Challenges of demand planning

Achieving high levels of forecast or demand plan accuracy is a challenge for most organisations. However, despite the importance of a good forecast to business performance, the investment in the forecasting or demand planning process within organisations is questionable. Organisations also grapple with target setting, conflicting the demand planning process for supply chain planning.

The term sales forecasting is commonly interchanged with demand planning in the context of sales and operations planning or as a key input for annual financial planning (budgeting). There is however a fundamental difference between the two and understanding this is key to help improve the accuracy of the forecasted volume sales of the products or services that a supply chain has to deliver. The Oxford Dictionary defines forecast as predict or estimate (rain is forecast in …). Demand planning, on the other hand, is the process of planning an organisation’s future sales (demand).

It is also important to recognise that demand planning consumer demand is a very different process from demand planning customer demand. Consumer demand planning has two fundamental sets of input and understanding this is key to un-locking potential improvements to accuracy levels.

Every consumer demand plan has elements that a business has control of (price, promotions, re-launches, etc.) and elements that a business does not control (weather, market conditions, taxation, government stimulus, etc.). Therefore such demand plans should ideally be constructed by incorporating marketing plans and commercial plans with the forecast of the ‘uncontrollable’ elements.  The recent tough and volatile market conditions have resulted in increasing influence of the ‘uncontrollable’ elements of demand. Thus, demand planning accuracy has generally deteriorated as of late.

Demand planning for customer demand is a very different challenge. Customers in this case are manufacturers and service providers ‘up the supply chain’ who eventually service the retailers (on line and traditional). In this demand planning process, an organisation have to understand, interpret and even ‘forecast’ customers supply chain strategy, manufacturing and stock holding policies and plans and more importantly the ordering behaviour. These factors distort the eventual consumer demand leading to major swings as the demand ‘travels’ up the supply chain. This is popularly referred to as the ‘bull whip effect’.

Therefore, organisations which supply to other businesses have to adopt a more collaborative approach to demand planning as well as adopt principals of demand control to improve accuracy in demand planning.  Life would be much easier for all if the entire supply chain of an industry (for example the apparel industry) develops their demand plan based on the end consumer sales with total visibility and integration between all players in the supply chain (retailers, wholesalers, contract manufacturers, and fabric and trims manufacturers).

In such a utopian state, there is only one demand plan (or sales forecast) which drives the supply chain of the retailer. All other players in the supply chain feeding this demand plan, works off ‘dependent demand’ which is the demand plan exploded by the bill of material across the supply chain and net of stocks, manufacturing and service plans which are totally visible to all. Unfortunately we live in the real world and despite the development of cloud based applications we are far from such a state.

This however does indicate that organisations who invest in collaboration (sharing of demand, data, challenges and plans) with their supply chain partners and customers are on track to improving demand planning accuracy. Achieving this also requires structured and well defined demand planning and demand control processes, systems and behaviour with clear sponsorship and engagement of the executive team.

Despite the universal recognition of the importance of accurate demand plans to an organisation’s short, medium and long term performance, the investment in the demand planning process is questionable.

In many organisations, demand planning is left to middle management. Short term demand plans influence our ability to service our customers accurately and with target service levels using the supply chain resources and working capital levels we have in place today. Our medium term demand plans ideally help us plan these resources and understand the levels of safety stocks and capacity we should be investing in. Our long term demand plans informs our investment and strategic plans for the business.

 There is increased recognition that we need to up the game in this area, especially in the face of tough and volatile market conditions. It is a challenging business process as there are many external factors influencing the output. There is one certainty in all demand plans or forecast; they are never ‘correct’. The objective of any business is to minimise this error and more importantly to mitigate variance through buffering in the supply chain resources that is affordable and has an acceptable ROI.

(The writer is currently the Global Digital Director, Coats Plc, UK. Prior to the current appointment he was the Global Supply Chain Director for Coats. Starting his career at Unilever Sri Lanka, Hizmy joined Coats 15 years ago as Head of Supply Chain in Sri Lanka. He will be one of the key resource personnel taking part in the Colombo Supply Chain Forum, which will be held from 22 to 24 January 2013 at Cinnamon Grand for which the Daily Financial Times is the Print Media Partner.)