External Causal Factors
External factors, such as weather conditions, holidays, and economic shifts, can have a substantial impact on demand. Incorporating these causal factors into the demand planning process helps in creating more accurate and realistic forecasts by accounting for external influences on consumer behavior.
Segment Demand
Segmenting demand by customer priority, typically through the ABC classification method, allows businesses to strategically categorize customers into high (A), medium (B), and low (C) priority groups based on criteria such as sales volume, profitability, and loyalty. Such segmentation enables tailored demand planning and resource allocation, ensuring that the needs of the most valuable customers are prioritized. High-priority ‘A’ customers receive more focus during the demand planning process and obtain higher service levels, ‘B’ customers receive less attention and are served with more of a focus on optimizing costs, and ‘C’ customers receive the least attention. By aligning demand planning with customer value, companies can optimize their supply chain operations, maximizing profitability and enhancing overall customer satisfaction. This approach ensures resources are focused where they can generate the highest return, aligning closely with the company’s strategic goals and customer service objectives.
Generate Forecasts
Using the data and insights gathered from the previous steps, demand forecasts are generated. This typically involves applying artificial intelligence and traditional statistical forecasting models to predict future demand based on historical data, marketing plans, and other causal factors. Forecasts should be created for different time horizons to support strategic, tactical, and operational planning needs.
Reach Consensus with Sales, Marketing, and Operations
A cross-functional approach is essential for effective demand planning. This step involves collaboration and consensus-building among key stakeholders from sales, marketing, and operations to ensure that the demand forecast reflects a broad array of inputs and perspectives and aligns expectations across departments.
Finalize Plan
Once consensus is reached, the demand plan is finalized. This plan then becomes the official supply chain forecast and is the basis for procurement, production, inventory, and distribution planning, ensuring that resources are allocated efficiently to meet forecasted demand.
Continuously Monitor and Revise
Demand planning is an ongoing process. This final step involves continuously monitoring actual sales against forecasts, analyzing deviations, and revising forecasts and plans according to a repeating planning cycle frequency, typically weekly or monthly, or on an ad hoc basis in the case of some type of market disruption. This requires a responsive and flexible approach to demand planning, allowing the business to adapt to changes in market conditions, consumer behavior, or other factors.
Artificial Intelligence and the Future of Demand Planning
The role of artificial intelligence (AI) in demand planning has grown significantly in recent years, driven by advancements in analytical techniques and the decreasing cost of cloud computing. AI technologies including machine learning and deep learning have revolutionized demand forecasting by enabling more accurate predictions through the analysis of large datasets and the identification of complex patterns that traditional methods might overlook. This surge in the use of AI across supply chain processes is evident as supply chain software vendors such as New Horizon increasingly offer new-generation AI-based supply chain planning software.
Understanding the specific applications and strengths of different AI approaches is a crucial step for businesses looking to leverage these technologies effectively. Moreover, it’s important to recognize that no single forecasting algorithm suits all situations, necessitating a portfolio approach to select the most appropriate model based on the nature of the demand, data availability, and specific business needs.
As AI technologies continue to evolve, their role in enhancing demand planning and overall supply chain efficiency is expected to grow, offering businesses new opportunities to optimize their operations and better meet customer demand. For a detailed look at AI, see our Primer: Artificial Intelligence for Demand Forecasting.
How to Choose the Best Demand Planning Software for Your Business
Selecting the right demand planning software is a critical decision for businesses aiming to optimize their supply chain operations and improve demand forecasting accuracy. The ideal software should not only meet current needs but also adapt to future changes and growth. Here’s a guide on how to choose the right demand planning software:
Features and Functionality
The first step is to assess the software’s features and functionality. Look for capabilities that align with your business’s specific demand planning requirements, such as advanced forecasting algorithms (including AI and machine learning capabilities), inventory optimization, and integration with S&OP. The software should support a wide range of forecasting methods, from statistical to machine learning-based, and offer tools for data cleaning, analysis, and reporting.
Ease of Use
A user-friendly interface and intuitive workflow ensure that your team can effectively utilize the software. Software that requires extensive training or has a steep learning curve can hinder adoption and productivity. Look for solutions with clear user interfaces, straightforward navigation, and the ability to customize views and reports to meet different users’ needs.
Ease of Implementation
Consider how easily and quickly the software can be implemented into your existing IT ecosystem. The ideal demand planning solution should integrate seamlessly with your ERP, CRM, and other critical systems, enabling smooth data flow and reducing the risk of disruptions. Also, evaluate the vendor’s support and services for implementation, including training.
Flexibility for Changing Business Needs
Your demand planning software should be flexible enough to accommodate changing business strategies, market conditions, and growth. It should allow easy adjustment of forecasting models, addition of new products or markets, and scaling of operations without significant overhauls. Software that can evolve with your business helps protect your investment over the long term.
Performance and Scalability
Assess the software’s performance and scalability, particularly its ability to handle large volumes of data and complex forecasting scenarios without compromising speed or accuracy. The system should be robust enough to support your current requirements and scalable to accommodate future growth in data volume, complexity, and number of users.
Modern Technology and Future-Proofing Your Decision
Select software built on modern technology that supports future trends, such as cloud computing and AI. Consider the vendor’s roadmap for future enhancements and their commitment to incorporating emerging technologies that could further optimize demand planning processes.
Total Cost of Ownership
Finally, consider the total cost of ownership (TCO) of the software, which includes not only the initial purchase price or subscription fees but also ongoing costs for maintenance, upgrades, training, and support. A solution with a lower upfront cost but higher long-term expenses may not be as cost-effective as it initially appears. Evaluate the TCO in the context of the software’s value to your business, including potential ROI from improved efficiency and decision-making.
Choosing the right demand planning software involves a careful evaluation of your business needs, the software’s capabilities, and the vendor’s support and technology roadmap. By focusing on these key areas, businesses can select a solution that not only meets their current demand planning challenges but also supports their future growth and success in an ever-changing market landscape.
Conclusion
Demand planning provides the foundation for effective supply chain planning, establishing an understanding of market demand that an organization works to fulfill. Demand planning enables organizations to meet customer needs, optimize inventory levels, and enhance operational efficiencies. The incorporation of AI technology into demand planning further elevates its potential, offering precision in forecasting that traditional methods often cannot achieve. As businesses face the challenge of navigating an ever-evolving market landscape, the choice of robust demand planning software is crucial, acting not just as a tool for coming up with a supply chain forecast, but as a strategic asset for fostering growth and sustaining competitiveness. By adopting a robust demand planning process, companies are better positioned to become agile, responsive, and aligned with their strategic objectives in the face of dynamic market conditions.
To Learn More
To learn about New Horizon’s product for demand planning, go to Demand Planning.
