What Is Demand Planning and How Does It Work?
Demand planning begins with forecasting customer demand for products or services.
It aims to optimize capacity and recruitment planning, supply chain operations, inventory management, and business strategies based on those forecasts.
So, how does it work?
Demand planning involves analyzing historical data, market trends, and predictive models to ensure that a business can meet future customer needs effectively.
Here’s a quick breakdown of the steps involved:
- Data Analysis: Collect and analyze historical sales and CRM data to form the basis of forecasts
- Collaborative Planning: Collaborative planning simply refers to coordinating with various departments (sales, marketing, operations) for their insights. Additionally, you can incorporate market research and customer feedback for a better understanding of consumer behavior.
- Predictive Modeling: Use predictive analytics and AI to forecast future demand.
- Scenario Planning: Prepare for various potential future scenarios that affect demand. This involves creating multiple forecasts based on different possible scenarios, such as an economic downturn, new market entrants, or changes in consumer preferences.
- Supply Chain Alignment: Align forecasts with supply chain operations for efficient software development/deployments, inventory management, etc.
- Strategy Integration: Use a demand forecast to inform and adjust business strategies, capacity planning, and recruitment.
- Continuous Reviews: Regularly update forecasts based on real-time data and market changes.
So, is demand planning essentially demand forecasting?
Demand Planning vs Demand Forecasting
Demand forecasting is a subset of demand planning, and it focuses specifically on predicting future consumer demand.
This involves using historical data, market analysis, and statistical models to estimate the quantity of products or services customers will want in the future.
In contrast, demand planning is a broader approach that includes demand forecasting but goes beyond. It involves activities like capacity planning, supply chain management, inventory management, and strategic decision-making.
So, while demand forecasting aims to predict what the customers will want, demand planning determines how the business will meet these needs.
Now, let’s delve into the importance of using demand planning.
Why Is Demand Planning Important?
Here are the reasons why demand planning is pivotal for your business:
- Optimized Production Planning
- Cost Savings
- Strategic Decision-Making
- Supply Chain Resilience
- Customer Satisfaction and Loyalty
- Resource Optimization
- Competitive Advantage
1. Optimized Production Planning
Demand planning enhances production planning efficiency by leveraging predictive insights, ensuring that production levels are closely aligned with market needs. For example, it can help you ensure that you develop the features that will likely be in demand from your customer base.
2. Cost Savings
Successful demand planning minimizes costs by reducing the need for emergency shipments and expedited development costs. It also decreases the likelihood of excess inventory and waste, leading to more efficient use of resources.
For SaaS businesses, a demand plan minimizes costs by reducing the need for rushed feature rollouts. It also decreases the likelihood of over-investing in less demanded features/tiers.
3. Strategic Decision-Making
Demand planning facilitates informed strategic decisions by using market trend analysis for effective promotion planning, product launches, and business expansion. You can also use these insights to develop strategic add-on services/plans – if you envision the demand for them.
4. Supply Chain Resilience
Effective demand planning builds a resilient supply chain by adapting to changes in actual demand and mitigating disruptions. For SaaS, this can involve mitigating server downtimes or service outages in response to product usage.
5. Customer Satisfaction and Loyalty
Demand planning enhances customer satisfaction and builds loyalty by ensuring consistent product availability along with timely updates and feature enhancements.
6. Resource Optimization
Successful demand planning optimizes resources by aligning production/development, distribution/deployment, and other processes with actual demand.
This includes optimizing human resources, from recruitment to balancing engineering team capacity and managing outsourced teams.
7. Competitive Advantage
A demand plan gives you a competitive edge by enabling swift and effective responses to market changes, positioning your business to capitalize on emerging opportunities and outpace competitors.
For example, you can quickly introduce new features or products in response to emerging trends or competitor moves.
Now, let’s check out the main elements of the demand planning process.
What Are the 3 Crucial Elements of Demand Planning?
The key components that drive the success of demand planning are:
1. Statistical Forecasting
This element uses mathematical models and historical data to objectively predict future demand, providing a data-driven foundation for effective demand planning. It considers seasonality, economic indicators, and other relevant variables to create a data-driven prediction of consumer demand.
Statistical forecasting provides a quantitative foundation for accurate demand planning, allowing businesses to make informed decisions based on statistical evidence.
2. Product Portfolio Management
This element focuses on strategically assessing and managing a company’s range of products or services. It involves analyzing the performance, profitability, and market trends of each product or service in the portfolio.
The goal is to identify which items should be prioritized, developed, modified, or potentially phased out – based on demand estimates.
