Demand planning plays a critical role in inventory management and in ensuring your business has the right products at the right time. Here’s a look at how it works — and how to make it work for you.
Inventory demand is dynamic. As noted by Fortune, many retailers have struggled over the past year owing to higher-than-normal inventory levels designed to meet growing consumer demand. But as demand has shifted, many companies found themselves with too much stock (or not enough), in turn leading to reduced profitability and potential waste.
The solution? Demand planning. In this piece, we’ll break down the basics of demand planning for inventory management, how it compares to forecasting, what the planning process looks like in-depth and what companies can do after unexpected demand output occurs.
What is Demand Planning?
It is the process of operationalizing demand forecasts to deliver on inventory objectives. In other words, planning is all about the practical implementation of demand forecast recommendations.
Difference between Demand Forecasting & Demand Planning:
Demand Forecasting is the first step in determining how much stock one needs for the future and is typically done weekly or monthly. Demand planning, meanwhile, follows demand forecasting, to ensure effective plans are in place to deliver on forecasting goals.
After demand planning and forecasting, the next step is demand management, which focuses on ensuring the right product is placed at the right time and at the right price.
The Demand Planning Process:
When it comes to the actual demand planning process, each division has its own set of goals and objectives. For example, while the sales team may demand consistently high levels of availability to satisfy orders, the finance team may be more interested in inventory cost.
So how can you adopt a more encompassing demand planning approach for inventory management?
It all starts with the business of B.A.N.T.E.R
By introducing a set of questions based on the B.A.N.T.E.R acronym, it’s possible to both encourage collaboration and effectively assess the quality and relevance of divisional inputs.
In essence, the B.A.N.T.E.R acronym highlights several areas that should be explored when assessing the validity of a sales opportunity.
Let’s break down each aspect of this:
1) Budget – What is the customer’s budget?
This is all about determining whether or not the customer has already designated funds to make a purchase. For instance, if the funding is not assured, the chance of a sale falling through is far more likely than if a budget has been specifically set aside.
Likewise, does this customer have a history of pulling an order at the last minute? If a customer is prone to leaving you high and dry, questions have to be raised as to whether this future demand should be taken into account. Finding the answers to such questions can often be very difficult given that customers can often be reluctant to divulge too much financial information during the sales process.
However, given that such information is key to gauging the likelihood of a sale, there are many things to consider when determining whether funding is assured or not. To effectively assess the budget situation, ask your sales team questions such as:
- How does the customer go about prioritizing investment?
- Is there a critical reason as to why the customer wants to make a purchase
- Has the customer’s budget ever been reallocated in the past?
- What ROI is being placed in front of the prospect for your product?
2) Authority – Who has the final say?
Most purchasing decisions require authority. If the purchaser does not have the authority to make the final decision, then the risk of the sale falling through is inevitably higher.
Even though the preliminary stages of the sales cycle are often delegated to subject matter experts, the ultimate final decision often rebounds back to the delegator. To determine if sales information comes from someone with authority, you should open up discussions around the political alignment between the decision maker and your sales team.
Questions may include the following:
- Is the ultimate decision maker known?
- Do you have political alignment with the ultimate decision maker?
- Does the ultimate decision maker understand the value proposition of your products on offer?
- Has the ultimate decision maker ever vetoed a decision in the past because of specific loyalties to another supplier?
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3) Need – How urgent is demand?
As mentioned in the previous whitepaper the goal of establishing the customer’s ‘need’ is to assess their willingness to make a purchase. If the customer has an urgent need, the chances of the finance being reallocated are far lower.
Without a full understanding of what is driving a customer’s decision, however, you risk investing a considerable amount of time and money to satisfy the demand that never materializes. On the other hand, however, if you fail to identify an urgent need in time, this could cause the customer great frustration.
In the worst-case scenario, if you are unable to meet customers’ expectations, you risk losing them to a competitor as they may be better positioned to satisfy demand more promptly. Discovering a customer’s need requires concentrated drilling-down.
To understand the urgency of their requirement, you should ask the sales team the following questions:
- What has the prospect identified as their ‘pain’ – is there a critical reason to buy?
