Forecasting and Demand Planning

Forecasting and planning are two critical managerial functions. Forecasting essentially refers to making projections or predictions regarding a future event, based on the previous trends as well as current performance. On the other hand, planning refers to the process of developing plans for things that need to be done in the future, and is also based on the existing performance as well as the expectations for the future.

Demand Forecasting

Demand forecasting forms an essential component of the supply chain process. It’s the driver for almost all supply chain related decisions. While demand forecasting is undeniably important, it’s also one of the most difficult aspects of supply chain planning. Demand Forecasting defined as the process by which the historical sales data are used to develop an estimate of the expected forecast of customer demand. Demand Forecasting provides an estimate of the of goods and services that customers will purchase in the foreseeable future. Demand Forecasting facilitates critical business activities like budgeting, financial planning, sales and marketing plans, raw material planning, production planning, risk assessment and formulating mitigation plans.

Demand forecasting can be classified in three types as follows.

Long-term Forecast: usually cover more than three years and are used for long-range planning and strategic issues. These will be a performance in broad terms; that is sales by product line or division, throughput capacity by ton per period or dollars per period.

Midrange Forecast: usually range from one to three years and address budgeting issues and sales plans. Again, these might predict more than demand.

Short-term Forecast: are most important for the operational logistics planning process. The projected demand into the next several months and, in some cases, more than a year ahead. These are needed in units, by actual items to be shipped, and for finite periods of time- monthly or perhaps weekly

How does Demand Forecasting benefits Supply Chain Management?

Improved supplier relations and purchasing terms: Demand Forecasting drives the raw material planning process which facilities the Purchasing Managers to release timely purchase plan to suppliers. 

Visibility and transparency of raw material demand improve supplier relations and empowers Purchasing Managers to negotiate favorable terms for their companies. 

Better capacity utilization and allocation of resources: Based on the current inventory levels, raw material availability and expected customer orders, production can be scheduled effectively. This leads to improved capacity utilization and judicious allocation of manufacturing resources. 

Optimization of inventory levels: A proper Demand Forecast provides vital information for driving the desired raw material, WIP and finished goods inventory levels. This reduces the Bullwhip effect across the Supply Chain, leading to optimization of inventory levels and reduction in stock-out or over-stocking situations.

Improved distribution planning and logistics: Apart from small businesses, this is particularly evident in businesses dealing with multiple SKUs and wide distribution networks. Distribution and Logistics Managers are enabled to balance inventory across the network and negotiate favorable terms with Transporters.

Increase in customer service levels: With optimized inventory levels and improved Distribution Planning and Logistics, customer service metrics like on-time delivery (OTD), on-time in-full (OTIF), case-fill/fill-rate, etc. are improved due to right sizing and right positioning of inventory.

Facilitates performance management: Management can set KPIs and targets for various functions like Sales, Finance, Purchase, Manufacturing, Logistics, etc. based on the medium to long range plans derived from the Demand Forecasting process. Organizational efficiency, effectiveness, and improvement initiatives can be designed for key areas of the company.

Demand Planning

Demand planning is the management process within an organization which enables that organization to tailor its capacity, either production or service, to meet variations in demand or alternatively to manage the level of demand using marketing or supply chain management strategies to smooth out the peaks and troughs. Demand planning include many activities as follows.

? Inventory Planning

? Production Planning

? Production Scheduling

? Procurement Planning

? Performance Measurements and Methods

? Decision Making Optimization

Elements of demand planning

Demand planning is a complex process that typically includes the following elements:

? data collection from internal and external sources on the factors known to predict or influence demand;

? statistical analysis of sales, inventory and other data;

? modeling the data to predict future demand; and

? collaboration with suppliers, manufacturers, salespeople and other stakeholders to gather information on events that could affect demand, such as promotions and production delays.

Demand planning is often conducted in the early stages of sales and operations planning (S&OP), a process for aligning supply with demand by coordinating sales planning and forecasting with production planning in a unified approach.

Advantages Of Demand Planning

1. Improves Product Forecast Accuracy

Effective demand planning can assist supply chain managers by accurately forecasting product production and expected company’s revenue.

 2. Increases Supply Chain Scheduling

By predicting and analyzing when sales are likely to happen, your business can better plan your production, warehousing, and shipping schedules. When you need to do mandatory maintenance shutdowns or website reboots, you can avoid the time periods when you receive the most orders to execute these activities.

3. Optimize Labor Management

Successfully predicting the peaks in demand will allow your business to plan your staffing needs more accurately during periods of high product demands. You can then take action such as hiring more temporary staff members to ensure you produce your goods on time.

4. Create Efficient Cash Flow Management

The inability to pay vendors and suppliers is not a situation any supply chain manager wants to encounter. If you do not pay your vendors on time, they might not be willing to deliver their products to you. This puts your production at risk. You risk angering your customers if your production delays affect your ability to fulfill their orders.

Abdul Gafoor

www.digitalsupplychaintoday.com