Rohan Singhvi, Head of Logistics and Warehousing, RAK Ceramics, explains and demystifies the complexities and intricacies of demand planning, in this special contribution (in Q&A format) to Global Supply Chain.
What is demand planning, and why is it important for businesses?
Demand planning is a tool to forecast demand for a particular product or service, to achieve high fill rates, maintain optimum stock levels and to keep up with high customer service levels.
Keeping pace with the demand for a product is critical, because failing to do so can result in lost revenue for the product or, even worse, lost customers. One the main goals of demand planning is to have just the right amount of inventory to meet customer demand without incurring shortages or wasting money on making and storing surplus inventory.
How do you forecast demand accurately in a dynamic market?
There are four ways to forecast demand accurately in dynamic market:
Enhanced data collection & Integration: Data collection is the backbone of any demand forecasting. This can be done by implementing integrated data management systems/IOT, which can help break down silos and ensure that all relevant data is captured and shared across departments.
Incorporate Advance Analytics & AI: Advanced analytics and AI technologies can help companies better understand complex demand patterns and predict future trends more accurately.
Flexibility and Scenario Planning: Building flexibility into the forecasting process and regularly conducting scenario planning can prepare companies for unexpected changes in demand.
Continuous Monitoring and Adjustment: Demand forecasting should be a continuous process that regularly monitors actual demand versus forecasted demand. This will help companies to identify discrepancies and adjust their forecasts.
What are the key components of a demand planning process?
Demand planning is a complex process that typically includes the following elements:
- Data collection from external and internal sources on the factors known to predict or influence demand.
- Statistical analysis of inventory, sales.
- Modeling the data to predict future demand.
- Collaboration with stakeholders to gather information on events that could affect demand, such as promotions and production delays.
Explain the difference between short-term and long-term demand planning?
Short term Demand Planning:
Short term demand planning typically covers period of less than one year, usually upto three months. The main purpose of short-term forecasting is to support operational decisions, such as scheduling, staffing, replenishment, and allocation.
Short-term forecasts are usually more accurate and reliable than long-term forecasts, as they are based on recent and relevant data, and have less uncertainty and variability. Some common methods for short-term forecasting are regression analyses, exponential smoothing and time series analysis.
Long term Demand Planning:
Long term demand planning typically covers a period of more than one year. The main purpose of long-term forecasting is to support strategic decisions such as market entry, capacity planning, investment and product development.
Long-term forecasts are usually less accurate and reliable than short-term forecasts, as they are based on historical and projected data, and have more uncertainty and variability. Some common methods for long-term forecasting are scenario analysis, trend analysis and simulation.
How do you handle seasonality and trends in demand forecasting?
There are three essential trigger points or factors such as Seasonality/Trends and Events influence demand forecasting. These factors can cause demand to fluctuate, spike, or drop unexpectedly making it hard to forecast.
Seasonality:
Seasonality is the pattern of demand that repeats itself over a certain period. Seasonality can be caused by natural factors, such as the change of seasons, or by human factors, such as holidays, festivals, or school terms.
To incorporate seasonality into your demand forecasting models, you need to identify the seasonal cycle and the seasonal factors that affect your demand.
Trends:
Trends are the long-term changes in demand that reflect the overall direction of the market, the industry, or the society. Trends can be positive, negative, or neutral, and can be influenced by factors such as technology, innovation, demographics, or consumer behaviour.
To incorporate trends into your demand forecasting models, you need to analyze the historical data and identify the trend components that affect your demand. You can use methods such as moving averages, exponential smoothing, or trend projections to extrapolate your demand forecasts based on the trend components.
Events:
Events are the short-term or one-time occurrences that impact the demand for a product or service, either positively or negatively. Examples of events include promotions, product launches, price changes, recalls, strikes, natural disasters, or pandemics.
To incorporate events into your demand forecasting models, you need to anticipate the occurrence and the impact of the events on your demand. You can use methods such as scenario analysis, causal analysis, or judgmental methods to adjust your demand forecasts for events.
What role does data analytics play in demand planning?
Data analytics plays the following major roles in demand planning-
- Uncovering Historical Patterns and Trends by analyzing large datasets containing historical sales, customer behavior, and external factors such as economic indicators.
- Identifying Seasonal Variations & Demand Cycles which are crucial for accurate forecasting.
- Predicating Customer Behaviour and Preferences that incorporateexternal factors such as economic conditions, competitor activities, weather patterns, and regulatory changes can significantly impact demand.
How do you integrate demand planning with supply chain management?
