Is Demand Planning the Sole Solution for Inventory Planning?

Demand Planning and Inventory Planning

Effective demand planning can provide very useful information for companies that have to project inventory needs in the future. It usually involves high level statistics and financial analysis in order to serve the dual functions of both forecasting the product needed in inventory to meet customer demand levels while at the same time predicting the least amount of inventory necessary to minimize inventory carrying costs. A faulty or non-existent demand planning process can lead to crippling results, ranging from customer dissatisfaction and lost sales to higher than necessary inventory carrying costs. But even companies that spend considerable resources on the demand planning process oftentimes come up short of effectively predicting future needs, which leaves many companies wondering if this sophisticated process is worth the time. So should your company invest the time and resources with the risk of potential failure, or is demand planning just a part of the strategy required to meet customers’ needs?

Why Demand Planning Fails so Frequently

At first glance, many would guess that demand planning fails in so many companies because of a lack of technology and reporting. And while technology can contribute to the problem (most frequently when past trends are weighted too much while ignoring future factors) you might be surprised to find out that “people” generally contribute the greatest margin of error to the process. Most often, the demand planning process is performed in a vacuum within an organization, with little interaction between different members of the organization. One of two departments within an organization typically dominates the demand planning function – either the sales team or the financial analysis department. However, when either one of these departments strong arm the process, then a complete and balanced forecast that takes into account different perspectives will be very difficult to achieve. Compounding the issue is the simple fact that statisticians and sales personnel alike usually have a certain personality profile, which is great in some ways but also a detriment to the success of the demand planning process if not supplemented with other members of the team with differing perspectives.

Broaden Perspectives Outside of the Organization

Not only is it important to obtain varying opinions within the organization, but bringing in outside suppliers into the discussion can successfully supplement the process and forge a better overall process. From suppliers and manufacturers to logistics and 3PL providers, these outside suppliers have unique perspectives that may not be present within the organization. For example, manufacturers and suppliers have intimate knowledge about their respective industries and niches, and therefore will more likely have their finger on the pulse of upcoming changes in raw materials markets. Similarly, logistics and shipping providers understand the cyclical nature of the overall shipping industry and may know of upcoming trends that could significantly impact inventory needs. The bottom line is that the companies with the most successful demand planning process incorporate outside advisors in order to gain professional perspectives and incorporate these perspectives into the overall process.

An Inconsistent Process is Disastrous

In addition to bringing the right people into the discussion, studies have shown that increased frequency in the demand planning process and decreased time to complete the entire process cycle lead to more accurate forecasting. It’s critical for companies to perform the process more frequently because projections will be subject to fewer factors and can be updated for unforeseen events. And by reducing the entire cycle time of the demand planning process, companies become more nimble and capable of making changes quickly and swiftly. Furthermore, by adding codified performance assessments and regular variance reporting, complete information can be disseminated in order to make the best decisions.

But the Demand Planning Alone Won’t Solve Every Issue

At the end of the day, demand planning is a helpful tool. But it will not save a company from an unforeseen event. That’s why many companies forge intimate relationships with suppliers and warehousing providers with fail safes in place to quickly adapt when necessary. In terms of manufacturing and supplier relationships, this manifests itself in the form of having pre-planned mechanisms for quickly producing new goods if necessary at a moment’s notice. And in terms of distribution, companies would be wise to build processes and procedures that help guide distribution personnel for how to bring the necessary resources to the forefront in order to pick and pack products within a very short time window once inventory arrives. Ultimately, demand planning is an extremely useful tool if used effectively, with proper perspectives from varying members of the team and external partners, and with adequate frequency and accountability. But the only way to truly safeguard the company against unforeseen events is to plan for the unexpected by creating processes and procedures across the entire life cycle for unexpected demand levels.

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