Demand planning is one of those things you might not notice until it’s too late. When you don’t work out your expected demand in advance, the results can be devastating.
This is something Nike learned the hard way. Poor demand planning led to supply issues that cost Nike over $100 million in lost sales and dropped its stock price by 20% in just a few months. So what happened?
Basically, a supply chain software glitch created an erroneous demand forecast and led to the company overordering thousands of one type of sneaker and drastically underordering one of its best sellers.
And all of it was preventable with better demand planning.
While demand planning isn’t perfect, it can help ensure your inventory levels remain more consistent and help you save money. Combining that with supply chain management lets you ensure the right parts and products are where they need to be at any given time.
Here’s what we’ll cover:
What is demand planning?
Demand planning is using data to predict the demand for specific products so you can set inventory levels and plan for supply needs. In other words, if forecasting predicts that you will need a certain number of a product to meet customer demand, planning is the process you use to know when and how much to order to meet the forecasted demand. It is the actual scheduling and actions taken to meet demand.
Demand planning is done after forecasting. Forecasting looks at the amount of supplies and labor available and ensures that your company doesn’t exceed these limits. This process involves gathering data from the company’s historical sales, consumer buying patterns, and market trends.
It then combines this information with variables like weather conditions, shipping issues, and lead times to get an accurate picture of future needs, like which items your team should order and the amounts.
Demand planning is:
- Putting in inventory orders for the correct items in the right quantities at the right time to prevent overstocking and stockouts.
- Making sure there’s enough space in the storage area for them.
- Ensuring there are enough cardboard boxes in the shipping department to get them out the door.
- Making sure that every section of the supply chain is ready and can process orders with as little downtime as possible and with the least amount of waste.
When demand planning is done right, the supply chain is humming. Inventory is at optimum levels, and orders can be filled in good time, efficiently, and with the least amount of expenditure.
Demand planning examples
So, theories are great, but what does it look like in the real world? Let’s look at some examples of demand planning in real life.
- Seasonal demand planning: If you run a seasonal business, like a swimwear business, you probably have most of your sales at specific times of the year. Using demand planning, you can look at previous years’ data to plan your wholesale orders and keep inventory levels adjusted to meet changing demand.
For example, you might need 100,000 more units for May and June, your busiest months of the year. You want to place these orders early enough, so you have the items in time instead of arriving in July when sales are starting to slow again.
Demand planning also helps you plan schedules to interview, hire, and train seasonal staff to be ready for the summer rush. You’ll also need to make sure you have enough shopping bags, shipping materials, and advertising materials.
- New product launch demand planning: When launching new products, you can use demand planning to analyze expected initial customer demands. You can survey potential customers to try and gauge interest levels in your new product, determine whether your pricing seems acceptable, and figure out how many units you should order based on this feedback. Then production can be planned based on the needed initial stock and the new product lead time to make sure you’ll be able to meet inventory levels starting day one of sales.
Demand planning can also help you plan out your timeline for your pre-launch advertising campaign. For example, if you find out that most people you’ve surveyed have no idea how to use your new product, you might want to spend more time advertising ahead of the launch to educate the market about what your new product can do.
- Status quo demand planning: You can also use demand planning in your day-to-day operations. By understanding your product lead times, you can reduce backorders by ordering new inventory at the optimal time for just-in-time restocking.
For example, if you regularly sell 500 units a month of a product, you want to have just that much stock, not 400, and not 600 on hand. Demand planning helps you more accurately judge when to order so that your inventory arrives as you need it.
Components of demand planning
Demand planning is a multistep process that involves looking at data from many sources. Let’s break the process down into 10 parts to help you create a more accurate forecast.
Analyzing sales data across multiple channels and locations
Analyzing the sales history across sales channels is a good place to start. You need baseline data to begin forecasting and planning. However, when you’re an omnichannel seller, gathering and analyzing all the sales data can take time and effort. Luckily, with all the great automated options available today, doing this manually is no longer necessary.
Cin7 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 aggregated sales history of your customers from multiple sales channels on Cin7 Omni’s homepage dashboard in one easy-to-digest set of data.
Using this, you can easily understand the customers’ purchasing behavior, buying patterns, your best-selling products, and identify slow movers. You can also target your customers with relevant products based on their past orders.
Calculating inventory turnover ratio
Your inventory turnover ratio indicates how efficiently your company uses its inventory and your overall business performance. With Cin7’s insight tools and precise inventory and sales data reports, you can accurately measure Cost of Goods Sold (COGS) and inventory turnover ratio.
Knowing and monitoring your normal turnover ratio lets you spot problematic changes and intervene quickly by adjusting outstanding inventory orders if you find any excess inventory or a lag in your sales. You can also create competitive price structures with this data to stand out from the competition, meet existing customers’ demands, and attract new customers.
Independent demand is the demand you have for a finished product — how much of your product customers want. For manufacturers, this means finished pieces, and for retailers, it means the items shipped out to customers. Knowing the quantity needed of the end product is a crucial step in demand planning.
Independent demand can vary greatly by season and economic factors, and can be impacted by changes in fashion or the weather.
