What Is Demand Planning? Definition, Models, Techniques & Software
Demand planning is a cross-functional process that helps direct-to-consumer (DTC) brands meet customer demand with greater accuracy and efficiency.
Using demand planning, DTC sellers can minimize stockouts and overstock situations and prepare for supply chain disruptions that typically impact profitability. In that way, demand planning can boost your bottom line and simultaneously increase satisfaction.
Keep reading to learn about all the benefits demand planning offers — plus how you can implement the demand planning process for your brand.
What is demand planning?
Demand planning is predicting future demand for a company's products. It combines sales forecasting, inventory management, and supply chain management to generate the most accurate predictions possible.
Additionally, demand planning analyzes consumer trends alongside real-time and historical sales data. With this information at your fingertips, your company can make efficient demand predictions and organize its supply chain to meet demand fully.
Why is demand planning important?
Demand planning is the key to driving profits and maintaining customer satisfaction. The demand planning process helps you prevent stockouts and avoid excess inventory. And it also reduces backorders and ensures you meet customers' expectations.
Stockouts are a bummer for retailers and consumers alike. In addition to frustrating your customers (because they can’t buy what they need), stockouts also cost your brand money (since a lack of inventory translates to a lack of sales).
Thankfully, when you incorporate demand planning into your retail operations, you can identify how much inventory you need to meet future demand.
In other words, demand planning guides your replenishment orders. And it makes sure you order the right amount of inventory at precisely the right time. That way, your stock levels won’t ever drop too low — and you won’t have to worry about running into a stockout situation.
Instead, you’ll have a continuous flow of inventory and be able to fulfill all orders accurately and on time.
Avoid excess inventory
Often, stocking too much inventory is just as harmful as not ordering enough.
When you have excess inventory at your warehouse, you’ll rack up more and more carrying costs the longer those products go unsold. And if your products are perishable or time-sensitive, those goods also run the risk of expiring (which contributes to lost sales and a lot of waste).
So, the goal is to order what you only need to meet demand — nothing more, nothing less. As daunting as that sounds, the demand planning process can help make it happen.
Demand planning aligns your sales and forecast data to make accurate replenishment predictions. This, in turn, lowers your risk of overstocking or accumulating excess inventory.
Selling on backorder can be a saving grace if you run out of inventory. For instance, stockouts may occur when your brand introduces new product lines since there are no historical data to base your forecasts on. Likewise, when brands go viral and experience unprecedented demand, backorders are a great way to pivot and maintain this momentum.
With backordering, customers can keep placing orders, and your company can keep its cash flow, well, flowing. These are essential benefits if your brand needs to pivot to a backorder model quickly.
But while backordering has its perks, some companies may be interested in reducing backorders and ensuring they always have the available inventory.
And that's where demand planning comes in handy. With demand planning, your brand can:
- Better manage its inventory levels
- Order enough replenishment products to prevent stockouts and backorders from occurring
Meet customer expectations
Customer expectations have been on the rise these last few years. Modern shoppers want convenience, consistency, and customization from their favorite brands. So, they’re looking for “seamless online transactions” and “companies to meet them wherever they are.”
In other words, customers expect to visit your website and find what they’re looking for within just a few clicks. Plus, they want a simple checkout process and the products they order to be ready to ship.
But your DTC brand can’t ship very fast if there aren’t any products at your warehouse.
That's what makes demand planning so crucial to customer satisfaction. When DTC sellers utilize demand planning, they have the products they need in stock and awaiting shipment. This means faster fulfillment and delivery times — and in turn, happier customers.
To that end, demand planning also supports greater customer retention. After all, happy customers are loyal customers who will return to your brand repeatedly.
If you’ve been connecting the demand planning dots, you’ve probably already realized that this process can save your company lots of money.
It will do wonders for your bottom line when you prevent lost sales (from stockouts) and avoid surplus carrying costs (from overstocking). Not to mention that avoiding stockouts will retain your customer base and increase their lifetime value (LTV) for your brand.
All that is to say, demand planning helps to drive revenue while also minimizing your overhead costs — like storing excess goods.
