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December 1, 2023

How To Define Your Demand Planning Horizon

Defining your demand planning horizon is an exercise in understanding the cumulative lead times of your supply chain.

One of the most important decisions you make is how far into the future you plan your demand. The horizon of your demand plan determines how much inventory you need to keep on hand, how much capacity you need, and how much you need to produce or buy. Defining your demand planning horizon is critical to ensuring that you have the right product in the right place at the right time. In this article, we will discuss the best practices for defining your demand planning horizon.

Understanding Your Supply Chain

The first step in defining your demand planning horizon is to understand your supply chain. Chakri Gottemukkala, Co-Founder and CEO of o9 Solutions, Inc., explains that "each of these activities have physical lead times associated with it." This includes move activities, make activities, and buy activities. Understanding the physical lead times associated with each of these activities is critical to determining your demand planning horizon.

"But then in each of these activities, there are other decisions to be made, for example, for the more activities or decisions related to adding capacity to help the move operation whether it's logistics capacity, or you might need to add storage capacity and lead time for adding capacity might be a few months, or maybe a few weeks. Similarly make operations make activities have capacities where you're might have labour capacity, manufacturing capacity and the lead time for that might be longer and different raw material have different long lead time.”

Understanding Your Decisions

Once you understand the physical lead times associated with each of your supply chain activities, you need to understand the decisions that impact those lead times. Gottemukkala explains that "the horizon at a broad level is dictated by the lead times of those decisions." This means that you need to understand the cumulative lead times of all the upstream decisions that impact your supply chain. For example, if you are making raw material decisions using your demand plan, you need to add up all of the lead times of the upstream decisions to determine your demand planning horizon.

"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 had to be added up to say, I need this this type of demand planning horizon if you have it two month, make activity, a one month or more activity, and then the raw material lead time itself is six months or six months. Two months, and one month is a nine month, nine month horizon at least that you need as a demand planning model."

Mapping Your Decisions

To map your decisions, you need to create a decision map of your organization. This map should include all of the decisions that impact your supply chain, as well as the lead times associated with those decisions. Gottemukkala stresses the importance of understanding the lead times of your organization's decisions, stating that "most organizations really don't have a good handle on those lead times." By mapping your decisions and understanding the lead times associated with those decisions, you can more accurately define your demand planning horizon.

"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."

Designing Your Horizon

Once you have a good understanding of your supply chain and your decisions, you can start designing your demand planning horizon. Gottemukkala explains that "it really comes down to depending on the decisions you're trying to support, what is the cumulative lead time from what we call the forecast or the decoupling point?" The forecast or decoupling point is the point in the supply chain where you position material to be ready to fulfill customer orders. From that point upstream to the decision that you're trying to make, you need to add up all of the lead times of the upstream decisions to determine your demand planning horizon.

"So it's really the design of the horizon depends on the cumulative lead times and the decisions you're 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."

The Takeaways

  • 1.

    Understanding the physical lead times associated with each of the supply chain activities is critical to determining the demand planning horizon.

  • 2.

    The horizon at a broad level is dictated by the lead times of the decisions that impact the supply chain.

  • 3.

    Mapping the organization's decisions and understanding the lead times associated with those decisions can more accurately define the demand planning horizon.

  • 4.

    The design of the demand planning horizon depends on the cumulative lead times and the decisions that the organization is trying to support.

  • 5.

    By accurately defining the demand planning horizon, supply chain leaders can ensure that their organization has a good handle on its lead times and is better equipped to meet customer demand.

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