Dependent demand, on the other hand, refers to the demand you have for the components that make up the finished product. For a manufacturer, the planners have to make sure they have all the bits and pieces and raw materials needed. If they don’t have every component ordered, your staff won’t be able to manufacture the right quantities of finished goods to satisfy the independent demand.
Cin7 inventory and production management software is a useful tool for dependent demand planning. It can generate a detailed Bill of Materials (BOM), an itemization of the raw materials needed to assemble particular goods and the quantities needed to fill a particular order.
Cin7 also creates weekly reports on both materials used and progress production, which allows you to check that your demand planning is on target. As a bonus, the cloud software can even instruct the machinery on the shop floor to start up, and it can do this as soon as it detects that stock is at the minimum level you’ve already set.
Monitoring the production process
If you’re a manufacturer, monitoring the raw materials, tracking the finished goods, and streamlining production time is vital for running a successful business and meeting your customers’ demands on time.
You also need to track the quality of your products and processes. To do this, many companies rely on statistical process control (SPC) software. Despite the recent drive in automation, however, many companies still manually enter data in Excel. In fact, so many still use Excel that even Microsoft tries to push users to swap to a different product, even though the one they suggest still requires a lot of manual work.
Instead of relying on outdated technology, automating your inventory and manufacturing processes can save you time and money. Automation helps reduce human error, reduces the need for frequent inventory counting, reduces revenue and manufacturing time lost from missing inventory, and reduces the staffing needed to manage your inventory and manufacturing processes.
Monitoring, tracking, and managing inventory
Strong inventory management that lets you know what you have on hand is integral to knowing what you still need to order.
With Cin7’s inventory management software, you can readily conduct regular stock assessments to ensure your stock is in optimal condition. You can also assign a batch number or serial number to track goods more accurately under your preferred inventory method.
By tracking your inventory carefully, you can minimize the risk of your inventory aging out and sell goods at a greater profit margin. The right inventory at the right levels, location, and condition ensures a smooth supply chain at every stage.
Cin7 also supports product bundling, enabling you to bundle relevant products and sell them at a competitive price. To top it all, you can also rely on Cin7 for managing your returns.
Internal processes demand
Demand planning is part of your Internal processes. It makes sure there’s no hitch in the supply chain on your end. Knowing the demand on your internal processes is also about ensuring you have enough space in the warehouse or storage area to place items for those projected orders as they come in from the suppliers.
When your internal processes are well-defined and working properly, your warehouse can ship to the end consumer without delay. These processes should clearly spell out each stage of the delivery process, so when someone asks, “What’s next?” there’s always a clear next step to take, whether that’s how an item is packaged, where it is stored in the warehouse, or what shipper is used.
On top of knowing your processes, this also means you have things covered in an emergency, like enough spare parts to cope with machine breakdowns and staff to keep everything flowing smoothly.
Managing product portfolios
Demand planning requires businesses to understand their products and lifecycles from introduction to phase-out.
Your product portfolio includes every product your company sells, including details like their market share, how the product is growing, and information on the customers. Your 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 to your portfolio, as it helps you understand how the new product impacts the sale of existing products. You want to be careful not to cannibalize another product, make sure each product aligns with your business goals, and have a clear overview of how each product is performing at any given moment.
Analyzing current trends
Besides internal factors, external factors outside of your control, like weather, staff health, and economic events, impact business performance.
Having a dedicated team to monitor external data on current events like recessions or natural disasters and develop contingency plans will help your business adapt to market volatility and prevent possible supply chain disruptions.
A transparent system will help you stay connected with your suppliers and track your goods during uncertain times.
Managing trade promotions
While marketing and promotions may seem unrelated to demand planning, arranging for advertising, discounts, and giveaways is an actionable part of the sales cycle and should be included. Publicity attracts interest and helps sell your products and goods, so it directly affects demand.
While Cin7 is primarily a connected inventory software, it can also help set up discounts, set start and end dates for a particular promotion, and apply those promotions to whichever of your products you choose.
Demand planning and supply chain management
Demand planning has a big impact on supply chain management. We’re only a couple of years post-pandemic, with supply chain disruptions still affecting many countries, a possible recession looming, and drastic changes in demand becoming more and more common.
Strong demand planning helps you manage your supply chain by:
- Streamlining inventory management.
- Putting relevant sales strategies in place.
- Ensuring efficient use of all resources.
- Encouraging companies to negotiate with suppliers for better deals.
When you manage your demand effectively, you are able to react to both internal and external factors much more quickly. The National Retail Federation forecasts that sales in the US will grow 4-6% in 2023, reaching a total of $5.13 trillion. In order to meet these levels, retailers will need to grow their inventory levels as well, but this growth won’t be linear.
Companies need to carefully track their demand and adjust inventory based on changes in their supply chain as well as customer demand. Using a connected inventory system will help you do this accurately and quickly.
Having the right amount of inventory in place when it’s needed is at the heart of a well-run business, and it’s why getting demand planning right is so crucial.
Cin7’s inventory software helps maintain flow from one stage of the inventory process to another. The software has features that can make supply chain management hassle-free, and the data it produces can be put towards forecasting and, as a result, better demand planning.
To find out more, schedule a demo with one of our experts today.