In short, demand planning is one of the best ways to reduce your overall spending and still meet customer demand with ease.
6 steps in an inventory demand planning process
It’s great to recognize the importance of demand planning — but understanding why you need demand planning doesn’t explain how to do it.
So, just how do you become a demand planner for yourself? By following each of these steps in the inventory demand planning process.
1. Team up with a demand planning software
The first step in demand planning is to team up with a proficient software solution.
Because demand planning begins with tracking inventory performance, you'll need a software partner to show you what your inventory is doing in real-time.
The best ERPs and operations platforms give you total visibility into product movement by tracking and monitoring your stock levels around the clock. These real-time insights are critical for guiding both inventory forecasting and production planning.
You might be wondering: Why can't I just do all this for free with spreadsheets? The reality is that spreadsheets are time-consuming, error-prone, and often outdated (especially when analyzing the data).
And if your data is outdated, it'll be much harder for you to make intelligent demand plans and timely forecasts. So, we strongly recommend you use a demand planning software with real-time, reliable inventory insights – instead of sticking with old-school spreadsheets.
2. Collect internal and external data
Once you’ve implemented a demand planning software, the next step is to collect all the relevant data you can — which includes data from both internal and external sources.
Internal data is information that relates to your order history and product performance. Much of this information will be already stored in your demand planning software. You may also want to consult with your sales or marketing team.
These teams can shed a lot of light on inventory metrics like turnover and conversion. For example, your sales department can speak to stockout rates and order lead times. Meanwhile, your marketing crew can tell you how promotional campaigns have impacted customer demand.
Once you’ve checked in with sales and marketing, you can compare their qualitative remarks with your quantitative information. This quantitative data typically includes historical order data and inventory analytics (which should already be housed in your demand planning software).
After all this internal data collection, be sure you don’t forget about your external data, too. This category relates to things like market trends and patterns in consumer behavior.
Digging into external data will require you to reference industry briefings (that highlight consumer behavior) and news articles (that point to current market conditions).
As you research, watch out for any anomalies — like supply chain disruptions or global crises — that could affect the future of demand planning. If you pick up on any of these anomalies, record them at this stage of the planning process.
3. Analyze the data you’ve collected
You should've gathered a good amount of data from various sources. But like it or not, this data isn't going to be much help unless you take the time to analyze it.
There are a few key metrics to pay attention to as you analyze your internal data, like:
- Sales numbers by channel
- Inventory turnover ratio
- Backorder rate
These metrics are the best representation of product movement and play an essential part in predicting demand.
If your brand experiences seasonality (periods of high and low demand throughout the year), you should note product performance for peak and off-peak months.
Analyzing your internal and external data is the only way to gain critical insights that'll inform your planning, purchasing, and beyond. Don't forget that the best demand planning software will complete this analysis for you.
4. Choose a demand forecasting method
The fourth step in the demand planning process is to choose a forecasting method. Generally speaking, forecasting methods fall into two categories: qualitative and quantitative.
A qualitative approach is used when brands don't have access to historical data. This might be because they're just starting out or because they've never prioritized their inventory records.
Either way, qualitative forecasting seeks the opinions of customers, salespeople, and even industry experts to help predict future sales.
Common examples of qualitative demand forecasting include customer surveys, sales team surveys, and the Delphi method.
Contrary to qualitative forecasting, quantitative demand forecasting relies on past data to predict future sales. Most quantitative methods use statistical forecasting models — meaning they leverage historical data to predict demand and inform supply chain planning mathematically.
For that reason, the more numerical data you have, the more accurate your quantitative predictions will be.
Common examples of quantitative demand forecasting include trend projection, seasonal index, naive method, straight-line method, and moving average method.
Which method is suitable for your brand?
As you decide between forecasting techniques, look for one that can meet your current needs and scale with you as your company grows.
For example, say your brand doesn't have B2B or wholesale business. Then, the chances are good that it doesn't have a sales team. So, you'll want to adopt a method other than sales team surveys.
5. Forecast demand & plan your inventory
After selecting a forecasting method, it's time to forecast demand. Depending on the method you've chosen, this could look a lot of different ways.