- Is this purchase something that has to be addressed soon or is it just a ‘nice to have’ type?
- If the customer didn’t take action, what would be the impact on their business?
- How will our product/solution resolve the impact of their need? can these benefits be proven?
4) Time – What timescale is the customer working on?
The time element focuses on establishing exactly when a prospective customer expects to receive their order.
If a customer is expecting to receive an order as soon as the contract is signed, then this places stress on the supply chain team to ensure that all items are available, in full, as and when the customer is ready to buy. However, if a customer has a flexible time scale this gives your supply chain team breathing space.
For example, if the lead time allows you may be able to hold off the order until customer demand is confirmed. Given that this element will ultimately determine exactly when your business has to take action, it is important to understand the customer’s delivery expectations.
To gain a better understanding of the customer’s timescale, the following questions could be used to open up a dialogue with the sales team:
- From the customer’s perspective, is there a burning requirement that requires attention immediately?
- Does the customer talk in general terms such as ‘around this date’ or has the customer defined a specific delivery deadline?
- Has the customer been consistent with time requirements in the past?
5) Execution – Are you able to execute?
While other elements of the B.A.N.T.E.R acronym are focused on the customer, the “execution” element requires you to look internally and assess whether you have the capability to meet the buyer’s requirements. By considering factors such as your current availability and ability to secure additional stock, you can begin to understand how well aligned your offering is with the needs of the customer.
It’s also critical for demand planning teams to build their colleagues’ trust in the process by presenting relevant and reliable data when approaching execution efforts. There are several things to consider when determining your ability to execute a customer order.
Given that various business divisions may have an influencing factor on your business’s capacity, the following questions should be used to create discussion between both sales and finance as well as any other divisions within the business.
- What is the accepted level of risk within the business?
- Who ultimately determines the best course of action?
- What’s the potential impact on the business if no action is taken?
- Is there already a business strategy in place to guide this decision-making process?
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6. Requirements – What do your customers really want?
The key here is to establish whether you understand the root requirements of the customer. For instance, if a customer was to order a large number of nuts from a wholesaler, is there also a requirement for bolts?
It is imperative that the sales team has with researched well and listened to the real objectives of the buyer and then aligned their products/ solutions with these requirements accordingly. Determining the answers to the following questions can provide the information that can assist you in quantifying a customer’s true requirement.
Common questions to ask include:
- What has the customer asked for and defined as their product needs?
- Is the customer familiar with all of the options available to them?
- Are we able to satisfy all of the customer’s requirements?
How to Align Your Demand Planning Approach to Actual Demand
Demand planning can help your organization weather unexpected demand increases or shortfalls, but only if it’s aligned to actual demand.
While communication between marketing teams, sales professionals, and customers can help provide a general sense of demand curves, three tactics can help ensure that demand forecasting is tied to reliable supply outcomes.
1. Let historic demand guide you — but prioritize the present
Historic demand patterns are relevant for future demand forecasting, but as the period between demand shifts grows shorter and shorter, it’s critical to prioritize the present. In practice, this means more heavily weighing demand trends of the last three months over those of the last three years.
2. Pay attention to demand classes
It’s also critical to pinpoint the demand for different item classes.
Frequent, normal, and “runner” products are those with consistent demands that recur every month. Lumpy, irregular, and “repeater” products see fairly regular demand with some volatility, while slow sporadic, and “stranger” items come with infrequent but potentially strong demand.
Planning for each class helps reduce the risk of over- or under-stocking.
3) Expect the unexpected
This could be a new product with no history and uncertain demand or a product that’s displayed substantial demand over just a few weeks. While it’s impossible to know for certain what demand curves will look like over time, forecasters can use historic data for similar items combined with their own market experience to identify the best approach to stocking and supply management.
With market demands rapidly changing, companies can’t afford outdated or inaccurate demand information. To ensure you’re prepared for the next normal of supply and demand, it’s critical to bring in BANTER, prioritize the present, pay attention to classes — and expect the unexpected.
Bottom line? Demand planning is critical to put demand forecast predictions into practice. But this process isn’t static. From internal communication challenges to external demand shifts, businesses need dynamic demand planning solutions that help them navigate the new normal of supply, delivery, and demand.