Introduction to Demand Planning

As put forth in the first article, demand planning seeks to predict future buying behaviour by drawing inferences from customer buying behaviour. The output of a demand planning exercise is estimated sales of a product in a particular geography.

Demand Planning is a structured way to arrive at a enterprise wide agreement on the expected sales of a product. The following are the key steps of a demand planning process
Data collection & cleaning
Statistical forecasting
Final Consensus forecasting

The first step of demand Planning is to determine the horizon of previous sales to consider. In typical cases, 24 months of rolling data is used to create a forecast. However in many industries such as garments and fast moving consumer goods, the product lifecyle is very short. In such cases, a concept of like profiling is used. In like profiling various products (SKUs) which have the same attributes in terms of product characteristics, price points and target segments are treated as same products for the purpose of forecasting.After the data has been collected, outliers are cleaned. Outliers are identified based on various business rules. For example, one organization defined outliers as those demand points which were more than 2 times the averaeg. This led to the elimination of 2 historical data points.

Once the data has been identified & cleaned, various statistical methods are used for demand planning. The most popular statistical methods are listed below. For a more detailed explanation of each of these methods, please refer to the article on statistical methods.
> Simple average
> Moving average
> Weighted Moving average
> Trend model
> Seasonality model
> Winters model
> Holtz winters model

The statistical forecast generates a forecast that may or may not be agrreeable to all stakeholders. In cases where the sales has seen significant variability, the forecast may be quite inaccurate. In other cases, where the marketing team wants to run a promotional campaign during an otherwise lean season, the forecast may need to be pumped up. However, all inputs from the sales & marketing teams may not be correct. The supply chain planing team , ideally, should be in a position to challenge the input numbers by referring to the current inventory position and historical sales patterns. It is important to note that in most organizations, sales & marketing have their own revenue targets to achieve and hence they prefer plugging in higher numbers. Supply Chain, on the other hand, is responsible for the inventory and hence can find itself in a difficult situation if it does not sufficiently challenge the numbers from sales.

Once a consensus is reached between sales, marketing & supply chain, the demand planing process is said to be complete. The above sequence is followed typically for old products. For new products, marketing has a go to market quantity for different markets. The go to market quantities are merely added on top of the forecast for other products. In case of phaseout SKUs, the forecst is adjusted to reflect the liquidation timeline. For example, a product has stock of 300 units and needs to be liquidated in 3 months. Even if the product has a forecast of 400 units, it will be adjusted to reflect 150,100 and 50 units over 3 months.

An Overview of Supply Chain Planning

In everyday life, planning is essential to success. We do financial planning to prepare our coffers for the extended human lifecyle. Players plan for the next game and corporates plan for the next financial year. Similarly, supply chain planning is a key enabler of operational efficiencies in the corporate supply chain. Indeed, significant benefits accrue out of careful allocation of shipments to various resources considering the capacities, routes, constraints and service levels than random allocation of shipments to resources on a FIFO basis.

The above is a very generic illustration of transportation planning. However, supply chain planning is much more than just transportation planning. A typical manufacturing supply chain consists of a firm which sources materials from suppliers, converts them to a finished good at some facility, delivers goods to the customer and in some cases accepts returns for the same.Effective planning is essential at every stage of the supply chain. Demand planning, supply planning, production planning, material planning, transportation planning are absolutely essential functions that help sustain an efficient supply chain. In addition, periodic inventory planning and network planning are critical operations, which when performed accurately, provide firms with a distinct competitive advantage. We will start with a brief description of the above terms, and in subsequent articles, will cover them in greater detail.

Drawing inferences from customer buying behaviour, demand planning seeks to predict future buying behaviour. Demand plan specifies the quantities of each product that is expected to be sold in the market. Once this is done, the firm proceeds to identify the facility that will manufacture the products. This activity is known as supply planning. After identifying the manufacturing location of each product, the firm creates a production plan & a detailed manufacturing schedule. The production plan, also known as master production plan (MPS) , lists the quantity of each product that needs to be manufactured, after netting off the current stock position. The manufacturing plan is a trigger for material planners to arrange for materials to support the continuous manufacturing operations. Material planning helps procurement place upstream purchase orders to various suppliers. After the products have been manufactured, they need to be shipped to various destinations using various resources on multiple modes – truck, rail, road, air and water. The act of optimally allocating products to resources on each mode is achieved by transportation planning.
The above 5 planning activities are continuous in nature, preceeding execution steps on a daily,weekly or monthly basis. Typically an activity is termed as operational in nature when it spans the immediate horizon of a few days to a few weeks. Activities that span few months to a year are tactical activities while activities further out in the horizon are strategic in nature. Accordingly, the planning processes described above can be classified as either tactical or operational planning activities. In addition, supply chain network planning and inventory planning are two strategic planning activities that also fall under the realm of supply chain planning. These activites extend further into the horizon – SCNP activity is undertaken once every 5 years while a inventory planning exercise is undertaken once every year.

Like most supply chain activities, planning is heavily dependant on technology. There are several tools available in the market jostling for space, claiming to de-stress the life of a planner. HOwever all these tools do come with their share of inaccuracies and assumptions. In the later sections we will look at some of the technological innovations that spur this field.