Cooperative environment is very demanding nowadays, mainly because there’re more competitors than before and there’s also much more prices’ competition. For this reason, it’s very important for any company to optimize the production chain‘s operation to the maximum. Discover what is Demand Planning and its actual role in companies.
Logistics has become a key factor since the size of orders are boosting, delivery times are shortening and returns are increasing. This, in fact, makes essential for companies to anticipate by planning the demand in order to appropriately coordinate warehouse management. Knowing this situation in advance, will help to previously make the necessary modifications to guarantee the sales process’ success.
For this reason, it’s necessary to integrate and synchronize different elements. Here, demand plan is the integrating element, which is also the cornerstone for decision – making. That’s why it’s such an important factor.
What is demand planning?
It’s definition belongs to the amount of the different processes aimed at maintaining adequate stock levels in the warehouse. For this reason, this is the component that drives the operation of the supply chain, as well as being one of the mechanisms by which a company coordinates and optimizes the process of manufacturing a product or providing a service.
It also includes the estimation of the sales of a company to, based on these calculations, coordinate the production process. The achievement of these estimations are from the joint action of different areas of the company and thanks to which, in addition, it’s possible to design strategies and establish policies to improve profitability.
There are two demand planning systems activities, common to all kind of companies regardless of their size:
Purchases
Demand projection improves decision – making regarding purchases and make strategic purchases, which contributes to the proper supply chain’s functioning. This helps to maintain stable prices and gain time to negotiate.
Sales
Helps to deal with the phenomenon of seasonality. We know that this occurs with certain lines, and the difficulties that arise when inserting a new product in the portfolio. This, in addition, results in a better service providing for both distributors and customers.
Its definition corresponds as well as the administrative and technological actions, together with the calculations made to maintain demand and supply’s balance. Companies can obtain figures such as the quantity of merchandise and the value of the product through this process.
The objective of demand planning is to improve supply and ensure customer satisfaction. In other words, it’s focused on solving a fundamental and quite common problem in companies: not having supply logistics to improve inventory management, a fundamental aspect in business’ functioning that can become complex when companies are growing.
For these reasons, it’s a key element to evaluate medium and long – term projections and establish the difference between current values and the goals to achieve in order to take the appropriate measures.
Demand planning is also used to determine the number of products that must make up the stock, the space to store all these items, the number of staff required for this operation and the shifts to make it. In the same way, it contemplates the use of a backup stock to guarantee fluidity in service provision, avoiding intermittence.
Quadruple convergence is made up of
- Processes.
- Staff.
- Data.
- Software.
Four questions that every manager should ask
- Why forecast?
- How accurate and detailed does the forecast need to be?
- Who should make the forecast?
- How often should we make a forecast?
The answer to these questions will determine how to implement demand planning and if it will be successful or not.
The sales and operations plan vs. demand planning
The concept of demand planning is so closely related to the concept of sales and operations plan that, frequently, they can cause confusion. Let’s analyze both concepts and their differences:
The sales and operations plan is the synchronization process of demand and supply. This process performs sharing ideas and projections presented by the different areas of the company in order to achieve a balance between demand, supply and financial objectives.
On the other hand, demand planning analyzes the behavior of the market, the products and services that customers consume, those that should be sold and how they should be offered.
The main objective is to synchronize demand planning and supply; therefore, the sales and operations plan has two phases:
- The demand plan.
- The production and/or purchases plan (supply).
This is how the demand plan is part of the sales and operations plan and thus, both concepts, despite their differences, articulate and complement each other for the correct projections.
Components, elements and practices
The concept of demand planning, besides, is closely linked to the driven demand which implies the analysis of market fluctuations, what consumers want, what is going to be sold to them and how it is going to be offered.
This analysis requires consistent responses that also have a scientific and a qualitative component that complement each other.
The scientific component
It’s associated with technical knowledge about quantitative models, which makes numerical data and technological resources very important.
The qualitative component
Refers to the behavior, skills and knowledge of the team members, as well as their communication skills.
Within demand planning there are four fundamental elements:
- Understanding and managing the demand.
- Definition of the demand plan.
- Generation of the statistical forecast.
- Validation and consensus of the demand plan.
These elements can be affected by certain facts such as
- Distortion of the information flow.
- Misidentification of the components of demand and consequently, of the factors that can determine changes in these values.
- Wrong execution of commercial procedures that affect fluctuations in demand.
- Very complex forecasts and, at the same time, not very accurate, with a lack of global criteria and generated unilaterally.
Practices to highlight
Management of commercial promotion
It’s the combination of practices focused on stimulating demand at the point of sale through discounts, gifts and promotions, among other incentives. It is ideal to save time and, above all, obtain an optimal ROI (Return of Investment).
Product portfolio management
Contemplates the inclusion of new products in the portfolio through planning, understanding how this insertion can affect the products already included and taking the necessary precautions for a healthy inclusion, optimizing profitability and improving performance within the market.
Statistical forecast
Making use of existing statistical data, supply chain forecasts are generated by applying advanced statistical algorithms. It’s very important to support these forecasts by reliable information ir order to avoid the possible extremes: shortages and excess of merchandise.
The execution of the demand plan
For the execution of the demand plan, it is required the articulation of different areas of the company as well as a constant dealing with suppliers. In the same way, it is important to note that since each company has its own structures, priorities and needs, there is not a single way to execute demand planning. However, its implementation process, in all cases, sticks to the following order:
Define the type of process
The first and most important thing is to determine the most suitable type of planning: short, medium or long term. Defining this, is important to establish a schedule, keeping in mind that the deadlines and goals must match.
