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Demand Planning: Everything You Need To Know (And How Revenue Forecasting Fits In)
Published on Thursday, September 16, 2021
To be as profitable as possible, your organization must have total efficiency in all its processes. This includes your supply chain! Inefficiency in your supply chain can cost you large sums of money, create bottlenecks, and waste time too. As you know, these are all bad for business.
A solution to this problem, particularly in terms of supply chain management, is demand planning.
Demand planning involves predicting the number of products you will need. Meaning you will need to implement demand planning for two main reasons. First, so that enough products can be available for customers who want them. Second, so that your products can be produced and delivered more efficiently.
What is Demand Planning
Demand planning is a cross-functional process that businesses use to forecast and predict demand for products and services to minimize excess inventory. Striking a perfect balance to avoid supply chain disruptions while increasing profitability and customer satisfaction.
But let’s take a closer look.
To execute demand planning effectively, you need to consider your sales and analyze the trends that you see. In addition, you must factor in trends in the overall market, and past customer trends within your business.
The purpose of this activity is to ensure that you can meet customer needs and demands and ensure that your buyers are always satisfied. As such, your objective with demand planning is to reach a middle-ground between preparing sufficient inventory to keep customers happy, while not overdoing it and creating too much which results in a surplus.
So, how do you do this? In summary, you blend your sales forecasting process with your inventory management and your supply chain management. In other words, you use both in-house data and data from outside sources, to determine what the demand for your product will be. Thereafter, you use that prediction to decide on your strategy for sales and operations and plan how much of the product you will manufacture.
The Importance Of Demand Planning
Why is demand planning so important? Well, if you don’t plan well, you may have either product shortages or have way too many units of product sitting in your inventory. This means that you can lose both revenue and products. And, what makes it worse is that a lack of sufficient planning can lead to lost customers too. This will not only be bad for your business internally but could put a dent in your organization’s reputation too.
In addition, demand planning can assist in the mitigation of something called the bullwhip effect. Essentially, this can be described as an occurrence in which there are minor changes in retail demand, which affect demand from those at the beginning of the supply chain, such as manufacturers, for example. If you have an idea of the future demand, you can communicate this to people at all points in the supply chain, and as such can reduce the bullwhip effect.
Demand Planning vs Demand Forecasting
Before we continue, we should note that people often confuse demand planning and demand forecasting. We’re here to tell you that these two concepts are not the same thing.
Demand planning has a much broader scope than forecasting does. Planning takes various factors into account, like business objectives or the market environment, for instance. Forecasting, on the other hand, is much more focused on analytics. It deals with the part of the process that uses data to extract information and details about the future demand you may have.
The two are very closely tied together though. Some consider the forecasting aspect to be the basis of the overarching demand planning that gets done in the end.
What is the Role of a Demand Planner
Since demand planning touches so many business functions, the location of employees who handle this responsibility vary from company to company. With demand planning requiring inputs from sales, marketing, purchasing, supply chain, operations, production, and finance many companies believe that it is most successful when the role is linked closely to marketing and sales divisions.
The skills that demand planners need is changing with AI and machine learning impacting how demand planners operate every day more and more. Demand planners will need to be able to react quickly and make constant valued based decisions as the future of demand planning will always be on, dynamic, and nonlinear
Today’s demand planner needs to have strong collaboration and communication skills to influence department leaders that partner with demand planning as they will be working with their counterparts in sales, marketing ,and finance. They will need to be tech savvy , technical and have savvy business knowledge.
Elements of Demand Planning
Demand planning is a complex process that typically includes the following elements:
Product Portfolio Management
The goal of product portfolio management is to maintain a high-level view of an entire portfolio of a product and where different product lines are interconnected with other product lines. Understanding of how creating or removing products may influence demand for other products in the market is important to understanding the overall product mix.
Trade Promotion Management
Trade promotions are marketing events that can influence demand, especially in the retail industry. Most often increasing demand through giveaways, discounts, and in-store promotions. Data from trade promotions will often include profit and loss data, insights on promotion spending, and where ROI occurred.
Using historical data, statistical forecasting creates supply chain forecasts with advanced statistical algorithms. Often times predicting seasonal shifts for demand because of change in weather, holiday season, or national disaster.
Why Demand Planners Need Revenue Forecasts
By now you may be wondering what revenue forecasting has to do with this topic. Not to worry, all will be clear soon. Let’s refresh our memory about revenue forecasting first.
To keep it short, by doing revenue forecasting, you are trying to predict the amount of money that will come into your business over a pre-specific duration of time. Usually, this period can be annually, bi-annually, or quarterly. In completing a revenue forecast, an analyst also takes into account various other factors such as the market sentiment, historical performance, and the sales pipeline.
From the definition alone, we can tell why demand planners need revenue forecasts. First, certain aspects of a revenue forecast can help you with demand planning. For instance, the revenue forecast considers the market, sales history, and potential sales in the future. All this information can help you to better your demand planning. Essentially, revenue forecasting can help with product analysis, which helps with demand planning.
Furthermore, at the end of the demand planning process, you have to decide how many units of a product you will manufacture. Some of the main benefits that can be leveraged from revenue forecasting are:
- The ability to structure budgets for business expenses better.
- The optimization of business decisions.
- The facilitation of strategic planning.
All of these advantages that you gain from revenue forecasting help you to complete the last phase of demand planning (deciding on how many units of products to order).
4 Best Practices For Demand Planning
There are several steps in the process of demand planning. Things can get chaotic if you don’t take control. Here are 4 best practices to ensure everything goes smoothly.
1) Use The Right Software
Like we said, revenue forecasting is an important aspect of demand planning. However, revenue forecasting can be complicated on its own. If you use the right software, though, it will be much easier. With revVana, you can automate your forecasts and instantly identify delays and reductions. The platform ensures that you have real-time revenue visibility, and you can even create automated scenarios based on any metric related to your forecast.
2) Collect and Develop Data
Data is at the core of demand planning, so you have to ensure you are using the right data. This means it needs to be accurate, relevant, and well-curated. With an incorrect dataset, you will make bad decisions.
3) Set Up Your Process Well
For the best, most accurate results, you should have a well-defined process. If your demand planning process is unstructured, it will likely lead to chaos and confusion, with very few useful outcomes. In general, your process should include these steps:
- Assemble data
- Create forecast
- Consider the market
- Factor in targets and goals
- Create an updated forecast
- Monitor results
The inclusion of these steps in your demand planning process should set you up for success!
4) Review Your Performance
Once the process is complete and you have implemented the relevant outcomes, ensure that you look back and review the process. You should look at factors like accuracy, efficiency, and overall performance. This will allow you to improve the process for the future.
The Bottom Line
Demand planning is a task that requires you to forecast which of your products customers will want, and how much they will want. It can be an overwhelming task if you don’t know where to start, or what tools to use.
For demand planning professionals, considering revenue forecasts in the process can make things much easier. What’s even better is that you don’t have to carry out the revenue forecasts yourself. Simply contact revVana and have it taken care of for you! Automate your forecasts, connect to Salesforce, and instantly have an understanding of where you stand financially!