Why Demand Planning is Critical
During times of volatility including inflation and recession, forecasting future sales becomes even more vital than it is during regular business cycles. Emerging from the pandemic, the global markets have experienced rising costs and significant demand. In the U.S., vast stimulus was added to the economy, creating pent up demand. At the same time, there was a lack of supply as manufacturers cut back during the pandemic and couldn’t find the people, materials, and equipment to keep up “regular” demand, let alone heightened demand.
Additionally, other supply chain disruptions arose such as the Russia-Ukraine war, further exacerbating supply chain challenges. Unfortunately, companies dependent on Chinese manufacturing are suffering further due to global logistics challenges, China’s lockdowns, and more. No one has the “right” inventory in the “right” place at the “right” time (and definitely not at the “right” cost) without a robust demand planning process.
Demand Planning (Sales Forecasting) To the Rescue
Demand planning is integral to utilizing scarce resources effectively. No one can afford to produce the “wrong” products with limited labor and material resources! Creating a demand plan will provide the best insight into future sales. As the key step of a SIOP process (Sales, Inventory & Operations Planning), also known as S&OP, creating the demand plan provides visibility into what customers will need. Most clients build a demand plan for a minimum of a year, focusing in on the budget year timeframe. In certain industries that have longer-term contracts, the demand plan will go out 2-5 years to provide insights into long-term decisions such as buying facilities.
The best practice demand plan will include the following information:
- Markets and/or customer groups
- Product groups that are meaningful from a manufacturing and/or materials standpoint
- Any noteworthy regional impacts (for example, if Asia is growing at a higher rate than Europe, this insight is important)
- Dollar forecast (and/or appropriate currency) by month by region/ distribution center/ production facility (depending on what is needed to ensure supply)
- Quantity forecast by month by region/ distribution center/ production facility (depending on what is needed to ensure supply)
- Unit of measure
- If you have multiple units of measure, a base unit of measure would be ideal.
- Key events, promotions, and/or
- Price changes
- Product transitions
- Forecasts for new products, customers, and/or locations
- Incorporates quote probabilities and inventory agreements
Best practice demand planning processes help executives predict the unpredictable.
Do You Need Demand Planning Software?
Of course, the answer to whether you need a demand planning software to be successful in forecasting is “it depends”. Multiple clients have utilized already existing tools and/or Excel (not demand planning software) to create a simple forecast that was fed into a SIOP process and achieved exponential results. For example, an industrial manufacturer took information from their ERP system, applied simple statistical formulas and created a forecast in Excel for 24 months with a greater degree of accuracy on the current fiscal year. They were able to utilize this forecast to successfully order long lead time materials and plan capacity (including taking actions to offload production they could not support and purchase additional equipment to shore up certain work centers in their operation), resulting in high service levels (OTIF, on-time-in-full) and successful execution of dramatic growth.
On the other hand, there are other situations where a demand planning software is required to create a sustainable process. Generally-speaking, high volume, promotion prone consumer industries require a demand planning software to succeed long term. For example, a food and beverage manufacturer used a forecasting system to create a base demand plan. It was able to pick up on changing trends, segregate promotions from regular business, and provide a more directionally-correct demand plan by location which was essential to supply Walmart, Walgreens, and Costco locations successfully. In addition to improving OTIF, the big retailers charged for stockouts at customer locations.
Demand planning is not a black or white situation. There are countless industries and examples in the middle. In certain situations, it makes good sense to utilize a demand planning software, and in other situations, it wouldn’t add value. It could depend on the customers, the capabilities of the company, other investment opportunities and rates of return, etc. Software itself never drives success. In fact, in many situations, it could drive worse results if not implemented well and/or if the company doesn’t have the resources and capabilities to maintain it. On the other hand, software can automate the repetitive so that your resources can focus on exceptions to drive greater success. For example, a lawn and garden tools manufacturer that supplied agriculture customers as well as customers like Home Depot and Lowes could achieve success with or without a demand planning software. In their specific situation, they already had robust process disciplines in place and high-skilled resources, and so it made good sense to upgrade the process with a demand planning software to take results to the next level and refocus resources away from mundane tasks to higher value tasks.
How to Select a Demand Planning Software
When demand planning software will provide an upgrade to your process and results, attention should be applied to selecting the best software to meet your business needs. As is true with best practices in ERP selection, selecting demand planning software starts with your business requirements.
Collect your business requirements to support a demand planning process. What functionality is important in developing a demand plan for your situation. For example, a few questions to consider in getting started include:
- Will statistical formulas suffice in gaining a directionally-correct forecast?
- Do you have promotions? If so, are they repetitive at the same time during the year and typically the same type of promotion?
