What Is Demand Planning? And Why Is It Important?

Demand and supply have always been an integral part of business management. It determines how a company produces or stocks products to meet market demands. 

The success and growth of a business depend on how well it can create enough products to meet its customer’s demands. While this can appear very simple for businesses to achieve, there is usually more to supply chain management than expected – which explains why they use demand planning.

In this article, we will discuss all you should know about demand planning.

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What is Demand Planning?

Demand planning is a supply chain management process of forecasting product demands to ensure that there are enough products available for supply.

The purpose of demand planning is to help businesses strike a balance between demand and supply, whereby a company’s inventory produces and stocks enough products for the expected market demands without incurring additional costs.

Demand planners monitor the internal and external factors that affect demand such as natural disasters, weather events, labor force changes, economic events, or global crises to develop accurate insights into future demands.

To accurately predict future demand, demand planning uses forecasting techniques to align a company’s inventory levels with its customer demands, predict expected revenue, increase profitability, and improve customer satisfaction. Check out the guide related to sales pipeline stages.

Why is demand planning an important business practice?

Demand planning is a strategic management process that allows businesses to forecast customer demand and plan the supply to ensure that there are enough products for every customer’s demands.

It is a continuous process that allows businesses to effectively respond and satisfy market demands by analyzing sales records, customer trends, and historical data. The use of demand planning in businesses offers many benefits, but for this article, we have identified the four (4) most important benefits of demand planning below;

1. Enhances business proactiveness

Effective demand planning enables businesses to stay at the top of the game and always ready to meet their customer’s demands. No sales-oriented and forward-thinking company would want to be struggling to fulfill orders and accrue costs and deficits, nor would they also want to have so much in the inventory and find it hard to get demands for the existing stocks.

Demand planning through demand forecasting provides businesses with accurate demand forecasts and helps them stay proactive in the face of changing demands. If not anything, you will be able to prepare for the present and future disruptions that affect product demands. 

2. It improves customer satisfaction

Based on the popular saying “happy customers are loyal customers,” businesses that satisfy their customers earn the trust and loyalty of such customers. 

Judging by the current and evolving market demands where same-day delivery has become a common feature of e-businesses, businesses have to ensure that they can meet their customer demands when they are made. When you can predict the estimated demands that you will be having in a day or week, you can plan for this to ensure every customer gets their orders as fast as they can without any hiccups – thereby increasing their satisfaction.

3. It helps you to be more agile

Effective demand planning will help you be more prepared in the face of any unforeseen market changes.

Even with effective planning, things can still go wrong when you least expect it due to external factors like natural disasters, global economic crises, severe weather conditions, etc. However, with demand planning, you can prepare ahead by developing coping strategies to deal with the issues when they happen.

4. It helps to reduce operating costs

Demand planning helps to align your sales and operational processes and ensure that you have enough stocks to meet every demand.

When you create a balance between market demands and supply chain planning, you can stock just the right amount of product in the inventory to ensure that there are no excesses and vice versa. Effective supply chain forecasts enable you to streamline the supply process and cut redundant processes – thereby reducing operating costs. Find some sales related guides, B2B sales process, sales funnel template, sales prospecting and sales dashboard.

Demand Planning vs. Demand Forecasting

Demand planning is the overall process that guides how a business can prepare enough supply to meet its demands. While Demand forecasting is an integral aspect of the demand planning process. It is the process of analyzing internal and external factors, historical data, sales records, etc., to predict future product demands.

Typically done within 18 to 24 months, demand forecasting guides the demand planning process – allowing businesses to plan accordingly when they are well-informed about their expected sales.

Elements of demand planning processes

There are four (4) key elements of demand planning. They include;

Product portfolio management

Product portfolio management requires a detailed understanding of products and their lifecycles. It is the process of managing every stage of a product lifecycle from new product introduction to end-of-life planning.

It looks at how the new products can fit into the existing product portfolio? How does it affect the other products? And how the sale of one product will affect others? Demand planners ensure that they are well informed of the above factors to optimize the product mix, maximize profits and increase the global market share of the products.

Statistical forecasting

Statistical forecasting is the use of historical data with advanced statistical algorithms to create supply chain forecasts.

It helps businesses create accurate data-driven forecasts to ensure that they create or stock the right amount of products and avoid stockouts and overstocks.

Considering how internal and external factors affect product demands, statistical forecasting helps to identify those factors early on and prepare for demand or supply emergencies when the need arises.

Trade promotion management

Trade promotions are marketing strategies that are used to generate in-store demand for products by offering discounts, in-store promotions, referral programs, loyalty programs, giveaways, etc.

Trade promotion management is the overall planning and management of sales to help businesses promote their products, stand out from competitors and build stronger connections with customers through targeted promotional activities and strategies.

Demand sensing

Demand sensing uses artificial intelligence (AI) to combine data from external factors (weather conditions, disease trends, government data, economic/financial data) and historical sales data to predict possible disruptions and factors that could influence demands in the nearest future.

Key Steps for successful demand planning

Demand planning is a multi-step process that requires you to take the following steps to improve your demand forecasts. 

Step 1 – Create a demand planning team: This first step involves setting up the demand planning team and assigning every team member their roles and responsibilities. For example, the finance team would create the actual forecast while the supply chain management team would manage inventories.

Step 2 – Define and gather relevant data: This second step involves the team agreeing on the relevant data to include for accurate demand forecasting and where to source it. It usually includes sales data, inventory turnover, production times, etc.

Step 3 – Use external data to improve forecast: This third step involves sourcing and using external data such as recent performance, suppliers’ and distributors’ delivery timelines, or economic statistics to create better forecasts.

Step 4 – Develop a statistical demand forecast: After compiling all the relevant internal and external data, the next step is to develop your statistical demand forecast with your forecasting model of choice – demand planning software or excel.

Step 5 – Review the demand forecast: At this stage, you need to review, reanalyze, and refine the demand forecast to clean it up and make it more accurate.

Step 6 – Weigh forecast against inventory: You determine how much inventory is needed to meet the demand forecast and plan accordingly to meet the predicted demands.

Step 7 – Measure Results: The final step is to identify KPIs that will help you measure the effectiveness of your demand forecasts.

Best Practice for demand planning

The following are the best demand planning practices used by successful demand planners to create accurate forecasts.

1. Use accurate inventory data: To create accurate demand forecasts, you must collate and use up-to-date and accurate inventory data.
2. Include all internal and external data: You can only get an accurate forecast when you consider all factors that could affect demand. To achieve this, consider adding supply chain data, weather events, market shifts, and consumer buying behaviors.
3. Demand buy-in and accountability from all stakeholders – collaborate with departments to get valuable information.
4. Choose the right tools.
5. Develop effective marketing strategies to promote demands.

Future of demand planning

The continuous technological advancement will keep improving demand planning. With the use of more advanced demand planning software, the Internet of Things (IoT), and artificial intelligence (AI) in demand planning, demand planners can now generate more data from many areas and use them to create better forecasts and improve demand planning as a whole.

The next generation of demand planning is what Anaplan calls demand management – a process where various groups connect to exchange information, ideas, and solutions that get synchronized with the omnichannel buying behaviors of customers. Also, check out some finest guides, B2B sales, SaaS sales and tech sales.