Reducing the noise in Planning through segmentation

Demand forecasting is the backbone of effective supply chain management, but it often suffers from noise—random variability that obscures true demand patterns. This noise can lead to costly inefficiencies, such as overstocking or stockouts. According to Professor Janet Godsell, the solution lies in better segmentation. By understanding the distinct characteristics of demand across products, customers, and channels, businesses can improve the isolation of the signal from the noise and significantly improve forecast accuracy.

Segmentation involves categorising demand data into meaningful groups based on shared traits. Traditional forecasting methods often apply the same techniques across all products and customers, treating them as if they behave uniformly. This one-size-fits-all approach amplifies noise, as it fails to account for the unique factors driving demand fluctuations. Effective segmentation, on the other hand, aligns forecasting methods with the specific dynamics of each group, enabling a sharper focus on underlying demand trends. This can also be true in AI models as well.

Different products display different demand behaviours. Some have stable, predictable demand, while others experience volatility due to factors like seasonality or promotional activity. Treating these categories the same in a forecast muddies the waters. Stable products may benefit from simple time-series analysis, while volatile ones require more sophisticated approaches like causal forecasting or machine learning, which can incorporate external factors to improve accuracy.

Customers, too, exhibit varied demand patterns. High-volume customers might order regularly and predictably, while low-volume or sporadic buyers introduce more erratic demand signals. Segmenting customers based on their purchasing behaviour allows companies to fine-tune their forecasts. Collaboration and shared planning can enhance forecast precision for reliable, high-volume customers. For less predictable customers, demand smoothing techniques help minimise noise and prevent overreaction to outliers.

Sales channels further complicate demand dynamics. E-commerce, for instance, often sees erratic demand spikes due to online promotions, while retail channels may follow more stable, footfall-driven trends. Ignoring these differences leads to forecasting inaccuracies. By segmenting demand by channel, businesses can adapt their forecasting models to reflect the unique characteristics of each, ensuring better alignment with reality.

The payoff of proper segmentation is clear: greater forecast accuracy, enhanced responsiveness, and improved decision-making. With segmentation, businesses can focus on true demand signals, filtering out irrelevant noise. This precision translates into better inventory management, reducing stockouts and excess inventory. It also fosters agility, allowing companies to respond swiftly to changes in demand patterns without being thrown off by random variability.

Segmentation also improves collaboration. By aligning forecasts with the specific needs and behaviours of different customer segments, businesses can engage in more productive partnerships with key accounts or suppliers. Sharing segmented forecasts ensures that all parties operate from the same data-driven understanding, reducing friction and improving supply chain synchronisation.

Implementing segmentation begins with analysing historical data to uncover patterns and variability across products, customers, and channels. Once these segments are identified, companies must apply forecasting methods tailored to each group. This is not a one-time exercise; demand patterns evolve, and segmentation must be reviewed and refined regularly to stay effective. The ultimate goal is to integrate segmented forecasting into every aspect of supply chain decision-making, ensuring that operations, from procurement to distribution, are driven by accurate, nuanced insights.

Reducing noise in demand forecasting is not just about refining processes; it’s about transforming the way businesses think about their supply chains. As Godsell asserts, segmentation empowers organisations to see demand clearly, act decisively, and remain agile in the face of uncertainty. In today’s volatile market environment, mastering segmentation is no longer optional—it’s a strategic imperative for any business aiming to stay competitive and customer-focused.

Are you enabling your demand planners to continue to improve forecast with better thinking around the tools they are using?