Demand Planning: Why It’s Important and What Makes It Effective
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An efficient and effective supply chain is the lifeblood of a consumer packaged goods (CPG) company. If a CPG can’t sufficiently meet consumer demand, it runs the serious risk of losing millions of dollars, as well as retailer partners and loyal consumers. A critical component of successful supply chain management is demand planning, which when done properly, can increase profitability and consumer satisfaction while shedding redundant, inefficient processes and reducing costs.
Despite what some may say, demand planning is not the same as demand forecasting, but it relies heavily on solid forecasting. And just as an accurate weather forecast helps you plan what you need to wear for the day and what you need to carry, accurate demand planning, based on those demand forecasts, helps you determine what products consumers will want or need during a particular timeframe—and ensure you and your retailers have those products available when and where they want them. An effective demand plan helps you achieve the right balance between adequate inventory levels and consumer demand, whether consumers are shopping in-store or online.
To ensure your business is sustainable and profitable, demand planning must, at the very least, align sales and operations teams and their respective processes; however, to execute optimal demand planning and consistently meet consumer demand, these two areas must work cross-functionally across your entire company, coordinating with numerous departments.
Demand planning can’t be a one-time thing or undertaken once a year. It needs to be a continuous process with all relevant parties thoroughly committed to constantly improving your demand planning strategies, practices, processes, and accuracy. At the core of making this possible and putting your company in the best strategic position to meet demand is the quality and reliability of your supply and demand data and the collaboration and input from sales and marketing departments.
WHAT IS DEMAND PLANNING?
Demand planning is a coordinated and collaborative process among sales, marketing, supply chain, finance, operations, purchasing, and production departments that helps CPGs meet consumer demand for their products. It involves planning future operations based on demand forecasts and aligning inventory to meet demand while minimizing excess inventory, ensuring product is in-stock or on shelves, and avoiding or better managing supply chain disruptions and unforeseen events.
Demand planning efforts require collecting and analyzing a variety of internal and external data and trends, including retail point-of-sale (POS) data, historical sales, seasonality data, out-of-stock rates, consumer behavior, market and economic conditions, and more.
In short, demand planning helps CPGs improve purchasing and manufacturing, fulfill expected sales, and meet consumer demand more efficiently.
HOW IS DEMAND PLANNING DIFFERENT THAN DEMAND FORECASTING?
The terms “demand planning” and “demand forecasting” are often used synonymously and interchangeably when talking about supply chain management and sales and operations planning—even by those who are “in the know.” Although there is overlap between them, these two processes are different and serve different purposes. By understanding their differences, CPGs can better fulfill expected consumer demand.
When referring to demand forecasting, we are talking about a very data-focused process of attempting to predict what the consumer demand for an individual product or products will be during a specific period. Working with key stakeholders across the organization, demand planners analyze internal and external data and run various forecasting models to make future estimations about the quantity of product that is going to be sold, transferred, or used during a specific time frame, whether that be a week, month, year, or even 24 months.
Demand planning, on the other hand, refers to the larger supply chain management process that incorporates demand forecasting and leverages its insights as the basis of the overall demand planning process. Demand planners take the demand forecast and ensure capacity is available, raw material orders are placed, inventory levels are optimized for the anticipated production rates, and delivery of materials and finished goods can be accomplished in the appropriate order. Although demand forecasts may change due to a variety of factors, they inform operations and sales strategies and decision-making so a company can meet demand and ensure consumer satisfaction while maintaining appropriate inventory levels and keeping costs as low as possible.
Simply put, demand forecasting determines what is likely to happen, while demand planning makes it happen.
WHY IS DEMAND PLANNING IMPORTANT?
Sales, profitability, and consumer satisfaction are three of the most important—if not THE most important—goals of a CPG. And demand planning, if executed suitably, is a strong driver of each. However, achieving those goals isn’t always smooth sailing, given the amount of coordination and collaboration required among business units and the large amounts, timeliness, and quality of POS, inventory, and third-party data needed.
Not developing and implementing sound demand planning practices based on accurate data and forecasts can result in many negative and costly business implications for both you and your retailer partners:
- Locked up working capital from excess inventory
- Increased inventory carrying costs
- Lost sales, revenue, and brand loyalty due to out-of-stocks, markdowns, dead stock, or low-value inventory
- Increased costs from inaccurate ordering and expedited orders
- Consumer frustration and dissatisfaction from increased lead times and backorders
- Inability to adjust supply chain plans and inventory accordingly when demand or market conditions fluctuate
- Increased lead times for production and increased production costs
- Failed trade promotions, new product launches, and product replacements
The demand planning process may be complex, especially with increased e-commerce and omnichannel retailing, but with so many sales, marketing, and operational decisions based on consumer demand for a CPG’s products, it’s imperative that a company deploys the most accurate and effective demand plans—and visit and revise those plans regularly. By properly aligning inventory levels to meet consumers’ wants and needs wherever and whenever they may be shopping, and by aligning sales and operations processes, CPGs will realize numerous benefits and advantages:
- Increased ability to fulfill orders and move inventory more quickly and accurately when necessary
- Improved agility to make intelligent, real-time decisions and supply chain adjustments due to unforeseen events and disruptions
- Increased consumer and brand loyalty from maintaining high levels of consumer fulfillment and satisfaction
- Elimination of inefficient, redundant, and costly processes
- Reduced production costs and inventory holding costs
- Improved staffing for seasonal demand spikes and slow times
- Increased profitability, profitability, and profitability!
