Demand planning is a key supply chain management process by which a company attempts to more accurately predict or forecast future customer demand in order to adjust company production to align with that demand. Demand planning is a key component of supply chain management and a major element of a company’s vital S&OP (Sales and Operations Planning) process.

Who owns or performs demand planning in a company?

Demand planning touches a multitude of business functions, so the title or org chart position of employees who undertake demand planning can vary. Demand planning may be couched under sales and marketing, purchasing, production/supply, operations, finance, or another department, or even hired out to an external organization or consulting firm. In what you might call “traditional” companies, the demand planning process is often owned by the Supply Chain Manager, or sometimes simply the Demand Planner.

What are the steps in the demand planning process?

Effective demand planning will attempt to accurately project demand over the next month to 6 months, as well as extending that projection out as far as 18 months to 2 years. Different organizations and managers undergo the complex demand planning process in different ways, and may include elements that another company might not deem vital. In general, though, effective demand planning will include some form of the following steps:

1. Collecting data from external and internal sources on all factors known to predict or influence demand

This may include consumer/sales trends, new product/service launches, marketing efforts, production delays or supply chain issues, new/unexpected moves by competitors, labor force issues, weather or social/global events that may impact demand, and internal and/or external part/component shortages. Year-over-year and seasonal trends should also be accounted for, as well as product life cycles, inventory levels, historical demand patterns for each product or service offered by the company, and market volatility or variability.

2. Analyzing sales, inventory, production, supplier, and other relevant data

In concert with the sales, manufacturing, supply, and marketing teams/leads, the collected data is analyzed and vetted, with the specific intent to identify factors or events that might impact demand over the selected future period. The team should also examine the previously produced demand forecasts, compare that data to actual sales over the last relevant time period, and attempt to identify all potential reasons for any discrepancies.

3. Creating a statistical data model to forecast future demand

Some organizations include this step as part of the demand forecast process, but first, ideally a data model must be created using the information gathered and analyzed in the previous steps. Intelligent demand planning/data modeling software can be a huge help here.

4. Building a demand forecast

Strictly speaking, a demand forecast and a demand plan are not the same thing. A demand forecast is what it sounds like, an intelligent prediction of future demand based on the data gathered, analyzed, and modeled in previous steps. The forecast is limited specifically to projected demand, without attempting (at this point) to resolve internal supply chain issues or other factors that may impact the company’s ability to meet this demand. Some business experts view demand forecasting as looking at the projected, pure consumer demand for your product/services in the absence of any supply issues or operational constraints.

5. Creating, reviewing, and implementing a finalized demand plan

Utilizing the demand forecast and incorporating all internal and external factors that may impact its fulfillment, the team, Demand Planner, or Supply Chain Manager creates a plan detailing the type, amount, and location of any and all inventory necessary to meet the demand forecast. This plan will need to be balanced against the company’s short- and long-term business goals, as well as any supply chain, production, inventory management, delivery, or financial constraints faced by the company. After the demand plan is fully vetted, it is then presented for review, modification, and approval by the Executive team, often during a monthly S&OP meeting.

What are the benefits of effective demand planning?

The ultimate goal of effective demand planning is to maintain exactly enough inventory to quickly meet actual consumer demand. No more, no less. Truthfully, this rarely happens in an exact sense, as consumer demand may be quite volatile in some markets, and even in very stable industries, there are enough variables to take into account that make it difficult to achieve a flawless ratio of inventory to demand. However, the more intelligently and efficiently a company engages in demand planning, the more it can benefit from:

Improved company efficiency, resource allocation, and supply chain management. A predictable and accurate demand forecast helps smooth production spikes or bottlenecks and lower needless inventory expenditures. This results in better cash flow, reduced waste, and can facilitate lower prices and greater sales volume.

Better profits while maintaining quality and service. A more efficient demand planning and inventory process reduces operational costs, and allows for higher product/service quality. This can show up as improved financial health for the company and investors.

Improved customer satisfaction. When customers/clients can quickly obtain as much of a company’s high-quality products and services as they want at a price they can accept, they are far more likely to continue to patronize the company in the future. Customer satisfaction has a huge impact on reviews, word-of-mouth, and return sales. When customers can’t get a product or service that is in high demand, it may temporarily result in product pricing spikes and profits. However, this can also result in the souring of customers due to a poor experience, and they may seek a similar product or service from a competitor who can better meet their demand.

Improved employee satisfaction. When employees and managers deal with happy clients and company leaders who have enabled an excellent inventory/demand ratio, they are happier, more productive, and more confident in the state of the company and its future, which benefits employees, management, and ultimately, the customer. In industries where labor must be added to meet increased demand, accurate forecasting helps lead to stability and can reduce employee turnover and excessive training/hiring costs.

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