Effective product portfolio management ensures that developmental and managerial resources are allocated efficiently and that your product mix aligns with market demands.
3. Trade Promotion Management
This component involves strategizing promotional efforts, such as discounts, special offers, advertising campaigns, and in-store displays, to boost sales and brand recognition. It addresses the planning, execution, and analysis of promotional activities.
It’s an essential component of demand planning as it directly influences consumer buying behavior and, consequently, the demand for products or services.
Now that we’ve got the basics out of the way, what are the methods involved in demand planning?
6 Demand Planning Methods
Most demand planners use a combination of these methods:
They can also be categorized as demand forecasting methods.
Let’s explore them in detail:
1. Linear Regression
Linear regression uses statistical analyses to establish a linear relationship between historical data points and predict future demand based on this trend.
This method not only establishes linear relationships but identifies how different variables (like price changes and economic factors) might impact demand. It’s particularly effective in stable environments where past trends are strong predictors of future demand.
2. Demand Sensing
This method leverages real-time data and advanced analytics to dynamically adjust a demand forecast based on current market conditions, facilitating more responsive planning.
Demand sensing often incorporates machine learning algorithms to adapt to market changes quickly. This method is highly effective in fast-paced industries where immediate data (like social media trends and weather changes) can significantly influence demand.
3. Delphi Method
The Delphi Method involves gathering expert opinions through a structured and iterative process to achieve consensus on future demand.
This method is particularly valuable in situations with high uncertainty or when dealing with new products or markets where historical data is limited.
This method compares an organization’s performance and demand planning processes with industry best practices or competitors. This helps identify areas for improvement and optimization.
Benchmarking can also involve analyzing internal historical performance across different business units or time periods. This helps identify best practices and set realistic demand planning goals.
5. Seasonal Trends
The Seasonal Trends method considers recurring patterns or trends in demand associated with specific seasons, helping forecast future demand based on historical seasonal variations.
This approach can be further refined by analyzing how external factors (like holidays and local events) impact seasonal demand. Understanding these nuances helps businesses prepare more effectively for seasonal peaks and troughs.
6. Moving Average Demand
The Moving Average Demand method calculates an average of a specified number of recent periods to smooth out fluctuations and identify underlying trends in demand.
This technique is particularly useful for smoothing out short-term irregularities or anomalies in data, providing a clearer view of the demand trend. Demand planners often use this technique in conjunction with other forecasting methods to validate and fine-tune demand predictions.
Now that you have an idea of the methods you can use, let’s go over the steps involved in accurate demand planning:
6 Key Demand Planning Steps
Demand planning, when done the right way, ensures forecast accuracy, efficient resource allocation, and strategic alignment with market dynamics and business objectives.
Here are the steps involved:
- Establish a Dedicated Demand Planning Team: Form a dedicated team with expertise in data analysis, market knowledge, and collaboration to ensure a comprehensive and coordinated approach to demand planning.
- Collect Internal and External Data: Gather both internal data (such as sales and production figures) and external data (such as market trends, customer insights, and economic indicators) to create a more accurate demand forecast.
- Pick the Right Demand Planning Methods: Choose demand planning methods that align with the characteristics of your business, considering factors like product complexity, market volatility, and data availability.
- Use a Relevant Demand Planning Tool: Pick a demand planning tool that suits the specific needs of your business, enabling efficient data analysis, forecasting accuracy, and collaboration within the demand planning process.
- Product Portfolio & Trade Management: Make the necessary changes to production/development, supply chain deployment, and promotional activities.
- Measure Your Results: Regularly evaluate your demand forecast accuracy against actual sales data. This will allow you to adjust your strategies accordingly using real-world data.
But here’s the thing:
Carrying out the demand planning process isn’t always as easy as it sounds. There are a couple of external factors that may impact your planning.
What Are the External Factors That Can Impact Demand Planning? (+ Solutions)
Here are the things that can disrupt your demand planning process and tips on how to tackle them:
1. Market Volatility
Rapid and unpredictable changes in the market, such as economic fluctuations or sudden shifts in consumer behavior, can complicate forecasting accuracy.
To address market volatility, it’s essential to adopt agile demand planning processes. This includes regularly reviewing and updating your forecasts based on the latest market data and trends.
2. Competitive Landscape
The introduction of new products, pricing strategies, or marketing campaigns by competitors can significantly influence market demand.
The best solution here is to keep a close eye on competitors’ activities and outperform them. Use market intelligence tools and competitor analysis to track their product launches, pricing strategies, and promotional efforts.
