Demand Planning 101 – The First Step to Managing the Supply Chain

Today’s supply chains have become increasingly complex and almost impossible to manage. Globalization, mergers and acquisitions, and changes in consumer behavior are just a few of the disruptors that have made managing a manufacturing supply chain a daunting task at best.  

Confronted with these issues, manufacturers need to ensure that they can deliver the right product to the right place at the right time. To do this, manufacturers must calculate the number of finished goods they need to produce to satisfy the requirements of the customer at any given time, a process known as demand planning.

What is Demand Planning and Why is it Important?

Demand planning is the starting point of the entire supply chain and business planning process. Supply chains are complex and sales objectives need to be clearly stated so they can be translated into plans for many other critical processes, such as marketing plans, financial plans, distribution planning, production planning and supplier planning.

What are the Different Aspects of Demand Planning?

Demand planning is not an easy task. There are many issues to consider including consumer preferences, where products can be purchased, how to price these products, and what other products are competing with my product for market share.

How Does Demand Planning Work?

Demand planning can be done at many levels or hierarchies. It can also be done at an aggregate or family level of a product group such as a total brand forecast. It can also get very granular by using an individual SKU at a specific storage location which is called item location forecasting.

Item location forecasting forces us to ask more questions, including: What do we forecast? It is important to remember that the more detailed we are in our forecast, the more chances we will have to make errors.

How Do You Start a Demand Planning Process?

All business processes start with an accurate product forecast. Customer service level, inventory carrying costs and inventory effectiveness at all levels of inventory, manufacturing and distribution costs all hinge on an accurate forecast.

Develop and Demand Forecasting Process

To develop a product forecast successfully and efficiently, the structured process should be managed by demand planners, people who understand the process, the business, the market and the supply chain. These professionals that manage the forecasting process accomplish a wide variety of tasks, are critical to the success of the demand planning process and can single-handedly impact the entire supply chain, including a company’s profits.

All purchasing and manufacturing activities are also based on the forecast, and one of the first steps in the forecasting process is to determine its frequency.

The frequency for the forecasting process is usually determined by the planning horizon which takes into account the types of products being produced and sold and the lead time of critical supplies. 

Determine the Accuracy of the Forecasting Process

Once you’ve developed a forecasting process, the next step is to determine if that process is accurate. There are some obvious, non-scientific indicators that can help to determine forecast accuracy, including whether customers end up ordering more or less than what the forecast said they would. The answer will have a cascading effect on production planning and procurement planning as well as on inventory costs.

In addition to the aforementioned forecast accuracy measurements, other business metrics can be used to gauge forecast accuracy such as backorders, expedited orders, stock-outs and obsolete inventory and if the customer fill rate is low. 

Using Demand Planning to Predict Demand During Uncertainty

Sophisticated demand planning processes, software and systems can give manufacturers in all industries the ability to better predict demand in uncertain times. Ultimately, the information generated through demand planning leads to more cohesive planning across the organization, which is evidenced by the fact that those with demand planning processes are better able to standardize their production planning and execution while connecting sales, purchasing and product development.  

An advanced demand planning process provides the information that manufacturers need to react on-the-fly to demand trends and alter their operations. This requires real-time visibility, and with this comes the ability to operate with agility, effectiveness and adaptability to target and address future disruptions in the market.

Stephen Dombroski is director, consumer markets at QAD.