Advantages And Disadvantages Of Using Demand Planning

  General, business advice

demand planning

Did you know that 79% of companies with high-performing supply chain processes recorded above average yearly revenue growth? Your supply chain performance can be the difference between success and failure.

One of the biggest factors in a high-performing supply chain process is analyzing and planning for your future business needs. One of the most common planning methods used by most businesses is demand planning. In fact, businesses using big data analytics in demand planning experienced a 425% improvement in order-to-cycle delivery times and more than six times improvement in supply chain efficiency of 10 percent or higher.

But first, what exactly is demand planning all about?

What is Demand Planning?

what is demand planning

Demand planning is a supply chain management process that analyzes current and projected demand to create a reliable forecast for your business. This method consists of these 10 steps:

  • Importing of historical data
  • Creating statistical forecasts
  • Importing customer forecasts
  • Collaborating with customers
  • Managing forecasts
  • Building consensus forecasts
  • Supply and demand collaboration
  • Securing constrained forecasts
  • Confirmation with customers
  • Re-examining data and adjusting planning accordingly

In addition to these 10 steps, there are three key questions your business will need to answer before setting up your demand planning process:

  • What products are involved?
  • What is the current location of these products?
  • What is the current pattern of their demand?

Your business has to conduct this process in an in-depth and detail oriented manner. The more information you possess before you start the execution, the more accurate the outcome will be.

After completing the extensive amount of statistical research, the key stakeholders can use the information to make a rational decision for the company’s future. Using real company data, they can plan future strategies to grow the business further.

This strategic role that demand planning method plays in the organization is viewed by many not only as essential but also the best way to look for accuracy and validity.

Now, after covering the basics of what demand planning is, let us look at the advantages and disadvantages of using this method.

Advantages Of Demand Planning

1. Improves Product Forecast Accuracy

accurate forecast 

Effective demand planning can assist supply chain managers by accurately forecasting product production and expected company’s revenue.

For example, if a company has consistently forecasted too many products for a monthly promotion, demand planning allows for two things:

  1. A framework to investigate previous forecasts and identify why the forecasted amounts were predicted in this manner.
  2. A methodical approach to adjust forecasts based on actual company data and more.

Why is this important? Having excess or idle inventory is detrimental to your business. Retailers lose more than $1 trillion globally as a result of overstock and out-of-stock situations.  Using demand planning, your business can analyze if your business has been meeting the monthly promotion goals and if it justifies the added costs of holding excess inventory.

Now, let us take a look at how Amazon, one of the world’s biggest eCommerce company, uses demand planning to forecast their product’s demand.

Using a predictive shipping algorithm, Amazon predicts and stocks warehouse products that are regularly purchased by customers. Amazon does this by analyzing the history of their customer’s buying data. For example, for paper towel rolls, Amazon would anticipate the number of paper towels rolls needed in a given week and adjusts warehouse stock accordingly. Using predictive analytics, Amazon is able to optimize business planning and create business efficiency.

With more accurate product forecasting, your business will be better equipped to plan your production needs.

 2. Increases Supply Chain Scheduling

By predicting and analyzing when sales are likely to happen, your business can better plan your production, warehousing, and shipping schedules. When you need to do mandatory maintenance shutdowns or website reboots, you can avoid the time periods when you receive the most orders to execute these activities.

Furthermore, during the months where your business anticipates an increase in demand, you can work with your suppliers and team members to ensure that stock levels remain high. In the event of any anticipated fulfillment delays, you can reach out to your customers early and update them of any upcoming fulfillment issues so that they can better prepare for this delay.

3. Optimize Labor Management

labor management

Do you have any idea how many staff members your business requires in the first week of July? If you haven't been using demand planning, the chances are probably not.

If you have too few workers when there is high demand for your products, your business could experience a decrease in fulfillment time along with a decrease in average orders completed per day. When you are unable to fulfill your customers’ orders on time, they will be disappointed. And, as a result, you might lose those customers’ business as they will be more likely to look for other suppliers for their business needs.

