The Demand Planning process to improve inventory management and service level

For manufacturing companies, the process of analysing and understanding the demand (or Demand Planning) represents one of the most important strategic actions for the optimization of materials management and fulfillment of sales orders, together with the Demand Management process. The possibility of making reliable demand forecasts, in fact, allows a more careful and optimized management of stocks, as well as an improvement in the level of customer service and an overall reduction in operating costs. Unfortunately, however, still few companies, generally leaders in their respective sectors, are equipped with staff belonging to the various company functions dedicated to the forecasting process, which draws up a single demand forecast plan shared at company level.

The Demand Plan

The Demand Plan indicates the realistic demand volume that the company intends to achieve in its forecast horizon, taking into account the Supply Plan and the sales budget, which establishes the necessary resources to production and the set of commercial actions to be undertaken for the sale.

The demand plan is an output of the Sales & Operations Planning process to which both the departments dealing with demand (marketing and sales) and those involved in its implementation (production, logistics and purchasing) contribute. In fact, it is obtained from the cross analysis of the demand, established by the sales opportunities on the market, and of the supply, in particular the possible limitations of production and distribution that depend on the logistic-production structures. The production, distribution and supply plans, established in the short-medium term, depend on it.

What is Demand Planning

The term Demand Planning refers to the set of business processes, management methodologies and quantitative techniques aimed at defining the demand plan of industrial companies. Demand Planning is the set of procedures aimed at analysing, predicting and managing demand; it requires the use of processes and tools for sales forecasts and correct inventory management. In particular, the discipline of Demand Planning has as its object the definition and study of the business processes of:

  • Sales forecasting: generation of sales forecasts;
  • Sales busgeting: generation of the company budget regarding sales at suitable levels of aggregation on products, markets and periods;
  • Demand plan creation: formulation of the final demand plan, with respect for company constraints in terms of production.

The business demand plan, generated through processes, methods and mathematical models of Demand Planning, quantifies the need for resources (manpower, machinery and materials) necessary to obtain it, supporting planning managers in the formulation of supply plans. The demand plan therefore constitutes the main input for the generation of production, distribution and supply plans.

The Demand Planning process

The Demand Planning process is in turn made up of some characteristic macro-processes, including:

  • Demand Analytics & Intelligence: analysis of historical demand, product and customer characteristics;
  • Sales Forecasting: the definition over time of the sales forecasts for the product-customer segments;
  • Demand & Supply Planning: the definition of the demand plan, the sales budget and the supply plans.

The objective of the Demand Planning processes is to effectively manage commercial demand, during the different phases of its life cycle.

Demand Planning and the current situation

A recent research by Aberdeen has unfortunately highlighted a certain backwardness of Italian companies towards the market of IT solutions that are available today to support Demand Planning. As many as 43% of the respondents declared that they do not use specific tools or at most use spreadsheets adapted by the operators (and therefore strictly linked to the operator and his logic).

Many planners then rely on management software modules (29%), probably ignoring that often the performance of these modules is quite far from what is the “state of the art”, in an attempt to have a single solution that performs all the calculations. Fortunately, 24% of respondents jointly use specialized tools and Business Intelligence solutions, which is probably the most correct approach to forecasting.

The advantages of demand planning

Demand Planning is a useful support to the company’s management mechanisms and turns out to be essential also and above all in cases where all other variables, such as price or product quality, are useless to differentiate themselves from competitors. So what are the advantages of Demand Planning?

The advantages of Demand Planning are many and start from the possibility of planning for the future by reducing uncertainty. In fact, planning the demand means anticipating and managing change, both endogenous and exogenous. A correct demand management allows to anticipate stock changes and to better manage lead times and consequently increase competitiveness, reduce costs, increase the level of service and the speed of response to customer needs.

For this reason, the awareness of the importance of a correct forecast of demand has now spread among the “best-in-class” companies. For almost all of these companies, united by excellent performances in terms of logistic performances and Service Level, the most important strategic action aimed at optimizing stocks and at the same time improving the service level, consists of the analysis and understanding of the demand phenomenon.

The role of the Demand Planner

To supervise the Demand Planning process there is a professional figure: the Demand Planner, who is the one who carries out the activity of sales forecasting and related management of product promotions. However, this forecast, as the consequent promotional activity to be activated, is strictly connected to the type of product sold.

The software for demand planning

Companies today have software solutions for demand forecasting and inventory management. These solutions allow manufacturing companies to optimize the Supply Chain by reducing waste and ensuring correct and timely supply to the market, increasingly important aspects in the current scenario.

The common functioning of a Demand Planning solution involves the analysis of historical sales data, their modeling using regression models and the return of a forecast curve of market demand as a function of the independent variables considered (regressors) as the historical inventory consumption and the specific variables of the business analysed such as the trend of time or currency fluctuations.

In short, with Demand Planning, planners can manage more consciously the purchasing, storage and inventory management processes by suggesting the quantities of products necessary to satisfy market demand and, at the same time, the supply quantities of components and raw materials for production.

Implement Demand Planning in your company

Companies that still plan the demand using modules purchased together with ERP management systems or with simple spreadsheets can improve methods and tools to carry out this fundamental calculation. Today, in fact, Demand Planning software provides irreplaceable support to all those company figures who oversee the production process, relieving them of complex tasks and leaving them free to devote themselves to the decision-making process. Find out how to equip yourself with these tools and gain a valuable competitive advantage by asking for more information or a demo from experts in Demand Planning, our purchasing consultants.

Contact software experts and ask them more information to understand what you need and what fits best your company.