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Demand Planning explained
Demand planning is a supply chain management process. It is the prediction of what a company intends to sell in the future (i.e., future demand). It involves determining what demand there will be for each product a company sells and then building plans to support this estimated demand.
For example (see video below): if the dotted line is your company’s current state, by looking back at the history, you can understand the product volume that was sold. But in order to secure enough product inventory to meet future customer demand, you’ll need to know how to predict what future demand may look like.
Demand planning breaks this information down into much more detail, learn more in this video:
You’ll also need to predict which channels you will sell each product and how you will process them through your distribution network. Demand planning is a core supply chain activity across many industries and businesses. Regardless of whether a business sells products to a B2B or B2C customer base, a demand plan is a necessity for determining how much product will need to be available to meet demand.
Demand Planning process
Demand planning is considered a strategic process for most companies but too often, developing and adhering to a process can be very difficult and complex. The main goal of this process is to provide planners with a reliable daily, weekly, or monthly demand plan to execute.
Demand planning involves 7 key steps:
- Collecting critical information and data;
- Measuring a prediction’s accuracy against the actual or postgame analysis;
- Developing a baseline forecast (and sometimes a potential uplift, if necessary);
- Providing analyst and planner insights into the supply chain forecasts;
- Editing, reviewing, and checking the forecasts;
- Approving and submitting a final demand forecast, and;
- Archiving and preparing the next forecast cycle.
Why is demand planning important?
Demand planning is important to business; it’s a necessary part of building an effective supply chain. Demand planning serves two essential functions:
Demand planning allows companies to see what’s in inventory and have the right amount of product in the right place so that they are prepared to meet customer demand.
Demand planning allows companies to plan more efficiently and manage inventory more strategically.
Demand planning can also help companies avoid the perils of overstocking, which can include increased inventory carrying costs, marking down products, or selling unsold inventory—at a deep discount and as quickly as possible—to make room for new products.
Demand planning software
When choosing demand planning software, there are many options. Companies should select software based on their specific needs. Demand planners should understand Enterprise Resource Planning (ERP) systems because it is the source of data. Demand planners must become experts in using demand planning software. Demand planning and forecasting are very important because many factors can impact and shape demand, including economic trends, weather events, and global emergencies.
Demand planners are an essential role in a company’s supply chain planning strategy. They use internal data (analytical, marketing, sales, etc.) and external data (weather, events, upcoming holidays, etc.) to best estimate demand for future products. Successful demand planners design a pilot version based on historical data. It’s important for companies to hire talented demand planners and invest in continued education in demand planning.
What is Supply Chain Management?
Supply chain management (SCM) is the active management of supply chain activities to maximize customer value and achieve a sustainable competitive advantage. It represents a conscious effort by the supply chain firms to develop and run supply chains in the most effective & efficient ways possible. Supply chain activities cover everything from product development, sourcing, production, and logistics, as well as the information systems needed to coordinate these activities.
There are five basic components in a supply chain management system:
Supply Chain Planning
To meet customer demands, supply chain managers have to plan ahead. This means forecasting demand, designing the supply chain intentionally, and determining how the organization will measure the supply chain to ensure it is performing as expected in terms of efficiency, delivering value for customers, and helping to achieve organizational goals.
Selecting suppliers who will provide the goods, raw materials, or services that create the product is a critical component of the supply chain. Not only does this include creating the contracts that govern the suppliers, but also managing and monitoring existing relationships. As part of strategic sourcing, supply chain managers must oversee the processes for ordering, receiving, managing inventory, and authorizing invoice payments for suppliers.
Supply chain managers also need to help coordinate all the steps involved in creating the product itself. This includes reviewing and accepting raw materials, manufacturing the product, quality testing, and packaging.
Supply chain management (SCM) is the process of overseeing supply chain activities. The main goal of supply chain management is to create customer value and to maintain a competitive advantage. It’s important for companies to develop processes and run supply chains in an effective and efficient way. Supply chain management can include activities like:
- Product development
There are five components to a supply chain management system:
1. Supply Chain Planning
Supply chain teams and managers have to plan in advance to meet customer demand for products. Supply chain planning often involves forecasting demand, designing a supply chain to meet customer demand, and setting key performance indicators to measure if the supply chain is effective and efficient.
Suppliers are a critical piece of a supply chain because they provide the raw materials or services that create a product. Supplier management not only includes creating and managing contracts but also maintaining strong relationships. To source strategically, supply chain managers and teams must oversee many processes including ordering, receiving, inventory management, and supplier invoicing.
Supply chain managers also play a role in coordinating product production including reviewing/accepting raw materials, product manufacturing, quality control and testing, and packaging. It’s also important to create a process to support product returns. This can include a protocol for scraping or reproducing a defective product or simply creating a process to return a product back to the original warehouse.
Logistics is an important part of the supply chain because it ensures that a product reaches the customer. The logistics process includes coordinating orders, scheduling deliveries, dispatching, invoicing purchasers, and receiving their payments.
It’s also important to create a process to support product returns. This can include a protocol for scraping or reproducing a defective product or simply creating a process to return a product back to the original warehouse.
What is the difference between dependant and independent demand?
There are two types of demand: dependent and independent.
If demand for a product is independent, this means that the demand for this item is driven by market conditions and not necessarily related to production decisions for any other items that may be in stock. In manufacturing, products that have independent demand are the end product that is sold to the customer.
Dependent demand for a product is based on product decisions from its “parent” components. The term “parent” is defined as an item that is manufactured from one or more components. For example, a desk is a parent product that is comprised of components like a desktop, legs, and furniture fasteners.
Demand planning and management depend on accurate data and collaborative forecasting processes so that companies can reach an agreement (both internally and with external suppliers and vendors) on the anticipated timing, product mix, and locations for demand. The demand planning process is a foundation for other processes like merchandising, logistics and budgeting.
Overall, demand planning is an important process to help companies ensure that there is enough product to meet customer demand and to keep their supply chain running efficiently.