Demand Planning Versus Forecasting

An understanding of the differences between demand planning and demand forecasting will help you to effectively manage your business’s supply channels.

The last few years has seen an unprecedented disruption in global supply chains. Backlogs at ports, a shortage of shipping containers, the COVID-19 pandemic, disturbances to shipping routes caused by blockages, piracy and a changing climate: these and many other factors have resulted in supply chain turmoil that has affected production in virtually every industry on the planet.

The principles of Demand Forecasting and Demand Planning have always formed an integral part of Supply and Operations Planning (S&OP). But given the current chaotic state of global supply chains, an understanding of the differences between these two vital components of your S&OP is more important than ever.

In this article, we are going to take a quick look and Demand Planning versus Demand Forecasting, and how you can apply them to sound supply chain management and your company’s S&OP strategies. 

Demand Forecasting: Divining the Future.

Business is all about prediction. Customer buying trends, supply chain issues, and currency fluctuations: are all factors that can influence your supply chain. Even events that are hard to quantify - such as climate change and political instability - are things that need to be considered during your demand forecasting procedure.

Demand forecasting is the process of making estimations about future customer demand based on both qualitative methods and quantitative methods. Qualitative methods of demand forecasting are based on expert opinion and information collected from surveys and feedback. Quantitative forecasting adds raw data and “hard” information - such as sales figures - into the mix to offset any personal opinion or bias.

Demand forecasting uses historical data to understand and predict future customer behaviour. This will assist in making crucial decisions about inventories, supply of raw materials and components, production timetables and the shipping of goods to the marketplace.

Crunching the data

Demand forecasting software can use historical data such as customer behaviour and market trends to predict future demand with reasonable accuracy. This software can also utilize data such as weather patterns, raw material constraints and inventory capacities in order to create predictions over weekly, monthly, quarterly or even yearly periods.

By forecasting accurately and setting out strategies using data-driven insights, your S&OP team can avoid, or at least mitigate, the effects of supply chain disruptions.

What if and what next?

Demand forecasting also allows businesses to introduce “what if” scenarios into their planning. By changing certain parameters in their forecasts, they can figure out where pinch points in raw material supply might happen or where seasonal disruptions to staffing or consumer demand might occur.

This allows planners to develop alternative strategies and tactical backup plans that can be brought into action should these disruptions occur.

Demand Planning: Making It Happen.

While Demand Forecasting determines what is likely to happen, Demand Planning takes the information provided by the forecast and generates an operational plan to make it happen. A Demand Plan ensures that production capacity is available, that orders for raw materials are placed, inventory levels are optimized and that delivery of the finished products can be achieved on time. 

Depending on what a company produces, Demand Planning has to be tailored to focus on a number of different demand types. The demand type will govern the factors that need to be considered during the planning process. There are three main types of demand: 

Independent Demand

This is demand for a finished product that is ordered by a business’s customers. It is a difficult type of demand to plan for because customers may place bulk orders at short notice, or change their orders due to economic or seasonal conditions.

For instance, the onset of a hot summer may trigger a spike in demand for more sunhats. To ensure that it has access to the correct raw materials, a company that makes these items should be including weather data in their “what if” scenarios during the Demand Forecasting stage of their S&OP process. If the hot weather doesn’t eventuate, the demand plan would revert to the standard scenario.

Dependent Demand

This type of demand consists of the raw materials and components needed to produce an item. Factors such as inventory on hand and supply chain constraints have to be considered during the demand planning process for Dependent Demand.

The operations devised during the Demand Forecasting process will trigger a set of Dependent Demand responsibilities and systems that each section of a company’s supply chain staff will have ready to go in advance. This will ensure that a seamless supply chain process can swing into action as soon as new or updated orders are received. 

Consumables Demand

The effective management of spare parts and consumables is a way that companies to achieve a high level of customer service and satisfaction without having to maintain a large inventory of products.

For example, a company that supplies farm machinery will need to have a Consumables Demand plan for harvest time, when a rapid response is required for spare parts and consumables.

Key gains for an effective Demand Planning strategy that takes into account the demand for spare parts and consumables include:

• An increased level of after-sales service and therefore customer satisfaction.
• Reduced inventory levels.
• Minimal losses arising from obsolescence.

Better Operations Planning and Marketing Strategies.

By understanding the differences between Demand Forecasting and Demand Planning, your company’s management team can keep abreast of the constantly changing environment of supply chain logistics. This will not only help to keep production operating at an optimum level, but also enable you to maintain high levels of customer satisfaction.

Best of all, it will ensure that your company’s profitability is not unduly affected by the ongoing constraints in the global supply chain. That alone is worth planning for.