The term supply chain management has been around for several decades; however, the concept behind it has existed for over 100 years of commercial history. The evolution of supply chain management has been especially dramatic with the emergence of technology and globalization. In the past, the focus of organizational improvement was on specific areas like manufacturing, logistics, or procurement. This approach gradually developed into more integrated operations and led to the concept of demand planning and forecasting. Today, no company can exist without a proper demand planning process. In this article, we’ll guide you through every aspect of demand planning and introduce you to its fundamentals.
Forecasting: What and Why?
Demand planning and forecasting is a challenging task. The words “demand planning” often cause stress, anxiety, and even despair within teams. It’s rare to find a business whose team is excited and optimistic about improving the demand planning process. However, after decades of technological advancements, there are now many solutions to demand planning and forecasting challenges.
The negative consequences of poor demand planning include:
- Overstocking
- Understocking
- Inability to spot demand patterns
- Inventory mismanagement
- Poor sales and operations (S&OP) processes
- Lost customers
All of these problems are costly and can even be fatal for a company. Stock issues arise in businesses of every size. Even giants like Walmart, Best Buy, Target, Kmart, and Nike have lost millions of dollars due to inventory mismanagement and faced the risk of being shut down. Demand planning and forecasting aim to improve supply chain processes and prevent these issues.
Fundamentals of Demand Planning and Forecasting
So what is demand forecasting all about? We live in a fast-changing world where business owners face new customer demands daily. Without a proper plan and forecast, your chances of satisfying your customers’ needs are almost non-existent. Demand planning and forecasting are especially difficult for fast-growing companies because they operate in volatile conditions. That’s why having a proper demand planning system is essential.
Demand planning is the foundation by which a business owner evaluates how the company will operate in the near future. It helps determine parameters like inventory, purchasing, and replenishment. If you want to perform a health check on your company, then demand planning is fundamental. Understanding how many products will be sold—and when—helps you stay competitive and profitable in the long run.
Sales managers in most companies face the challenge of maintaining balanced inventory management. Inventory mismanagement occurs when businesses fail to strike the right balance between stock levels and sales. When demand rises unexpectedly, it can cause stockouts. When demand is lower than anticipated, it leads to excess inventory. Over time, both situations reduce customer satisfaction and result in lost customers. And if you lose customers, you lose your business. That’s why demand planning and forecasting are essential for success.
The fundamentals of demand planning and forecasting lie in making accurate estimations of future sales. From the company’s perspective, demand forecasting means determining its share of total market demand in advance. These estimations are based on factors such as current and anticipated market conditions (e.g., increased competition) and controllable or uncontrollable influences (e.g., new product introductions or government policies). Analyzing forecasts helps you understand customer needs and buying behaviors.
Accurate demand planning offers numerous benefits, but the most direct outcome is avoiding overproduction and underproduction. This saves money and improves customer loyalty. At Intuendi, our demand forecasting software analyzes every product category, sub-category, SKU, and style to identify precise sales trends and future opportunities. It also evaluates potential consequences—both positive and negative—that may impact demand levels.
Demand planning and forecasting support better decision-making in areas such as:
- Creating a winning pricing strategy
- Planning and scheduling production and procurement
- Making accurate financial provisions
- Designing and implementing advertising campaigns on time
Demand Planning Process Step by Step
Step 1 – Specify the Objective
Now that we understand the importance of demand forecasting, let’s look at how to implement the process step by step.
First, set a specific objective for your forecasting. The objective may relate to short- or long-term demand, one or several market segments, demand for a specific product, or overall demand for that product in the market. The objective serves as your guide and directs the entire process.
Step 2 – Define a Timeframe
Once you have set your objective, determine the timeframe. A demand forecast can cover short or long periods. In short-term forecasting, most demand factors can be assumed to remain constant. In long-term forecasting, more variables come into play and conditions become more volatile.
Step 3 – Choose a Demand Forecasting Model
Demand forecasting models fall into two categories:
- Survey Method – based on consumer surveys and opinion polls.
- Statistical Method – based on trend projections and econometric models.
The method should be chosen based on the purpose of forecasting and the factors influencing demand. When conducting manual demand planning using statistical methods, it’s best to use granular approaches that reveal when, where, and how different segments may purchase your product and at what price. This is especially important for innovative products in emerging categories.
Step 4 – Collect and Import Data
Data is the backbone of demand planning. If your company has been operating for some time, aim to use at least 24 months of sales data for accurate analysis. If you’re new to the market, rely on secondary data and account for both internal and external factors. In all cases, ensure that the data you use is relevant and reliable.
Step 5 – Align with the Business Strategy and Adjust Ongoing
The demand planning process must be fully aligned with the company’s overall business strategy. Inventory management connects with nearly all other internal processes. When creating a forecast, you should integrate multiple data sources (e.g., historical data, customer feedback). Tactical decisions about resources, distribution, shipping, and inventory must all align with business goals.
Remember, demand planning is ongoing and requires continuous adjustments. As new data becomes available, your forecast must be updated to improve accuracy.
Maintaining an effective demand planning process reduces lost sales and stockouts. A properly implemented S&OP plan ensures the company uses resources—capital, budgets, warehouses—in the most efficient way.
Requirements for Sustainable S&OP Implementation
Sales and Operations Planning (S&OP) is the process where executive-level management meets regularly to review demand and supply projections and discuss the financial impacts. The aim is to create an operating plan that summarizes how company resources (e.g., time, money, employees) will be allocated. Companies that use S&OP gain better visibility across demand and supply, improved inventory management, stronger product lifecycle management, and more accurate budget forecasting.
However, S&OP implementation is often poorly structured, especially when initiated bottom-up without executive sponsorship. Skipping essential steps damages credibility and can undermine the company. Implementing S&OP is like building a house—it requires a strong foundation.
Key pointers for S&OP:
- S&OP in the Hierarchy – S&OP should sit within the supply chain function but must have senior management support. Collaboration across Sales, Operations, Finance, and Logistics is essential.
- S&OP Leader – this leader must have strong supply chain knowledge and discipline. A junior candidate is not suitable.
- S&OP Team – a strong, supportive team is key to launching and sustaining the process.
- Roles & Responsibilities – each member must have clearly defined responsibilities and training. All activities should be recorded.
- Documentation and Auditing – formalize processes through documented procedures and instructions. This ensures continuity if team members leave. Conduct regular audits to confirm that plans are being executed properly. Large companies may dedicate an entire department to S&OP auditing.
Final Step: Adopt the Right Demand Planning System
Demand planning and forecasting require hard work, time, and consistency. In today’s globalized, fast-changing business environment, success is nearly impossible without the right system.
At Intuendi, we provide advanced inventory management and demand planning software. Our feature-rich platform supports demand and sales forecasting, inventory and budget optimization, omni-channel demand planning, and more.
Investing in software like Intuendi eliminates inventory mismanagement and simplifies forecasting tasks. Our machine learning–based solutions provide accurate, effortless forecasting that drives business growth.
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