The Fundamentals of Demand Planning Cycles
Defining demand planning cycles depends largely on how frequently your drivers of demand are changing.
In this interview, Chakri Gottemukkala, Co-Founder and CEO of o9 Solutions, Inc., discussed the importance of designing demand planning cycles for organizations. Here are some best practices for defining demand planning cycles for supply chain leaders.
Determine the Horizon and Frequency of Demand Forecasting
To design effective demand planning cycles, it is important to determine the horizon and frequency of demand forecasting. The horizon refers to how far out the organization needs to forecast cycles, while the frequency is how frequently the organization needs to re-forecast. If nothing changes in the business, then the organization only needs to forecast once and that forecast is stable for the entire horizon. However, if the drivers of demand are more dynamic in the short term, then the organization needs to re-forecast more frequently.
"The frequency of demand planning, i.e., the cycle of demand planning is dictated by how frequently the drivers that are driving the demand plan are changing."
Design Operational and Tactical Planning Horizons
Organizations need to determine their operational and tactical planning horizons. The operational planning horizon focuses on what changes on a weekly basis, while the tactical planning horizon is where the organization forecasts on a monthly basis. The weekly cycle focuses on the operational planning horizon, while the monthly cycle focuses on the tactical planning horizon.
"It's important to get the operational horizon and the tactical horizon and the weekly cycle focus on the operational horizon and tactical. The tactical monthly planning cycle focused on the tactical horizon getting those horizons and the cycles aligned is very, very important."
Add a Strategic Planning Horizon
Some organizations need to make strategic decisions using the demand planning process that have a three to five year lead time. In these cases, the organization can add a strategic planning horizon, which is much longer and can be done less frequently, such as once a quarter or even once a year.
Incorporate Daily Demand Sensing Horizon
In some industries, organizations may need to respond to changes that are happening on a very dynamic basis, such as daily changes. For these cases, organizations can incorporate a daily demand sensing horizon, which is very short term and focused on the next few days.
"In those cases where you have demand drivers that are changing on a weekly basis, and causing a lot of impact on your supply chain, you are better off putting in a weekly demand planning cycle as well to re-forecast the business."
Effective demand planning cycles can help organizations respond to changes in the market and manage supply chain operations more efficiently. By considering the horizon and frequency of demand forecasting, designing operational and tactical planning horizons, adding a strategic planning horizon, and incorporating a daily demand sensing horizon, organizations can design demand planning cycles that meet their specific needs.
1.Determine the horizon and frequency of demand forecasting to ensure that the organization stays ahead of changes in demand.
2.Design operational and tactical planning horizons to forecast on a weekly and monthly basis, respectively.
3.Add a strategic planning horizon to make strategic decisions that have a three to five year lead time.
4.Incorporate a daily demand sensing horizon in industries where changes are happening on a very dynamic basis, such as daily changes.
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.
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