THE ROLE OF SALES, MARKETING, AND DATA QUALITY IN DEMAND PLANNING
As previously stated, demand planning relies on vast amounts of information from diverse sources and input from several departments. When that information isn’t timely, accurate, and at the necessary level of granularity, it reduces the accuracy and effectiveness of both demand forecasting and demand planning—which in turn, can lead to numerous ramifications for your business. And although there are many stakeholders in the demand planning process, without consistent communication and coordination with sales and marketing teams, demand planning might as well be called “demand guessing.”
One could argue where the demand planning function should reside—under sales or supply chain. But no matter who owns it, sales and marketing teams play two of the most critical parts in generating accurate demand plans because they are sitting on a wealth of information, both past and present.
Naturally, sales managers provide sales forecasts, but they also supply demand planners with historical POS data, timing of product price changes, and past growth rates. Salespeople serve as a CPG’s eyes and ears into the market. They usually know before anyone else about new competitors, what products are in high demand, and which retailers are growing or not. The insight they have into the latest developments in the market are invaluable to demand planners.
Marketing also informs better decision-making in the demand planning process with key information about past and planned initiatives, consumers, and competitors that can significantly shape demand: trade promotions, marketing campaigns, advertising, new product launches, consumer buying behavior, competitive products and offerings, and more. By identifying true demand drivers and the marketing levers that can be pulled to spike demand, marketing teams help optimize demand planning and supply chain execution.
For the contributions from sales and marketing to have the greatest impact on creating consumer demand and optimizing inventory levels to meet that demand, the demand and supply data used to generate actionable insights and that serves as the basis for those teams’ strategic decisions needs to be clean, accurate, and as granular as possible. If demand planning is the linchpin of an effective supply chain, then timely, high-quality retailer data is the linchpin of accurate demand planning.
Sure, you can develop forecasts and plans based off POS data by channel and location, or at a chain level, or based off syndicated data—but those plans won’t be accurate or reliable because you’re not seeing the complete picture of demand. To better gauge true demand to facilitate optimal demand planning, sales and marketing reporting, analyses, and decisions should be made using daily POS data at an item and store level. Only then can you have the precise data to streamline your sales and operations to meet consumer demand and your revenue and profitability goals.
BEST PRACTICES FOR DEMAND PLANNING
Demand planning is a multi-step, often complex process that can become even more complicated as your business and data needs grow. Successful companies employ several best practices to ensure increased efficiency, collaboration, and effectiveness with their demand plans:
- Assemble the appropriate cross-functional demand planning team, and ensure all stakeholders thoroughly understand their roles and are committed to, and accountable for, improving the demand planning process.
- Clearly define internal and external data requirements: Identify the types of data needed, data sources, level of data, and who and how the data will be collected, aggregated, and supplied.
- Ensure you have accurate and timely retail sales and inventory data. You can’t plan for the future if you don’t have the right data.
- Review, challenge, refine, and validate the demand plan, especially by sales and marketing, during your demand review meeting.
- Measure results monthly and adjust forecasts and plans when necessary.
Accurate demand planning and forecasting give CPGs and their retail partners a competitive edge by enabling them to better prepare for and meet future consumer demand while minimizing excess inventory and reducing costs. By making demand planning an integral part of its sales and operational strategies, a business will run more efficiently and profitably and improve customer and consumer satisfaction.
Consumer demand, though, can change at a moment’s notice for a variety of reasons—and have a negative effect on sales, revenue, and profitability. Having accurate, updated demand and supply data at your fingertips to produce the most valuable insights makes it much easier to absorb the impact of unexpected fluctuations in demand and allows a company to adjust on the fly to avoid disruptions, lost revenue, and missed sales opportunities.
Poor data leads to poor insights, misguided decisions, and faulty planning. A good plan will be based on good data, but the BEST plan needs to be based on the BEST data.
For more than 28 years, Retail Velocity has provided consumer goods manufacturers with the most timely, granular, and reliable POS and inventory data—daily data at an item and store level—to serve as the foundation for advanced analytics, improved business intelligence, and accurate demand planning that does what it’s supposed to do: drive profitable growth as efficiently as possible.
If you’d like to learn more about how we can enable more accurate and effective demand planning and accelerated growth, reach out to us today.