Why is Demand Planning Important for an Entrepreneur

Why is Demand Planning Important for an Entrepreneur

An entrepreneur needs proper planning to keep his entrepreneurship going and meet future growth. There are several things that must be done for the success of a business. Demand planning needs to be ingrained in the business as a continuous process. Demand planning focuses on the analysis of consumer trends as well as historical sales. It separates data to optimize your business’s potential to meet consumer needs in the most efficient way.

To achieve this target, the process focuses on combining sales forecasting, inventory management, and supply chain management. They use data from internal and external sources to make predictions on future demands. This prediction makes it easy for the manager to strategize their demand operations carefully and plan how much to produce to meet the overall needs.

Importance of Demand Planning

Effective demand planning brings out the best in both customers and business owners. It provides customer satisfaction and profits to the respective sides of a business by assisting them in striking a balance between customer demand and sufficient inventory levels. This is not a simple goal, as it requires smooth coordination across the organization. If you bring in excess inventory, it will lock your working capital and add inventory cost as well. This strikes you with low-cost inventory or obsolete inventory altogether. Hence, proper planning is required to avoid such unwanted activities within any business.

Poor planning results in supply chain disruptions. Planning within a business also requires a comprehensive solution developed to provide visibility, core analytics, and execution capabilities. Ibp software is majorly incorporated in any industry to achieve the orchestration of supply chains and to retain control over the costs being delivered through products and services. Also, the business starts to fall short on goods, eventually resulting in backorders or stockouts. In the long run, this can delay your delivery leading to a substantial unsatisfied customer base.

Steps to Structure Successful Demand Planning 

As mentioned, demand planning involves multiple steps and is not a single-lined process. The process can get complicated with the change in the scope and size of the business. Some of the critical steps to structurize an effective demand planning process include:

Define Relevant Internal Data

It is essential for employees involved in the demand planning process to agree on specific data being used to develop an accurate forecast. This is the relevant data that varies from one company to another. It must include sales data by location and channel, inventory turnover, out-of-stock rates, production times, lead times, and other inventory metrics. You always need to check with your marketing team about the specifics of timings and price changes, including campaigns and promotions affecting the demand. Start gathering information from manufacturing teams about new launches and competitive offerings. This could impact forecast accuracy.

Make a Team

You need to ensure that every member of the demand planning team has been offered certain roles and responsibilities. Representatives from supply chain groups and purchasing teams are responsible for ensuring the accuracy of inventory management and meeting the demand forecast. On the other hand, the finance team often builds the actual forecast. Other departments focus on their roles, making an efficient team altogether.

Make a Statistical Demand Forecast

Combined, decide on the kind of forecasting model that makes sense for your business. Start working on it after you have decided. This can be done best with demand planning software. Although some companies still use tools such as Excel that require manual work and are time-consuming. These manual works are prone to errors as well. Even before forecasts and company-wide usage, you might want to make predictions by a product line or customer region.

Challenge the Forecast

Review, refine, and reanalyze the demand forecast together with many stakeholders. After this, add the current data to know whether it significantly impacts predictions. Any information that might not be accurate can be questioned and perhaps removed from outliers. This could distort an overall forecast to know the effects positively. This is the best time to double-check whether the demand forecast merges with the company’s broader financial forecasts.

Use External Data to Enhance the Forecast

Another crucial input for the process of demand planning is external data. These metrics revolve around the recent performance surrounded by delivery timelines of distributors and suppliers. You need to know the purchasing habits of your customers. Some of the external information involves overall economic conditions impacting shifts and sales in a market.

Weigh Forecasts against Stocks

Try to determine the number of stocks or how much inventory you need to take in to predict the demand or cycle inventory, including a buffer of stock for safety. Look for the necessary vendors to identify the demand and clear them. Check with them to ensure the delivery of necessary goods and services. This is on your required timeline. Make sure the transportation vendors know how to handle the volume. Check your schedule for transferring goods between locations.

Measure Results

Identify the KPIs or the key performance indicators that allow you to measure the efficiency and effectiveness of the demand planning processes. Also, you can set targets for each of them. Your business might track forecast accuracy, sales, fill rates, inventory turnovers, order fulfillment lead times, or COGS. Continuously reviewing performance against targets and making adjustments is necessary.

Demand Planning Methods

Some of the common models that create a statistical forecast in the region of demand forecasting include:

  • Linear Regression: They intake the prior demand levels and place them through a square regression model to predict sales.
  • Seasonal Trends: As the name suggests, this method predicts demand based on sales during particular seasons or months. The method is favorable for companies having high seasonal sales.
  • Moving Average Demand: It assumes that the demand in the future will be the average of the ending sales periods.

Bottom Line

Demand planning is a cross-functional method that assists businesses in meeting the demands of customers. Appropriate demand planning minimizes excessive inventory and eliminates supply chain disruption. Therefore, it aims at increasing the organization’s profitability and customer satisfaction. This leads to efficiency gains in the long run.

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