If you’re using the Delphi method, you’ll have to send out the first round of questionnaires to your panel of experts.
If you’re using trend projection, you’ll have to look at the ebbs and flows of demand patterns (and then adjust for seasonality). Trend projection is a subset of demand sensing, or the art of “picking up on short-term trends immediately so you can better predict what consumers will want, when and where.”
With your forecasting method activated, you can start to predict future demand for your products.
However, even after a forecast is generated, it’ll be best to review these numbers with your key stakeholders or department leads. And then, revise your plan as new information is introduced.
By challenging your forecasts or seeking a second opinion, you can be sure to eliminate any outliers that might affect your predictions, for example, promotional events or pandemic bulk buying. With these outliers removed, you can improve your forecasting accuracy in a big way.
Lastly, remember to weigh your demand forecasts against your current inventory levels. This means reviewing what you need versus what’s already in inventory (to ensure you don’t overstock on low-selling SKUs).
In addition, you might also add some safety stock to your forecasts. This will serve as a buffer in case customers surprise you and order more inventory than you anticipated — or in case any unexpected delays pop up in your supply chain.
6. Measure the results of your demand planning
The final step in the demand planning process is to measure your results. If you don’t know what went well or where you missed the mark, how can you possibly improve?
With the help of key performance indicators (KPIs), you can assess the effectiveness of your business planning and figure out what changes are needed moving forward.
Some of the best KPIs for demand planning include inventory turnover ratio, order lead times, and forecasted sales (versus) actual sales you brought in.
These metrics tell you how your products are moving and how customers behave. And it provides historical data you can use for future demand planning cycles.
Best practices for demand planning
Well-executed demand planning will require your company to organize and systemize. A few best practices for making this happen include: setting specific goals, having accurate data, preparing for seasonality, etc.
Define the process & set specific goals
Whether you are demand planning for the first time or the 50th, it can help to go through the steps in the demand planning process and identify which apply to your business.
For instance, if your company is already using a demand planning software, you can skip to the data collection phase (and save your team considerable time and effort).
Once you've defined your brand's planning process, you can set specific goals. Goal setting can streamline this process, keeping you accountable for achieving what you set out to do.
Your targets might include eliminating stockouts for good or saving a certain amount of money by the end of the year. Naming your goals will give your brand a clear vision for growth in both the short- and long-term.
Ensure inventory data is accurate
One of the best practices for demand planning is ensuring all your inventory data is up-to-date. The fact is, you can't successfully plan demand unless you have accurate data.
That’s why it’s so important to gather your data from a reliable source, like a demand planning software (discussed in more detail below).
You can trust this software to deliver precise calculations and the most current inventory counts — such as the type of insights you need to make better demand predictions.
The bottom line is insufficient data leads to bad decisions. And those decisions will hurt your forecasting accuracy.
Prepare for seasonality
The most effective demand planning considers each product's unique life cycle. This is especially important when seasonality and holiday surges (roughly Black Friday until Christmas) affect the product life cycle.
But as exciting as this increased traffic can be, it also puts your brand at a higher risk of stockout.
So, then, how do you stay in stock and capitalize on all your website traffic? By factoring seasonal fluctuations into your demand planning process.
On top of preparing for an influx in customer demand, your brand should also account for longer lead times leading up to the holidays. Lead times are around six months (300% longer than usual) and are expected to get longer as we approach the 2022 holiday season.
To offset this, you might need to place orders with your supplier further in advance and order extra safety stock to protect you from potential delays.
Regularly monitor & revise forecasts
As mentioned in Step 5 of the demand planning process, it's essential to monitor regularly and revise your demand forecasts. You can catch any errors in your calculations or outliers in your data that might influence your projections.
Examples of these outliers include a one-time promotional campaign that led to a surge in sales or a weather event that caused shipping delays and a subsequent stockout.
You can significantly improve your forecasts' accuracy by removing these anomalies to customer demand. This makes forecast revisions a demand planning best practice — and why you should start editing your estimates every time you forecast.
