Demand planning is a necessary process to effectively determine how much inventory you need to meet customer demands.
The demand planning process, which helps to plan accurate inventory forecasts and make optimal purchasing and planning decisions for your business, relies on many data points, such as historical sales data, factoring in lead time data, market intelligence, and supplier performance, while considering supplier and customer demands.
Part 1: The benefit of demand planning
Why does your business need an accurate inventory forecast?
Creating an accurate demand forecast is vital to your business’s success. It ensures you can place the right orders to avoid holding excess stock and having too much capital tied up in your inventory.
A forecast can help you:
- Predict future sales expectations
- Determine optimal inventory levels that drive replenishment
- Establish if an item is stocked-out, potentially going to stock out, or is in excess
- Identify if you have too much stock on order.
These predictions would only be actionable if they were able to forecast accurately. The more accurate the forecast, the more accurate your purchasing and planning will be, creating a balanced inventory.
Many businesses say that they don’t forecast; however, the following actions below are essentially a forecast:
- Using the average of your last few months’ sales data
- Manually calculating your min/max stock levels
- Using ‘gut feel’ to decide what stock to buy
There are many inventory planning tools available to help you create the best possible forecast without reviewing every stock item.
How do you get the most accurate demand forecast?
A healthier, balanced inventory will result in significant savings for your business where you can prevent stock-outs and avoid carrying excess inventory. Therefore, a robust, structured forecasting process is critical for your inventory planning.
When your forecasts improve, you will experience a reduction of your slow-moving and obsolete stock and a reduction in stock-outs.
Part 2: Inventory forecasting activities
What are the forecast planning activities? Typically there are monthly and weekly forecasting activities.
Review system forecast. At the beginning of each month, your demand planner needs to review the system forecast to ensure that the forecast information is included and reasonable. You can achieve this by:
- Letting an inventory forecast engine do the grunt work and create computer-generated forecasts for all stock items.
- Using sales or demand history to generate a forecast.
- Picking up on trends, seasonality, intermittent demand, and one-off sales spikes.
- Factoring in data, such as lost sales.
Any forecast engine worth its salt will generate forecasts using several different algorithms and then compare all of those generated forecasts with the sales/demand history to determine the “best fit” forecast. This results in great forecasts for the bulk of your stock items. A small percentage of items will need manual intervention, as no forecast engine will get every forecast right.
Monitor those items with consistent variances between sales and forecast: Adjust the forecast up where sales have consistently exceeded the forecast and – adjust the forecast down where sales have always been lower than the forecast. By aligning sales and forecast data more closely, you lower the risk of generating excess inventory or experiencing costly stock-outs.
Adjust your forecast for new or lost customers: Adjust forecasts for new or lost customers as soon as you are aware of the change. Use the computer forecast, but, subtract a lost customer’s monthly demand from the computer forecast.
Factor in new stock items to your forecast: New stock items will have no sales, so new items should be manually forecast for the first few months. However, ensure that the “new” item is not a replacement for a “like” product, where a cheaper or better quality product has been sourced and will now be sold instead of the old product. Linking the “new” item to the “old” item in a supersession chain will result in the old item’s sales history being used to generate the new item’s forecast. Adjust forecasts to include additional promotional demand on top of the expected normal sales. Report on forecasting performance and make sure your measure also distills the bias between over and under forecasting. It would help determine whether the manual intervention improved the result if you considered measuring the difference between the system-generated forecast versus the manually adjusted forecast.
Always perform a sanity check: Do a sanity check at a macro level. After making changes to individual item forecasts on an exception basis, review overall sales to forecast to ensure that the overall growth is not too extreme or too conservative. Most forecasting applications will enable macro forecast adjustments, should they be required. Once you complete the monthly forecast review and endorsement, the focus switches to a weekly review to highlight exceptions.
During your weekly activities, severe changes between sales and forecasts will highlight potential issues with the forecast on individual stock items. Reviewing these alerts enables prompt response to possible changes in demand. Review forecasts for the top 5-10 sales versus forecast exceptions:
- Where you are selling more than the forecast, consider increasing the forecast.
- Where you are selling less than the forecast, consider reducing the forecast.
- Be mindful that you may be selling less due to stock-outs.
Adjust the forecast as soon as you see a trend emerging before it results in stock-outs or excess inventory. Effective demand planning can help your business respond quickly to changes in demands whether you are a manufacturer, wholesaler, or retailer. Using a demand planning solution allows you to plan accurately and create detailed automated forecasts.
Are you working with an intuitive demand planning solution that can:
- build better forecasts
- capture full sales potential
- reduce inventory holding to free up working capital?