Demand planning and forecasting
Demand planning is defined as “using forecasts and experience to estimate demand for various items at various points in the supply chain.” Demand planning is necessary as demand is random and highly seasonal. The accurate demand forecast is critical for any business to succeed and to:
1) Avoid inventory shortage and customer backorders(A backorder is an order for a good or service that cannot be filled at the current time due to a lack of available supply.)
2) Improve cost efficiency by reducing overtime production, excess inventory, and expenditure in the shipping cost.
Why demand forecasting is challenging?
Demand forecasting can be challenging in new product introductions when you have no past or historical data. The demand for a new product can be studied by examining the seasonal effects and effects of pricing and promotions on the particular product with qualitative knowledge from prior experiences.
Results achieved by Demand Analytics
1) Build analytical models to accurately predict demand based on factors such as time, price, seasonality, and other environmental factors.
2) Identify the main drivers for demand and quantify their impact.
3) Increase revenue and decrease cost.
General principles of Demand planning
1) Operations Perspective:
Deals with- The operations team deals with the business planning process and develops demand forecasting as input to sales and operations planning(S&OP). They focus on production, inventory, shipping, sourcing, and revenue planning.
Objective- To accurately predict demand.
Concerned about- Cost of extra supply than the revenue loss of unmet demand.
2) Marketing Perspective:
Deals with- It is the revenue center which is awarded by the sales team.
Objective- To influence demand by various factors.
Concerned about- The revenue loss of unmet demand than the cost of extra supply.
Impact of Demand Analysis
Effective demand planning results in
a) 10–20% less inventory
b) 15–20% better order fulfillment(The order fulfillment process is the steps a business takes from the moment they have received an order until it is delivered to the customer.)
c) 20–40% shorter cash cycle time(The cash to cash cycle is the time period between when a business pays cash to its suppliers for inventory and receives cash from its customers.)
Which translates to
a) 40–60% better profit margin
b) 40–60% better EPS(Earnings per share is a company’s net profit divided by the number of common shares it has outstanding. EPS indicates how much money a company makes for each share of its stock, and is a widely used metric to estimate corporate value)
c) 2~3 times ROA(Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.)
d) 1/10 the shortage of peers
Therefore, it is evident that a proper demand planning is necessary to maintain a efficient supply chain. It aids in understanding what the inventory goals should be and why, as well as what an appropriate forecast should be through ongoing analysis and tracking of the forecast.