Integration of Demand planning with Supply chain management can be done through IBP (Integrated Business Planning) tools such as S&OP (Sales & Operations Planning) that act as strategic interface between the two elements of Sales and Operations.
The beauty of S&OP lies in its dual focus: while ‘sales’ is concerned with the demand side, examining market trends, customer behavior, and sales data, ‘operations’ is all about the supply side, which encompasses production capacities, logistics, inventory management, and resource allocation.
S&OP fosters communication and collaboration across the organization, driving improved efficiency, reduced costs, increased customer satisfaction, and better business performance.
What are somefamiliar challenges faced in demand planning, and how do you overcome them?
Quality and availability of data:Good data is the backbone of any demand forecasting. But businesses often must deal with data that is missing, wrong, or out of date, which can make predictions that aren’t correct. This can be overcome by having data cleanup, by adding more data sources & using demand forecasting tools.
Variables from external factors:Demand estimation can be affected by things outside of the company, like the economy, what competitors do, and changes in what customers want. A lot of the time, traditional forecasting methods can’t take these changing factors into account, which makes their predictions wrong.This can be overcome by using advanced analytics, scenario planning and collaboration with experts in the field.
Changes in product’s lifecycle:As innovation speeds up, advanced product life cycles are getting shorter. Because of this, it’s hard to predict demand, especially for new goods that don’t have any historical data. This can be overcome by product analysis,pre-launch testing and evaluation once the product is released.
Keeping both accuracy andtimeliness in mind: It is not always easy to balance the need for accurate predictions with the need to make them on time. Businesses need to find a balance between doing thorough, accurate demand forecasting, and giving quick and useful insights. To overcome this business needs to use rolling forecasts and make short term predictions.
Alignment between departments and collaboration: Demand forecasting shouldn’t happen in a vacuum. When departments like marketing, sales, finance, and operations aren’t working together properly, it can cause problems with predictions and, in the end, the business plan. This can be overcome by setting up a way to forecast together with inputs from cross functional teams and use collaborative demand forecasting tools.
Can you discuss the importance of collaboration between different departments in demand planning?
Demand collaboration is a process where multiple stakeholders come together to provide input into the forecasting process.By establishing collaborative demand planning, companies can have a comprehensive view of inputs from various departments and supply chain partners which allows them to identify relevant changes and shocks more quickly.
By gathering information from all relevant parties, you can create a more comprehensive forecast that considers a broader range of factors and provides a clearer picture of future demand. This close collaboration enables teams to create better coordinated responses faster.
How do you measure the effectiveness of a demand planning strategy?
Effectively tracking key demand planning metrics involves assessing forecast accuracy, fill rate, Inventory Turnover ratio, lead time variability, stock turnover, customer service levels, backorder rate, demand variability, on-time delivery performance, inventory turns, and stockout rate.
Regular monitoring of these metrics provides insights into demand precision, inventory efficiency, and overall supply chain reliability. Ongoing analysis allows for informed adjustments, optimizing demand planning strategies to enhance customer satisfaction and operational effectiveness.
What technologies or software tools are commonly used in demand planning?
There are five major technologies or software tools that are used in Demand Planning-
- Forecasting and Demand Planning Software.
- Inventory Management Systems.
- Data Analysis and Reporting Tools.
- Collaboration and Communication Platforms.
- ERP and Supply Chain Management Systems.
Can you provide examples of successful demand planning strategies implemented by companies in different industries?
Amazon
Amazon is a company that heavily relies on demand forecasting to manage its operations. The company uses algorithms and machine learning models to analyze customer data, sales history, and other relevant data to create accurate demand forecasts.
These forecasts help Amazon determine how much inventory to stock, where to store it, and how to distribute it efficiently. By using demand forecasting, Amazon has been able to reduce delivery times and improve customer satisfaction.
Ford Motor Company
Ford Motor Company is another company that has successfully used demand forecasting to improve its operations. The company uses predictive analytics and machine learning to analyze historical sales data and make predictions about future demand. This allows Ford to adjust production levels to meet demand and optimize its supply chain.
Coca-Cola
Coca-Cola is a company that has been using demand forecasting for decades. The company uses a variety of methods, including statistical modeling and trend analysis, to create accurate demand forecasts.
Apple
Apple has the best demand forecasting tools to plan its supply of iPhones /iPads across the world. It does its demand planning by doing historical data analysis, market research, and using the existing supply chain data. They use Machine learning and AI to analyze large amounts of data and adjust forecasts in real-time based on changing market conditions.
