The Importance of the Horizon in Demand Planning
In this video, we will discuss the importance of the horizon in demand planning. We will explain what the horizon is, how to determine the right horizon for your organization, and why it is important to get the horizon right.
Demand planning is the process of forecasting future demand and making decisions based on that forecast. The horizon is the time period over which the demand plan is created. The horizon is important because it determines the decisions that can be supported by the demand plan.
For example, if the horizon is six months, then the demand plan can be used to make decisions about production, inventory, and marketing. However, if the horizon is only one month, then the demand plan can only be used to make decisions about inventory.
The right horizon for your organization depends on the lead times of your supply chain. The lead time is the time it takes to produce, deliver, and sell a product. The lead times of your supply chain will determine how far out you need to forecast in order to make informed decisions.
If you get the horizon wrong, it can have a significant impact on your business. If the horizon is too short, you may not have enough time to make the necessary adjustments to your supply chain. If the horizon is too long, you may be wasting resources on products that will not be needed.
So Chakri you talked about the three core elements of a design of a Demand Planning solution, and the first one being the horizon. Could you elaborate more on what that means? Yeah. What's the how do you design the horizon of a Demand Planning model?
So let's first examine what the demand plan, the demand forecast, the demand plan is used for. Right. It's essentially being used for driving the decisions in the supply chain. And the horizon at a broad level is dictated by the lead times of those decisions.
So let me expand on that. If you take any supply chain, your company's supply chain, it has multiple supply chain activities, different types of supply chain activities make up the supply chain. For example, you have move activities, you have make activities, you have buy activities. And any supply chain, depending on the business, has one or more of those types of activities.
So more activity is moving product from one facility to the other, whether it's DC to stores, factories to DCs, DCs to customer locations, make activities are making product, manufacturing product, whether it's finished goods or subassemblies or raw material that goes into the finished goods. And then you have by activities where you're actually buying material or raw material or finished goods from suppliers and bringing it into your into your controlling your supply chain. So each of these activities have physical lead times associated with it. Right?
The physical lead times being the move activity physically, what does it take to move from point A to point B, make something with respect to buying stuff, there are contractual lead times when you place the orders with your supplier, so there's physical lead times in the supply chain. But then in each of these activities, there are other decisions to be made. For example, for the move activities there are decisions related to adding capacity to help the move operation, whether it's logistics capacity or you might need to add storage capacity. And the lead time for adding capacity might be a few months or maybe a few weeks.
Similarly, make operations, make activities of capacities where you might have labor capacity, manufacturing capacity, and the lead time for that might be longer and different raw materials have different long lead time. So how do you design the horizon? It really comes down to depending on the decisions you are trying to support. What is the cumulative lead time from what we call the forecast order decoupling point?
What is a position in the supply chain where you're positioning material in this to be ready to fulfill customer orders. That's the forecast order decoupling point. What is a cumulative lead time from that point upstream to the decision that you're are trying to make? So, for example, if you're trying to make raw material decisions using the demand plan.
Then all the decisions cumulatively, all the lead times of the upstream decisions have to be added up to say, I need this type of Demand Planning horizon. If we have a two-month make activity, a one month move activity. And then the raw material lead time itself is six months. Six months, two months and one month is a nine-month horizon at least that you need as a Demand Planning model.
So it's really the design of the horizon depends on the cumulative lead times and the decisions you are trying to support. So in order to design a Demand Planning horizon, you need to really understand the lead times of your organization, the lead times of all the activities in the supply chain of your organization. And most organizations really don't have a good handle on those lead times. They really don't understand all the lead times of all the decisions that you're trying to make.
So one of the key things that we always advocate is besides the decision map of the organization, you need to have a very good understanding of the lead times of those decisions, and that's very key to designing the Demand Planning horizon.
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