What is Demand Planning and Why Is It Important?

Understanding the conditions and prerequisites for company growth is vital for making relevant management decisions. What is demand planning, and is it necessary? What is the difference between demand and sales? What does the strategic vision depend on? I will tell you everything in this article.

What is demand planning?

The increasing market competition makes companies monitor and analyze their sales, demand, and, accordingly, their forecasting. Let's look into what demand planning is and why it is almost impossible to survive without it.

Demand planning is the process of researching and evaluating ‌future demand for goods and services. It allows companies to make efficient managerial decisions. Supply chain enterprises often implement software solutions to automate demand planning and inventory management.

Demand planning is relevant for all industries, especially for perishable goods, where planning is crucial. Otherwise, losses are inevitable due to product spoilage.

Are demand and sales the same thing?

What is the demand? Demand is the real needs of your customers, what they want and come to you for. And sales are their purchases, that is, your shipments. Imagine that demand and supply are arrows pointing toward each other. Often these arrows do not intersect. They can live in "parallel universes". And only when you reach the conditions where these two arrows intersect your business grow.

Let's take a closer look at this topic.

Demand is like rain that drips from the sky. You can influence it somewhat, but it is either there or not. In turn, sales are demand adjusted for your opportunities. That said, those capabilities may be limited by the breadth of your product line, the availability of inventory at the point of sale, and many other factors. Therefore, with only an idea of sales, you can't plan demand correctly. For this reason, every company should first and foremost set itself the task of capturing demand as it is. This is a fairly trivial task by which to understand the real picture.

The ways of fixing demand can be quite different, but sometimes not structured at all:

• Sales manager activity in chat rooms

• Calls from clients in CRM

• Documentation of interest from customers

• Tracking activity on the website

• Other means of researching activity and tracking people

There are many sources of demand signals. But one thing is to record it. Another thing is to store it properly. In practice, it happens that customers come for some items but buy (or are forced to buy) others.

Fixing demand is the cornerstone task before preparing for planning. Therefore, as a rule, one of the first tasks when planning a demand is understanding the order processing process and the sources of demand generation.

No sales, no demand?

Another cornerstone question that affects the quality of demand planning: is lack of sales a factor in lack of demand? This question regularly arises when you need to calculate how accurate demand planning is.

In reality, the lack (or presence) of sales is not always in direct correlation with demand. To make sense of it, it is necessary to consider many components and errors, such as the lack of goods in stock, malfunctioning call center mode, technical failures on the website, and others. Another crucial factor to consider is the efficiency of shipping operations, which may require the company to hire a web developer to optimize the online ordering and tracking system for a better customer experience and minimize technical failures on the website.

For instance, let's consider an e-commerce company that experiences a decrease in sales for a particular product. While the lack of sales may initially suggest a decrease in demand, the problem may actually lie in shipping-related issues. Delays in order fulfillment, shipping errors, or poor delivery service can all contribute to dissatisfied customers and a subsequent decline in sales.

What affects the quality of demand planning?

The issue of demand planning quality is cross-cutting and affects many business processes in any organization. When a smooth demand planning process is implemented and resources are managed efficiently, systematic growth will occur. This results in:

• Growth in the level of service - customers are provided with exactly the product they need

• Growth in sales level - customers do not face missed sales

• Increase in inventory turnover (no excess inventory in the warehouse)

• Increase in the effectiveness of assortment management and promotion (the management better understands the formation of demand and customer activity and is aimed at attracting new customers and promoting sales)

• Optimization of the supply chain and more efficient use of production and human resources

• Increase in the financial stability of the company

Any company can only achieve the most accurate and effective results by implementing an automated system. It can help to analyze large historical data sets with different assortments and identify hard-to-predict and unpredictable items.

Conclusion

Thus, demand planning is the most important process with which any planning starts in the company. When there is an understanding of how many customers there will be, better plans can be formed, and a better understanding of how many people and production resources are needed. This contributes to greater financial sustainability, as the company has a strategic vision.