Blog General retail Demand planning: What is it? Principles and importance
26 April, 2024

Demand planning: What is it? Principles and importance

Demand planning is the process of anticipating future customer demand for products or services based on historical data and market trends.

Business decisions should be driven by data, not guesswork. 

Demand planning lies at the heart of inventory management, ensuring manufacturers and retailers anticipate their needs accurately. As the name might suggest, demand planning is the process of using forecasting insights to anticipate customer demand. 

By leveraging precise data and forecasting techniques, companies can mitigate the risks of overstocking and stockouts, which can have detrimental effects on their reputation and bottom line. 

In this post, we’ll go over what demand planning is and its importance, exploring how it intersects with demand forecasting to drive supply chain efficiency and enhance overall profitability.

What is demand planning?

Demand planning is the process of anticipating future customer demand for products or services based on historical data and market trends. It involves forecasting the quantity of goods needed and strategically managing inventory levels to meet those demands efficiently.

Graphic defining what demand planning is.

Demand planning examples

Demand planning is useful in various scenarios across industries, from retail to manufacturing. Here are a few examples of when you’d use demand planning:

  • Anticipating increased demand for winter coats and boots during colder months
  • Predicting surges in sales for limited edition product releases or holiday-themed items
  • Adjusting inventory levels for perishable goods based on past sales patterns and upcoming events
  • Coordinating with suppliers to ensure availability of popular items during peak seasons or promotional periods

Why is demand planning important?

Demand planning is a vital aspect of supply chain resilience. By anticipating customer demand, businesses align production and distribution to avoid shortages or excess inventory, ensuring optimal operational efficiency.

Demand planning affects supply chains by: 

  • Streamlining inventory management
  • Putting relevant sales strategies in place
  • Ensuring all resources are used efficiently
  • Encouraging companies to negotiate with suppliers for better deals
  • Providing high levels of customer satisfaction

Graphic outlining the importance of demand planning in supply chain management

10 components of demand planning

Demand planning is a multifaceted approach essential for ensuring seamless operations and meeting customer expectations. We’ll walk you through 10 key components that form effective demand planning strategies.

Bubble map showing the 10 components that form demand planning strategies.

1. Analyzing sales data across multiple channels and locations

Analyzing the sales history across sales channels tops the list. However, when you sell on multiple online platforms and have your physical stores at various locations, gathering and analyzing all the sales data can take time and effort. And it’s also not productive to do it manually, as you have other important things like your business expansion and customer satisfaction that need your attention.

Cin7’s inventory management software connects your online and offline sales channels, enabling you to access all the sales data at your fingertips. You can view the sales history of each customer from every sales channel on Cin7 Omni’s homepage dashboard. You can then understand the customer’s purchasing behavior, buying patterns, best-selling products, and slow movers to target the customers with relevant products.

2. Calculating inventory turnover ratio

The inventory turnover ratio indicates how efficiently your company uses its inventory and your overall business performance. With inventory reports and tools and precise inventory and sales data reports, you can accurately measure cost of goods sold (COGS) and inventory turnover ratio. 

You can intervene earlier if you find any excess inventory or lag in your sales and put things back on track as soon as possible. You can also derive competitive price offerings to stand out from the competition to meet existing customers’ demands and attract new customers.

3. Independent Demand

Independent demand refers to the customer’s direct need for the final product. In manufacturing, it includes the finished pieces that consumers purchase. For retailers, it translates to the specific items they sell and ship to customers. 

Accurately forecasting the quantity of end products required is foundational to effective demand planning. It sets the stage for aligning production, inventory management, and distribution processes to meet customer demand efficiently.

4. Dependent Demand

This is about the components that make up the finished, or end, product. For a manufacturer, planners have to make sure they have all the bits and pieces and raw materials needed to put whatever it is they’re producing together, and they need them in the right quantities to satisfy the independent demand.

Production management software is a useful tool for dependent demand planning. It can generate a detailed bill of materials (BOM), which is an itemization of the raw materials needed to put particular goods together and the quantities needed to fill a particular order. 

It can also produce weekly reports on both materials used and the progress production is making,  allowing you to check that your demand planning is on target.

As a bonus, the digital system can even instruct the machinery on the shop floor to start up, and it can do this as soon as it detects a predetermined minimal amount of orders in the works.

5. Monitoring the production process

If you’re a manufacturer, effectively monitoring the production process is essential to ensure you meet customer demands. This involves overseeing various aspects, like the availability of raw materials, production progress, and the timely completion of finished goods

By closely tracking raw materials, you can address any shortages or delays, minimizing disruptions to production schedules. Monitoring the production timeline also helps optimize efficiency and reduce lead times. This helps with timely delivery of products to customers, which is essential for meeting customer expectations. 

6. Monitoring, tracking, and managing inventory

Stocking the right inventory levels across your sales channels is mandatory to meet the customer’s needs on time. Besides stocking right, having optimal inventory control is crucial — preventing inventory from turning obsolete, maintaining goods at optimal conditions, and ensuring no discrepancies are all a part of managing inventory.

Inventory management software helps you readily conduct regular stock takes to ensure your stock is in optimal condition. You can also assign a batch or serial number to track the goods and dispatch the old stock first. Thus, you can minimize the risk of being left with obsolete inventory and sell goods on time at better profits. 

The right inventory at the right levels at the right place and in the right conditions ensures a smooth supply chain.

7. Internal processes demand

Here, we’re talking about demand planners making sure there’s no hitch in the supply chain. It’s about ensuring there’s enough space in the warehouse layout or storage area to place items for those projected orders as they come in from the suppliers. 

It’s about ensuring everything is in place to move items from the warehouse to the end consumer — the right equipment, the right level of packing materials, and the right shipping services. And it’s about having enough spare parts on hand to cope with machine breakdowns along with enough staff to keep everything flowing smoothly.

8. Managing product portfolios

Demand planning requires businesses to understand their products and lifecycles from introduction to phase-out. Product portfolio management is a part of demand planning that involves maintaining the entire portfolio of products you sell. Products are often interconnected, and the sale of one product affects the sales of another. 

Maintaining a product portfolio is helpful, especially when you add new products, as it helps you understand how the new product impacts the sale of existing products.

9. Analyzing current trends

Besides internal factors, external factors like weather, health, or economic crises impact business performance. So, apart from analyzing sales data, retail trends, and other internal factors, considering these external factors are also vital. 

Having a dedicated team to acquire external data on current events like health crises or natural disasters will help your business promptly adapt to market volatility and prevent possible supply chain disruptions.

10. Managing trade promotions

While marketing and promotions may seem tangential to demand planning, arranging for advertising, discounts, and giveaways is an actionable part of the sales cycle and should be included. The same goes for trade shows. In effect, this is because publicity attracts interest and helps sell the products and goods a company offers.

Cin7 Omni can be a great help in this area. It can set up discounts and set start and end dates of a particular promotion, and it can apply those promotions to any of your products you choose.

Create better demand planning with Cin7

Having the right amount of everything in place in the right quantities when it’s needed is at the heart of a well-run business, and that’s why getting demand planning right is so crucial.

Cin7 Omni is a great way to maintain flow from one stage of the process to another. It has features that can make supply chain management hassle-free and produce data you can put toward forecasting and, as a result, better demand planning.

To find out more, schedule a demo with one of our experts today.


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