3. Seasonal Variations
Seasonal variations can significantly impact demand planning. For instance, educational software is usually in high demand during the back-to-school months, and this can have an effect on demand planning.
To tackle seasonal variation issues, create a season-specific, accurate demand forecast and ensure your supply chain is prepared to handle peak demand periods. Collaborate with sales and marketing to plan promotional campaigns aligned with seasonal trends.
4. Geopolitical Reasons
Economic policies, trade agreements, political instability, and natural disasters can all disrupt a demand pattern.
While there’s not much you can do here, if possible, diversify your supplier/developer base to reduce risks associated with geopolitical instability.
If you still need answers to a few more demand planning-related questions, we’ve got you covered:
4 Demand Planning FAQs
Let’s clarify some key concepts related to demand planning:
1. What Is the Difference Between S&OP and Demand Planning?
S&OP (Sales and Operations Planning) focuses on aligning sales, operations, and other departments to achieve overall business objectives.
Demand planning is a subset of S&OP, specifically addressing forecasting and fulfilling customer demand efficiently.
2. What Is the Difference Between Demand Planning and Supply Planning?
Demand planning focuses on predicting demand and optimizing inventory and production schedules in response to those forecasts. Supply planning (also referred to as supply chain planning) ensures the availability of resources and materials to meet the forecasted demand.
Together, demand planning and supply chain planning harmonize the supply chain by aligning anticipated demand with the necessary resources.
3. What Is the Difference Between Demand Planning, Inventory Planning, and Inventory Forecasting?
Demand planning predicts future customer demand in order to optimize business operations – one of those involves analyzing market trends and customer insights for effective inventory control.
Inventory planning focuses on maintaining the right inventory level to meet projected demand, which is central to inventory optimization and preventing excess inventory and understocking.
Inventory forecasting, a subset of inventory planning, projects future inventory needs based on historical sales, seasonal trends, and market analysis.
4. How Do Demand Planning, Demand Forecasting, and Sales Forecasting Work Together?
Demand forecasting anticipates future demand based on historical sales data and market analysis. Sales forecasting refines this prediction, focusing on the estimated revenue generated by this demand.
Demand planning takes these two forecasts and aligns supply chain activities to meet the anticipated demand and drive that predicted revenue. It involves decisions on inventory levels, production schedules, and distribution strategies.
Together, these three methods form a cyclical process: demand forecasting provides the foundation, sales forecasting adds sales-oriented insights, and demand planning translates these insights into actionable plans.
As a demand planner, you can use these methods to ensure you’re well-prepared to meet customer demand while minimizing costs and maximizing efficiency.
Now, what’s the best way to do sales forecasting?
If you’re already using Salesforce for sales forecasting, you can streamline the process by using Scratchpad — a tool that helps sales teams work together and faster in Salesforce.
Here are the features that make Scratchpad stand out:
- Rollups: Scratchpad automates the rollup process and eliminates the need to use a spreadsheet to keep track of deals. Scratchpad’s Rollups help you track the evolution of each deal at various levels, providing essential insights into the history of and reasons behind specific changes.
- Waterfall Analytics: Scratchpad’s Waterfall Analytics offer a simple breakdown of your forecast changes and the reasons behind them. This ensures you have an accurate forecast that’s always in sync with your existing pipeline.
- Sales Trends Analytics and Daily Snapshots: Scratchpad’s Sales Trends Analytics allows you to spot trends in how the forecast evolved over time. This allows you to compare your current sales data with that from previous months, quarters, or years. Included in Trends Analytics is a feature known as Daily Snapshots, which provides a historical record of daily changes in the pipeline.
- Scratchpad Command: Scratchpad Command brings Salesforce to users no matter where they are on the web — eliminating the need for separate note-taking apps, spreadsheets, documents, and more. It allows sales reps and managers to import data seamlessly from a spreadsheet (or a prospect’s website) to a CRM — providing a more efficient way to handle the entire sales pipeline.
Harness the Power of Demand Planning for Business Success
By accurately forecasting customer interest and helping you prepare for it, demand planning is indispensable in 2024. It can help you adapt to market changes, optimize resources, reach your customer success goals, and maintain a competitive edge.
But demand planning can’t be done in isolation.
It builds on sales forecasting insights.
Mastering this aspect is crucial to unlocking your sales potential and achieving your targets.
And that’s exactly where a tool like Scratchpad comes in.
If you’re keen to learn more, try Scratchpad for free today and discover how it can do wonders for your Salesforce forecasting processes.