Simply put, demand and inventory planning exists to ensure businesses have the appropriate number of products available to meet customer demand without excessive inventory.
Demand planning
Demand planning, a strategic cornerstone of an organization’s supply chain management (SCM), is a crucial function that aims to accurately forecast the buyer’s demand for a product or service and the timing of these purchases. This process drives operations across the supply chain, from sourcing raw materials, products, and components for production through to final distribution. However, many organizations still rely on cumbersome and inflexible spreadsheets for their planning, which struggle to cope with the unpredictability of demand.
Adopting modern demand forecasting software can provide a significant competitive edge, enhance the accuracy and transparency of forecasts, and give your organization a clear advantage in the market.
Inventory planning
The inventory planning process is also a strategic cornerstone of an organization’s SCM: it ensures that an organization has the right amount of stock available to cover customer orders. It is the process of determining the optimal quantity and timing of inventory, aligning with sales and production planning. Inventory planning can help lower the cost of storing inventory and avoid overstock situations, improve cash flow and profitability by planning the optimal inventory levels needed. Ensuring that you have the right amount of inventory at the right time is crucial in meeting customer needs and can reduce the risk of over and underestimating stock, thereby improving your financial performance.
When these two planning disciplines work effectively together, an organization can plan production more efficiently by knowing the expected demand and aligning production and sourcing with customer needs. They can therefore avoid overstocking, which ties up excess working capital in storage costs, and stockouts, which lead to lost sales and can impact the rest of the supply chain.
Roles and responsibilities
The cornerstone of demand planning is forecasting, which uses historical data, market trends, and additional factors to estimate future demand for a product. Data analytics, which collects and interprets sales data, market intelligence, and other data to develop demand forecasts, underpins this. For an organization to be effective, demand planning must align with sales targets and potential marketing goals to ensure the appropriate inventory levels are available when needed.
Inventory planning also considers many factors. It attempts to optimize stock levels by calculating the appropriate inventory to hold based on demand forecasts, lead times, and minimal stock requirements and safety stock levels. Inventory planning also determines when to place orders with suppliers and manufacturing before stock runs below the threshold. It also enables storage management by optimizing warehouse space and inventory rotation.
The demand planner plays a strategic role, relying on skills in supply chain management, sales, business analytics, and market intelligence to forecast current and future customer demand by understanding and predicting sales trends. The demand planner would employ forecast modeling to anticipate future customer demands by analyzing patterns over time, demand aggregation (as well as disaggregation when required), managing by exception, and most importantly, collaborating with product portfolio managers, working with product developers to shape product plans and create product demand, coordinating and aligning activities with sales and operations planning (S&OP) functions and working with internal and external suppliers. This collaborative approach is key to effective demand planning. A demand planner must also continuously review and adjust demand planning as internal and external factors come into play.
The inventory planner manages the inventory to meet the product and service level requirements. This involves reviewing stock levels as well as minimizing the costs of handling goods at various points in the supply chain. Inventory planners must coordinate with demand planners to help adjust inventory levels, monitor inventory levels in real time, track stock movements, and coordinate with other SCM functions to make stock adjustments. They must operationalize economic order quantity calculations required for their business and work with inventory management formulas to calculate the minimum inventory level at which a new order must be placed.
Best practices in modern demand and inventory planning
There are many best practices that should be considered when designing or revamping demand and inventory planning processes within your organization. Given the tight connection between the two, many of the best practices overlap.
Incorporate statistical forecasting techniques
Use tools that provide statistical forecasting to analyze historical data and forecast future trends.
Integrate effectively with ERP and data from other sources
Ensure you have access to accurate sales and inventory data and use common/standard metadata. Integrate with supply lead times and weather forecasts when needed.
Ensure collaboration with stakeholders
Evangelize the perspective that demand planning and inventory planning processes are critical to the enterprise's success. All stakeholders should demonstrate support for the cooperation required for an enterprise to be successful in demand and inventory planning.
Provide continuous improvement
Establish processes to enable continuous process improvement and develop metrics that can track the impact of these planning areas.
Audit and inventory performance analysis
Establish and track metrics, including inventory turnover rates, sell-through rates, and days inventory on hand to improve inventory management. Processes should be audited as needed to ensure accuracy and effectiveness.
Ensure technology solutions meets your demand and inventory planning requirements
Leading technology to support demand and inventory planning addresses many critical capabilities an organization needs. Many organizations would best adopt these processes; however, ensure that you maintain your business by adopting a solution different from the right fit. Also, ensure that you have the requisite professional experience, whether through internal or external resources, to ensure optimal systems integration.
Coordinate issue resolution between stakeholders
Demand and inventory planning requires coordination between many departments as it involves significant inter-departmental coordination. Collaboration must be managed to ensure candid and constructive discussions occur to ensure alignment with enterprise strategy.
Strive for the good, not perfect
Perfect accuracy is not realistic. Instead, demand and inventory planners must strive to achieve the best consensus forecasts possible, considering the vast amount of input required for a plan.
Next steps
To learn about how demand and inventory planning works in Pigment, click here.
To learn more about Pigment for supply chain, click here.
