In the context of today’s highly competitive eCommerce market, as well as uncertain economic conditions, it’s more important than ever for businesses to try and squeeze every drop of value and efficiency out of their supply chain.
In today’s article, we’re going to take a look at the role of demand planning in this process.
In this article
What is demand planning?
Definition of demand planning
Demand planning refers to the process of using historical data and predictive analysis to forecast the demand for a product or service.
It allows businesses to ensure that goods and services can be delivered efficiently, storage and logistics costs can be optimized, resources can be managed properly, and that goods and services are always available to the customer.
Importance of demand planning
Demand planning is highly important for businesses that want to grow, be profitable, and offer the best shopping experience to their customers.
Accurate demand planning plays a huge part in improving a business’ bottom line, whether that’s helping to minimise storage costs, reducing wastage, eliminating stockouts, reducing the impact of supply chain disruptions, and more.
Ultimately, demand planning is important because, when done right, allows businesses to strike the perfect balance between storage costs and customer demand.
Key challenges in demand planning
Demand planning isn’t a particularly straightforward process, with a mix of internal and external challenges often presenting themselves.
Internal challenges include little or low quality historical data, which is the foundation of a smart demand plan.
There may also be a lack of standardized processes within a business when it comes to demand planning, which can result in different conclusions from different or even identical data sets. Miscommunication and human error can also present a risk to demand planning.
There’s also a considerable number of external factors that can be a challenge for accurate demand planning. Changing customer behaviour, volatile economic conditions, disruptive world events, seasonality, emerging trends, and new competitors entering the fray can all throw a spanner in the works.
Benefits of Effective Demand Planning
Improved inventory management
Perhaps the most impactful benefit a demand plan can bring to your business is the improvements you can make to inventory management. Some of these benefits include:
- Capitalise on trends and seasonality: By better understanding when demand is high, you can ensure it can always be met, and prepare marketing campaigns to take advantage.
- Reduce storage costs: A demand plan can help you strike a good balance between having enough stock on hand to meet demand, while preventing too much inventory being placed in a warehouse.
- Reduce wastage: By including BBE dates in your calculations, you’re better equipped to reduce the amount of stock going to landfill or being recycled.
Inventory positioning: You’ll be able to better understand high demand differs in each geographical location, and position your stock accordingly.
Increased customer satisfaction
Customer satisfaction is incredibly important for retention, loyalty, and of course, growth.
Customers are going to be satisfied when they know they can rely on you to have the products they want, and they can trust you to deliver the goods quickly.
Demand planning helps you to achieve this by helping you to reduce or even eliminate the amount of time items are out of stock or on backorder, and helps you to cut down delivery times by storing inventory in strategic locations.
Furthermore, you’ll be better equipped to communicate with your customers by developing marketing strategies in line with your demand plan.
Better resource utilisation
Accurate demand planning helps us to squeeze the most out of the resources we have available, whether that be human, machinery, technical, material, and so on.
Production scheduling, for example, can be timed correctly with an accurate forecast. If your suppliers are aware of when they’ll need to begin manufacturing your goods well in advance, they can ensure they have enough resources available to ship your products to you on time.
The same can be said for in-house capacity planning. Understanding when you’re going to have busy or quieter periods allows you to adjust staff levels accordingly, and opens up possibilities for temporary workers, rather than full-time contracts.
Effective demand planning will increase sales and reduce costs, both being flagship ingredients for a profitable business.
You’ll have better sales because you will always have product in stock, meaning you’ll never miss an opportunity to make a sale. Moreover, customer loyalty and retention will improve when a customer knows you’re reliable. They’re more likely to recommend you to people in their life, too!
On the other end of the spectrum, demand planning helps reduce business outgoings by helping to make spending decisions more efficient. Stock levels can be kept at an optimal amount, inventory positioning can be better managed, human resources more aptly utilized, and shipping costs reduced.
Key factors influencing demand planning
Customer behaviour and preferences
Understanding how, why, and when customers buy your products should be taken into account when demand planning. The better you understand customer behaviour when buying online, the better you’ll be able to meet their needs.
If you’ve been trading for a while, you might have a good amount of useful customer data already, whether it’s customer service tickets, reviews, sales trends, and other forms of feedback.
Market research is key in this area, which includes surveys, focus groups, questionnaires, and interviews. Analysing social media accounts can also be an effective way of understanding customer preferences, as it’s often the place where a customer or potential customer can voice opinions, complaints, and other useful information.
