The Importance of the Cycle in Demand Planning
In this video, we will discuss the importance of the cycle in demand planning. We will explain what the cycle is, how to determine the right cycle for your organization, and why it is important to get the cycle right.
Demand planning is the process of forecasting future demand and making decisions based on that forecast. The cycle is the frequency with which the demand plan is updated. The cycle is important because it determines how quickly you can respond to changes in demand.
For example, if the cycle is one month, then you can only make changes to the demand plan once a month. However, if the cycle is one week, then you can make changes to the demand plan every week.
The right cycle for your organization depends on the nature of your business and the lead times of your supply chain. If your business is very dynamic and demand changes frequently, then you need a shorter cycle. If your business is more stable and demand changes slowly, then you can have a longer cycle.
If you get the cycle wrong, it can have a significant impact on your business. If the cycle is too long, you may not be able to respond to changes in demand quickly enough. If the cycle is too short, you may be wasting time and resources updating the demand plan unnecessarily.
So if horizons is the first core element in the design principles of a Demand Planning solution and cycle is the second, could you elaborate on the considerations for what that planning cycle should be? Yeah. So how do you design the Demand Planning cycles of a Demand Planning model? So we talked about the horizons, which is how far out you need to forecast cycles is all about how frequently do you re-forecast, right?
So over that horizon, how frequently are you re- forecasting the business. Now if you think of it fundamentally, if nothing changes in the business, right, there's no change in the drivers of demand then you don't need to re- forecast your forecast once the forecast is stable for the entire horizon, why do you need to re-forecast? So the frequency of Demand Planning, i.e. the cycle of Demand Planning is dictated by how frequently are the drivers that are driving the demand plan changing. So typically, most companies have a monthly planning cycle because, you know, even stable businesses, there are changes happening that capture those changes in a monthly Demand Planning cycle.
And then the re-forecast, the demand forecast for the rest of the horizon. But if in your business, for example, if the drivers of demand are more dynamic in the short term, for example, where they could be competitive actions or pricing actions or market actions like contractions or internal actions like pricing or changes and new product dates, etc., that are causing the demand signal to change. If you're doing only a monthly planning cycle, but these changes are happening pretty dynamically on a weekly basis, then the supply chain is not getting aware of that through the Demand Planning process.
And in fact, they'll be seeing a lot of a lot of variations and a lot of reactions and impacts of that in the supply chain. So either they have to buffer for it. Or you're facing customer service issues. So in those cases where you have demand drivers that are changing on a weekly basis and they're causing a lot of impact on your supply chain, you're better off putting in a weekly Demand Planning cycle as well to re-forecast the business.
If you have a weekly planning cycle, do you re-forecast the entire horizon every week? Not necessarily, if the drivers that are changing on a weekly basis are impacting only certain parts of the Demand Planning horizon. Then the weekly planning cycle should focus on that horizon. The drivers that are impacting the mid to long term forecast would be changing less frequently.
So typically the weekly planning cycle focuses on what we call the operational planning horizon. What that horizon is depends on the nature of the drivers that are changing on a weekly basis and what the impact in the horizon. So companies need to get the operational horizon designed based on what changes on a weekly basis. The mid to long-term horizon that you are forecasting on a monthly basis is what we call the tactical planning horizon and what drivers are changing in those horizons.
So it's important to get the operational horizon and the tactical horizon and the weekly cycle focus on the operational horizon and the tactical monthly planning cycle, focus on the tactical horizon. Getting those horizons and the cycles aligned is very, very important. That said, you know, the Demand Planning process, but also have a strategic planning horizon where if you're trying to make strategic decisions using the Demand Planning process that have a 3 to 5-year lead time, long-term CapEx decisions, etc., then you can add a strategic planning horizon and that could be done less frequently, once a quarter or even once a year because it's a much longer look, and there are no drivers that are telling you how things are going to change five years from now.
So you can do that once a year. So you have an operational planning horizon, a tactical planning horizon, and a strategic planning horizon governed by a weekly planning cycle, a monthly planning cycle, and an annual planning cycle. Some companies, depending on the nature of the business, there could be some changes that are happening on a very dynamic basis, very daily basis, and they need the supply chain to respond on a daily basis. And in those industries, those companies potentially would also have a daily Demand Sensing horizon, which is very, very short term focused on the next few days and your re-forecasting the business for a very short horizon, let's call it the Demand Sensing horizon on a daily basis so that you can make certain short term supply chain decisions based on changes that are expected, based on demand drivers are potentially changing on a daily basis as well.
So that's how you design the cycles and each cycle focus on different parts of the Demand Planning horizon.