Measure the actions
Taking as a base the values that the company defined in the beginning of the process, is important to determine the accuracy of the forecasts in order to establish the goals to achieve.
Implement an improvement and management system
In this regard, we recommend the use of software, given the precision it offers when evaluating the final results of the process and determining if expectations were met or not. Even if you don’t have software or aren’t planning to purchase one, using an Excel document can be very helpful.
Improve the process
When a cycle ends, another begins. For this reason, after finishing, the process’ restart is mandatory, applying everything learned in order to improve the performance and increase productivity.
The factors involved
Sales can also suffer afection by unforeseen events and unexpected changes, therefore, the forecasts regarding them can have a considerable error rate and, consequently, there are not one hundred percent effective projection methods. Although there are products with a constant consumption pattern, there are also many seasonal ones, which are in a greater demand at certain times of the year, while others are subject to changes in habits or the appearance of certain trends, so the projections of their sales can be very difficult to do.
Therefore, when making product sales projections, companies must use previous sales records, which must also include the products requested by the consumer, regardless of whether these products were available for sale. In the case of new products for which, for the same reason, there are no records, the only reference is an analysis of the number of potential customers and the local and international market, being very aware of social, political and economic factors that may have an impact on sales.
It’s also crucial to keep an eye on competition. It’s not enough to identify it, but also analyze their strategy to be two steps ahead.
Quantitative methods and qualitative methods
There is a great diversity of quantitative methods that calculate demand regarding the available stock based on the records. The most important are two:
Naïve method
It’s based on historical values and assumes that the trend in sales will remain stable over time. Its main drawback is that, by not anticipating variations, it is unreliable.
Simple or mobile average method
Establishes an average of sales for a specific period. In order for the trend to be more realistic, this average is set in short periods (maximum a trimester).
Qualitative methods are mainly used when new products are launched, including market research. This analyzes potential customers, the competition and even the behavior of consumers on the internet.
The role of technology
The growing demand has driven these processes’ digitization, as well as the use of artificial intelligence to execute planning.
Experience and knowledge have been helping companies make accurate demand projections.
By entering in the digital era, many companies began to use Excel to perform these calculations. This is still the most used tool by medium and small businesses. However, whether to make projections or to manage a warehouse, it’s better to use more advanced resources.
Therefore, the person in charge of making sales estimates must have a software specialized in demand planning. This software works with the information flows obtained from the ERP which, in turn, came from inventory management.
In the same way, it should be noticed that the technification process of demand planning has been evolving through three generations
First generation
Handmade processes carried out by company employees, which were mainly based on knowledge and relatively accurate calculations although very subjective.
Second generation
The process begins to digitize becoming less handmade when a first software is integrated into the ERP that includes: the stock (available, backup and in transit), deadlines and projections, which helps the person in charge of planning to determine precisely the products that must be checked and those that must not, saving time and obtaining more precise mathematical results. Some companies have their own systems that are based on spreadsheets to be used in replacement of an ERP software.
Third generation
For managing inventories and coordinating supply, incorporate advanced systems that seek service improovement while maintaining the inventory levels is priority.
Nowadays, software is the basis that supports the whole demand planning process, and it’s an essential element for optimizing both planning itself and inventory management. In the same way, technology has opened a significant gap between companies that still use old – fashioned methods and those that have become more technical and, in this regard, it is also worth keeping in mind that existing software is evolving precisely to adapt better to the needs of companies.
The ideal software should integrate the following features
- Statistical calculations.
- Integration of areas.
- Coordination of events.
- Record and management of point of sales information.
- Inclusion of external factors in the calculations.
- Creation of possible future scenarios.
- Management of high volumes of information.
- Analytical capability.
Best Practices
Although they may vary depending on the company, its operation and its particularities, there are certain practices that can be implemented in all cases in which demand planning is required, among which are:
Implementing a good ERP system
It’s very important to choose an Enterprise Resource Planning software that really satisfies the needs of the logistics system.
Data collection and processing
Having a data monitoring mechanism helps to speed up operations and improve the ability to respond to any unforeseen event.
Manage processing models
Articulating logistics to all company processes makes sales forecasts even more precise and optimizes profits.
Making tests
Runing simulations to test and analyze the demand plan, allows to implement improvements and correct failures, reducing the error rate.
Despite that, demand planning may vary from one scenario to another. The implementation of theese measures will increase the demand plan’s effectiveness, allowing to make accurate projections regardless of the scenario.
The advantages
The main advantage of demand planning is that, after having carried out the corresponding calculations, the purchasing department of the company can determine the number of products that are needed, whether they are raw materials (to guarantee that the production line runs smoothly without interruptions) or finished products (to satisfy consumer demand in real time).
Knowing in advance the number of products to manage, in turn, allows to
- Satisfy the customer by offering a better service.
- Have enough stock every time.
- Anticipate possible difficulties in the production line.
- Prevent having obsolete merchandise in the warehouse.
- Reduce storage costs.
- Make the most of storage space.
- Optimize the capital invested in inventory management.
- Increase the level of sales.
Proper demand planning contributes, not only to the company’s productivity, but also to the proactivity of the areas involved. This helps to provide timely and satisfactory responses to consumer requirements, that’s why it’s essential to improve the companies’ competitiveness.
If you like this post, we invite you to activate the RSS to keep up to date with what we post. We also invite you to follow us on social media so you won’t miss any of our posts. Don’t forget to share and give us a like.