Use demand planning software
As you already know, teaming up with demand planning software is the first step in the demand planning process. And yet, it's worth repeating that using demand planning software is a best practice that your company should employ.
That's because robust planning software will do a lot of the heavy lifting for you (saving you both time and money). Software solutions can automate tasks like inventory tracking and calculating your optimal stock levels. All you have to do is make a few quick clicks.
With these tasks handled on your behalf, your team can spend more time interpreting the results and adjusting your forecasting plans as needed.
Benefits of demand planning software
There's no doubt that demand planning software has numerous benefits for DTC brands. But the truth is, you can enjoy even significant benefits when you use more than one planning software running simultaneously.
For example, using Cogsy and Skubana together can be a wildly powerful combination. Skubana collects your initial data. Then, Cogsy helps you understand what this data is trying to tell you (so you can turn the static data into actionable insights).
Among the most significant advantages of integrating Cogsy and Skubana are tracking real-time data, improving forecasting accuracy, and creating smarter purchase orders.
Track real-time data on your inventory levels
Modern demand planning software — including Cogsy and Skubana — is equipped to track all your inventory data in real-time. This means retailers have a 24/7 view of their inventory levels, customer orders, product movement, etc.
And because this information is updated automatically around the clock, you can feel confident all the data you collect is as precise as possible. In other words, Cogsy and Skubana deliver data you can trust and paint a clear picture of what's going on with your stock levels.
While this real-time data is a big player in demand management, it also supports a better supply chain management process. You'll finally have visibility into exactly what your products are doing and where they are at any given time.
Improve the accuracy of demand forecasts
While creating accurate demand forecasts can feel like a tall order, demand planning software makes the entire forecasting process simpler and more convenient.
Because demand planning software does such an excellent job of monitoring your inventory, you know that you're always working with the most current and correct data. And this accuracy will go a long way in improving your demand forecasts, as well.
When you know how much inventory you have in stock (or in transit), you can make more informed predictions on what you need to reorder. In that way, Cogsy and Skubana help to improve your demand forecasts and your operations planning.
With demand planning software, you know that your forecasts are based on your inventory reality — rather than relying on guesswork and hoping for a good outcome.
And accurate forecasts prevent overstocking and inventory shortages and boost customer satisfaction by ensuring you always have the right products.
Create smarter purchase orders
You know that demand planning software provides real-time inventory data to improve your forecasting accuracy. But did you realize planning software can also take these forecasts and transform them into POs?
It's true -- demand planning software excels at creating simple, streamlined purchase orders. Brands that use Cogsy have access to a handy purchase order feature that helps them replenish their stock in just one click.
Cogsy creates optimized POs tailored to your brand's exact inventory needs in seconds. Gone are the days of ordering too much — or too little — stock.
Accurate POs will also reduce inventory costs (since you’re no longer purchasing SKUs you don’t need). And they ensure customers can always buy the products they want.
Are you ready to optimize your demand planning process with the help of innovative software solutions? Contact Skubana today to learn more about how Skubana + Cogsy can help level up your retail operations.
Looking for a little more explanation on the demand planning process? The answers to our FAQs can help!
Frequently Asked Questions
What is the difference between demand planning vs. supply planning?
Demand planning is the process of predicting consumer demand so that you can inform and guide your company's supply chain operations. On the other hand, supply planning focuses on managing your inventory supply to meet the targets you've laid out in your forecasts.
What is the difference between demand planning vs. capacity planning?
Demand planning helps predict consumer demand so that you can navigate your company's supply chain operations. Capacity planning, however, is the process of comparing forecasted demand to resource supply. That is, capacity planning balances the tension between supply and demand.
What is the difference between demand planning vs. demand forecasting?
Demand forecasting is when retailers predict demand based on historical data and customer buying behaviors. Demand planning takes forecasting further by considering how this will affect your brand's inventory needs, including how much you should reorder and when.
Adii is the Co-Founder and CEO of Cogsy. Adii is empowering retail brands to pursue operational excellence. Previously, Adii co-founded ecommerce website builder WooCommerce (acquired by Automattic) and ecommerce marketing automation platform Conversio (acquired by CampaignMonitor).