Demand Planning is a collaborative approach between the different functions in an organization – usually Sales, Marketing, Finance, and Supply Chain – that seeks to arrive at a single, unbiased, and consensual forecast of customer demand. The demand planning process is a very critical step for companies because it arrives at a single, agreed estimate of customer demand which becomes the basis for critical downstream processes (e.g. sales and operations planning, supply planning, stock holding policies, manufacturing, purchasing, etc.).  It also triggers improvements in related and sometimes requisite processes that feed into demand planning (e.g. promotions process, lifecycle management, new product introductions, etc.).

For companies wanting to establish or improve the demand planning process, it is important to go through a demand planning design activity. Simply put, this requires the organization to answer basic but often difficult questions as:

  • Why forecast?
  • What to forecast?
  • Where to forecast?
  • When to forecast?
  • How to forecast?

Why forecast?

The organization in the cusp of establishing the demand planning process needs to clarify the purpose and rationale of demand planning and forecasting in relation to its business existence and meeting its customers’ expectations. Organizations cannot afford not to forecast their customer demand.  By knowing future customer demand, an organization is able to plan and organize its business to be able to win and meet this expected customer demand.

In general terms, demand planning provides a glimpse of future market or future customer demand and paves the way for the company to develop a course of action to meet this future demand. This is akin to undertaking a feasibility study when planning to start a business – where one of the primary and critical elements in a feasibility study is the market study.  The market study involves determining the size of the market, estimating target market or customer demand, competition, etc. Hence, a forecast of market demand is determined in the market study.  From this market study the rest of the feasibility study elements like the product, technical, operational and financial studies are then developed and clarified.

Fundamentally, the organization has to determine the benefit and value that demand planning and forecasting can provide. These may include among other things:

  • Knowing market volatility and demand seasonality to help develop product availability strategy.
  • Understanding product holding strategies e.g. make-to-stock, make-to-order, etc.
  • Developing pricing strategies.
  • Developing product distribution strategies including warehousing and logistics.
  • Formulating inventory reduction strategies.
  • Determining timing of promotions and product launches.
  • Operations planning and staffing.
  • Financial budgeting.

What to forecast?