Successfully predicting the peaks in demand will allow your business to plan your staffing needs more accurately during periods of high product demands. You can then take action such as hiring more temporary staff members to ensure you produce your goods on time.

4. Create Efficient Cash Flow Management

The inability to pay vendors and suppliers is not a situation any supply chain manager wants to encounter. If you do not pay your vendors on time, they might not be willing to deliver their products to you. This puts your production at risk. You risk angering your customers if your production delays affect your ability to fulfill their orders.

Also, forecasting demand helps your business to predict any shortfalls in sales. With this information, your business can plan to stockpile cash or negotiate for loans or credit terms in advance to meet your financial needs.

Disadvantages Of Demand Planning

Now that we have discussed the benefits of implementing demand planning, let's look at the other side of things. Here are four disadvantages of demand planning.

1. More Complicated Than Helpful

complicated data

Supply Chain Insights shared, "demand planning is the most misunderstood and most frustrating of any supply chain planning application." This is a viewpoint shared by many. You simply cannot predict the future.

You can plan and forecast different business scenarios, but you cannot be confident that any of these scenarios will happen. Many factors can render a forecast worthless, even when you use good data.

As a result, some companies have shied away from implementing demand planning as it is both time-consuming and tedious. Companies are unwilling to invest time to create a forecast that may not yield any benefits.

2. Numbers are Full of Uncertainty

For any given business, just because June 2017 was a great month for orders, does not guarantee that June 2018 will be just as successful. This idea makes the notion of using demand planning worthless in the minds of some organizations.

It is difficult for a business to base their predictions for the new year based on the previous year as there are many unknown factors. Every promotional campaign, every season and every customer will not behave the same as the year before. In times of political and economic uncertainty, historical data could be completely baseless if used for forecasting. Furthermore, current data is not always readily available.

3. Cognitive Bias

cognitive bias

For demand planning to work, data has to be collected from different departments, such as sales or customer success/account managers. Also, the owner of the overall demand planning function must sign off the numbers and is responsible for how low/high they are at the end of the day. While data, sales team input, and customer feedback are all important, since demand planning numbers are all set by people, they are susceptible to cognitive bias.

Cognitive biases include overconfidence, conservatism, recency, bandwagon and other effects, which may over or under-inflate demand planning forecasts.

For example, if the sales team receives incentives for exceeding their sales targets, they might lean towards setting low numbers to improve their bonuses. Or, the CFO in charge of demand planning may be overconfident about new product lines being released.

4. Keep it Simple

Many businesses, especially smaller ones, believe that demand planning is far too complex. They do not have the manpower nor the time to invest in creating a viable demand planning forecast.

A statistical approach may be the right idea for certain campaigns, but to keep each campaign consistent, it is best to keep the planning process as simple as possible.

Here are some other common methods that businesses use:

  • Time series methods (Looking at historical data.)
  • Regression methods (Examining historical averages to hypothesize future relationships based on common variables.)
  • Heuristic methods (Leveraging the experience and expertise of company leaders to execute off their ideas and projections.)
  • Consensus approach method (Voting among key players across the organization.)

To Use Or Not To Use This Method?

If you are a part of an organization that keeps very detailed data on each month’s inventory and fulfillment rates, then demand planning could be useful. You can track the months where the supply chain team has excelled in and try to mirror some of the ways they were able to accomplish such success.

If you are not part of an organization that has much historical data, then starting with a simple organizational structure with a clear and simple analytical process will probably be a great start. Trying to implement anything that is more complicated than originally intended is not the wisest decision when first starting out.

While the usefulness of using demand planning is debatable, using an inventory and order management software to help manage your supply chain process only bring benefits to your business. Here at Sweet, we help wholesalers, manufacturers and distributors to streamline their supply chain process. To find out how Sweet can help your business, request a free demo today.

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