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July 17, 2023

The Three Critical Elements of Demand Planning Model Structure

In this video, we will discuss the three critical elements of the demand planning model structure: horizon, frequency, and granularity. We will explain why these elements are important and how they can be used to improve the accuracy and efficiency of demand planning.

Demand planning is a critical process for any organization that wants to ensure that it has the right amount of inventory to meet customer demand. However, demand planning can be a complex and challenging process. One of the most important aspects of demand planning is getting the structure of the demand plan correct.

The three critical elements of the demand planning model structure are horizon, frequency, and granularity.
- Horizon refers to the time period over which the demand plan is created. The horizon should be dictated by the lead times of the decisions you are trying to make. For example, if you are making production decisions, the horizon should be long enough to account for the lead time of production.
- Frequency refers to how often the demand plan is updated. The frequency should be dictated by how frequently the drivers of demand are changing. For example, if the drivers of demand are changing on a weekly basis, the demand plan should be updated weekly.
- Granularity refers to the level of detail in the demand plan. The granularity should be dictated by the decisions you are trying to make. For example, if you are making inventory decisions, the granularity should be fine enough to account for the different SKUs that you sell.

Getting the structure of the demand planning model correct is essential for ensuring the accuracy and efficiency of demand planning. By understanding the three critical elements of horizon, frequency, and granularity, you can create a demand plan that is fit for purpose.

So you mentioned the importance, the vital importance of getting the structure of your Demand Plan correct. If you want to increase the maturity of your planning, so can you elaborate on that structure? Indeed, the Demand Planning model structure is one of the most important aspects of getting the Demand Planning capability right and is actually one of the least understood aspects of how companies operate the Demand Planning process. So let me elaborate on the critical elements of the Demand Planning model structure.

There are three of them. One is called the horizon, the Demand Planning Horizon. Second is the cycle or frequency of Demand Planning, and the third is the granularity of Demand Planning. So what do we mean by the horizon of Demand Planning?

The purpose we are doing a Demand Planning process is to drive decisions so the horizon is dictated by the lead times of the decisions you are trying to make. So the lead times in the supply chain dictate the horizon over which you need to create a demand plan. And a lot of times, the Demand Planning horizon is not synchronized with the longest lead times in the supply chain. So that becomes a challenge in the process, because then the decisions that are supposed to be made don't get made, or they get made with demand forecasts that are not well thought out.

Second is what we call the frequency of Demand Planning. The frequency of Demand Planning is dictated by how frequently the drivers of demand are changing. So do you forecast on a weekly basis? Do you forecast on a monthly basis?

Do you forecast sometimes on a daily basis, and to what horizon of the demand overall demand plan are you changing on a weekly versus a monthly basis? These are critical things to get right in the structure of the Demand Planning. If you have demand drivers that are changing on a weekly basis, waiting until the monthly cycle to re- forecast the business, you might be causing a lot of turbulence in the supply chain because if you are forecasting only monthly and are drivers that are changing weekly, then there's going to be someone calling the supply chain saying, Hey, my demand has changed, can you do something for me?

So it is going to cause a lot of reactive processes in the supply chain or will have to create a lot of buffer in the supply chain. So getting this cycle right is extremely important and depends on how frequently the drivers of your business demand are changing. The third aspect of it is the granularity at which you forecast demand. What do we mean by granularity?

At a broad level, you are forecasting demand in multiple dimensions of your business, right? You have your, what products are you selling? So those are organized around selling SKUs that are organized into product groups, product lines, brands, categories, etc. Your forecasting along your customer/ market dimension, your customers are organized into Where are they buying?

All the way to geographies, customer segments, etc. On time, weekly, days, weeks, months, quarters, etc. So what granularity do you forecast at, at the intersection of these dimensions is extremely important. A lot of times we find that companies are forecasting at a too granular detail, too far out, and it's fake details.

You know, forecasting at scale level 18 months out is not really adding value. No one knows exactly what the numbers are, but that's how it's being done. So the granularity has to be dictated by the decisions you are trying to make. The decisions dictate what granularity the forecast is required at, and so getting that right will have a big impact on reducing the burden of Demand Planning.

Otherwise, a lot of fake details and fake number churning is going on in companies. So those are the three aspects of getting the Demand Planning structure right. And we should go into each of these and talk about that in more detail.

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