- Do you get customer forecasts and/or consumption / usage data? If so, would analyzing to this greater level of detail provide a value-added benefit over statistical formulas?
- Do you have new products, customers, and/or locations? If so, would you be able to model the forecast of a similar product, customer or location?
- Do you gain better insights into your forecast at a product line level or aggregate grouping of products? If so, would you increase or decrease the forecast by a percentage across the entire group and want the software to spread it to the appropriate mix of products and/or locations?
- Do you have better insights into your forecast at the location or region level? If so, would you gain value by letting the system spread the forecast to the appropriate mix of products?
- Do you have price changes occurring throughout the year that you’ll need to incorporate as of certain dates?
- Do you need to incorporate quotes and/or inventory agreements?
- Do you solely need a demand planning system or are you looking for a supply planning and/or replenishment system as well?
Next, research potential demand planning software options. Although this appears easy to do online, it is far from easy to get to the appropriate level of detail to end up with software options in the appropriate price range with the most critical functionality features. As a globally recognized expert in selecting software, our Google searches only yield appropriate results less than 20% of the time. Frustrating! You don’t need a lengthy list. A few decent choices will suffice.
Depending on your company size, complexity, investment budget, and other factors, you will perform a simplified or comprehensive RFP (request for proposal) where you compare the software options to your business requirements to narrow the selection options. Typically, you should demo 2 or 3 options to see how the software will be used to meet your business requirements. Track how each software satisfies your business requirements and focus on those critical to your process. It is easy to get lost in bells and whistles the software suppliers want to show you instead of focusing on what will drive value for your business.
In addition to comparing functionality, you’ll want to compare pricing and partners. Pricing is another black hole. Getting apples to apples pricing is nowhere near as easy as it appears, and it is always extremely misleading. Dig into pricing until you have a side-by-side comparison of like items, considering short term and long term. Typically it is best to use a total cost of ownership calculation over 5 or 10 years, depending on your circumstances.
Finally, dig into the partner. 80% of success is in implementation, and your partner will be integral to this result. Every supplier will have success stories and talk a good game or they will not be in business very long. In fact, there are more sharks in software sales than in almost any other industry. They sound wonderful, but when rubber meets the road, it is often a different story. Make sure you don’t marry the wrong partner while selecting the “right” software.
Using a Demand Planning Software
The great news is that if your business is well-suited to use a demand planning software, using the software will simply enhance your manual process. Remember, it won’t work to implement a software without solid process disciplines and data integrity. On the other hand, assuming you are starting with a solid base, you’ll gain key advantages.
- Automate your repetitive manual tasks.
- Enable greater use of statistical formulas and will choose a “best fit” formula based on historical data.
- Gain access to increased functionality to manage events and promotions.
- Reduce effort and time in calculating forecasts at lower levels of detail which are statistically incorrect and focus efforts at more meaningful levels (groups of customers, products, etc.)
- Typically your forecast will easily transition to your ERP system and into your planning and capacity analyses.
- Focus attention on exceptions and deviations to drive results
- Gain accuracy at sku and location detail – in most situations, more effort won’t yield results; however, software will yield results.
Demand planning software will add value if you have a solid base. The only question is how much value in comparison to the cost and resources required to implement and maintain. For certain industries, it is integral to achieving superior delivery performance with high levels of OTIF and quick lead times.
Incorporating into SIOP, also known as S&OP
Demand planning software will not achieve the intended results if not incorporated into a SIOP process (Sales, Inventory & Operations Planning). The demand plan is the “S” of SIOP and required to drive capacity and staffing, sourcing, long-lead time material, and customer and product priority decisions at a minimum. SIOP inclusive of demand planning is not a one-time process; instead it should be conducted on a monthly cadence, looking out at a 12-24 month horizon. Results will follow.
As clients gain traction, they are tempted to skip monthly cycles. Keep the priority focus on SIOP inclusive of your demand plans. If you focus on exceptions and changes, the process will be quick yet critical to keeping resources aligned on priorities and addressing changing conditions. Undoubtedly, with the level of volatility in today’s business environment, sticking to the process will yield exponential results. For example, one of our most successful clients is vigilant in prioritizing Executive SIOP meetings (and associated processes). Even in months where key executives believe there are no changes, 80% of the time something arises through the process that keeps them ahead of the curve in pivoting strategies or ensuring the alignment of demand and supply, and most importantly, the related resources. This client will undoubtedly be better prepared for the next curve ball.
If you want to pursue upgrading your demand planning process, upgrading your use of technology and/or incorporating into a SIOP process, review our SIOP webpage of resources or contact us to discuss further.
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