Demand planners need a good understanding of the present and predicted economic conditions to inform their planning.
As we know, consumer confidence tends to take a hit when inflation and interest rates are high, whereas they’re more likely to buy from you when there’s disposable income in the back pocket.
In turbulent times, where people may be worried about personal finances, businesses may wish to cut back production and save on storage costs. This provides leftover capital to ramp up production again when the economic outlook improves.
Seasonality and trends
The demand of many goods and services depends heavily on time of year and trends. You won’t see much demand for sun cream during the winter, for example, and sales of Christmas decorations are going to be much lower in March.
Taking into account the fluctuating demand of goods and services over the year is imperative to accurate demand planning. Businesses should lean on historical data to identify high and low points in demand, and be aware of industry trends that may impact demand around the year.
Being keenly aware of competitor activities, business models, marketing strategies and product offerings will result in more accurate forecasting. For example, you may notice that competitors run deep sales and certain times of the year, which might drive away demand for your products at the time.
The demand planning process
Step 1: Identify the data you’ll need
An effective demand plan requires data from various sources and areas of the business. In most cases, you’ll want to use sales data, customer data, inventory data, and shipment data as a minimum.
Remember that every business is different, and there may be other relevant information for you to collect.
Step 2: Collect the data
In an ideal world, all the data you need will be digitized and easily accessible. This might not be the case if your data management hasn’t been up to scratch, or you’re using some archaic systems.
It’s important to dig deep at this stage, as you will be cleansing the data at a later stage. Draw on the aid of colleagues to find sales records, inventory reports, customer surveys, marketing statistics, and any other suitable data sources.
It’s a good idea to look at external data sources at this stage, too. This might include industry trends, and demand signals such as economic predictions and world events.
Step 3: Organise and cleanse
Now you’ve collected all the necessary data, it’s time to organise the data in a suitable format and begin the process of cleaning it up.
Whether you’re creating simple spreadsheets or more advanced databases, it’s important to ensure that everything is formatted consistently, errors and duplicates are removed, and all unnecessary information is cleansed.
Try not to take shortcuts at this stage, as organising the data properly now will set the foundation for more efficient analysis in both the short and long term.
Step 4: Analyse the data
With your data in satisfactory state, it’s time for analysis. Look for trends and patterns in your data, and pay close attention to your sales and inventory data.
Here you should aim to identify the key drivers for demand in your business, which might include time of year, trends, marketing campaigns, or even economic conditions.
Be sure to visualise the data to better understand patterns and trends, as you’ll likely discover things you would’ve missed if only using raw data.
Step 5: Choose demand planning method
When you’re happy with the data analysis part of this process, it’s time to start demand planning.
There are several different demand planning methods, and which is most suitable for you will depend on your skill level, data set, and the size and complexity of your business, and the specific goals and objectives of your demand plan.
Here are some of the most popular demand planning methods:
- Historical data method: This is the most straightforward method, which involves looking at historical data to make assumptions and predictions about future demand. The more historical data you have, the more accurate your results will be. It’s suitable for smaller businesses with a limited number of SKUs.
- Econometric method: A more complex method that involves a series of calculations and the use of mathematical formulas. The econometric method makes use of internal sales data as well as external market data to make smart predictions about demand.
- Delphi method: This method leans less on the data you’ve compiled and more on third-party experts. It involves putting together a small panel of industry leaders and using their expertise to help predict future demand. The findings are then compiled into a report.
- Sales force composite: This method leans heavily on your sales team for the best results. Each member of the sales team will predict how much they expect to sell over a given period of time. They’ll be able to share their expertise into the current state of the market and use their own historical success to predict future demand.
How to make demand planning simple
At James and James, we help clients cut down the time it takes to create a demand plan, by gathering data for you in real time.
Our award-winning software, ControlPort, has built-in data collection tools that automatically track and record all the inventory data you need to create a comprehensive, accurate demand plan in no time at all.
As an industry-leading 3PL, we’ll also store, pick, pack, and ship your products to customers across the world, powered by multiple fulfillment centres in the UK, EU, USA, and soon, Canada.
With us taking care of fulfillment, you’ll have more time for demand planning, marketing, product development, and everything else you need to do to grow your business. To get started or find out more, get in touch with us on +44 (0)1604 801 915, or fill in a simple online form.