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July 17, 2023

Why Demand Planning Matters

In this video, we discuss the importance of demand planning and how it can help businesses improve their supply chain and customer service levels. We define supply chain activity lead times and customer service levels, and we show how demand planning can be used to optimize these factors.

Demand planning is the process of forecasting future demand for products or services. This forecast is then used to make decisions about inventory levels, production schedules, and marketing campaigns.

Demand planning is important because it helps businesses to ensure that they have the right amount of products or services available to meet customer demand. This can help businesses to improve their customer service levels and avoid stockouts.

Supply chain activity lead times are the amount of time it takes to buy, make, and distribute products. Customer service levels are a measure of how satisfied customers are with the service that they receive.

Demand planning can help businesses to optimize their supply chain activity lead times and improve their customer service levels. This can be done by forecasting future demand accurately and using this forecast to make decisions about inventory levels, production schedules, and marketing campaigns.

Why do Demand Planning? Demand Planning is done because of supply chain activity lead times. Comprising of buy, make and sell activities and customer service levels, which can range from excellent through to very good, satisfactory and fighting. Optimising supply chain activity lead times and improving customer service levels can be managed with regular accurate demand planning.

Let's define supply chain activity lead times first. There are many different lead times and descriptions in the supply chain. Let's describe the key ones here. Purchasing owns the buy activity, which is the task of obtaining raw materials from suppliers.

This is the sourcing lead time. Manufacturing owns the make activity, which is how long it takes to make products. This is known as the production lead time. Distribution owns the sell activity, which is the task of delivering products to retailers or end customers.

This is the distribution lead time. These lead times can then be combined to become the supply chain activity lead time. Now, let's define customer service levels, which is a calculation of how satisfied customers are with the service that they have received, customer service level is calculated from customer expected lead time, which is the amount of time that a customer will typically wait for their order to be fulfilled. Customer expected lead times vary across business and industry.

They might be instant or could be a few minutes. For others, they might be weeks. Customer expectedly, times also vary across different demographics, although many customers will want the soonest possible availability. Others will be willing to wait longer for personalization.

Customer service level is measured by assessing the number of orders delivered inside the customer expected lead time and dividing that number by the total number of orders within the period being reviewed and then multiplied by 100 to provide a percentage. So the higher the number, the better your customer service level. If a business delivers poor customer service levels, they can lose orders and customers. As an example, let's say the customer expected order delay time is one month, and it takes three months to buy, make and distribute the product, which is the supply chain activity lead time.

Then in this situation, you cannot wait for the customer order before you start planning. You have to anticipate at least two months in advance what the future demand will be and then plan the supply chain activity accordingly. So to summarize, you do demand planning to ensure that you have the right amount of materials purchased and available to make and deliver the products in time to meet customer service levels.

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