How Effective Demand Planning Can Reduce Business Costs

The same principle is often applied to the world of retail and logistics, with an accepted wisdom that 80% of profits come from 20% of stock. This makes sense, as some products will naturally have higher demand and be more lucrative than others at different times. Where that becomes particularly challenging for brands – especially in an online landscape that’s more competitive and globalised than ever – is understanding which products will sell best and when, as well as preparing to take full advantage of those opportunities.

Demand planning is the best way to gain that understanding, and it is an essential part of driving the best possible results for your business. This guide explores how demand planning works in practice, the scale of the difference it can make to your organisation, and how to go about implementing it.

What is demand planning?

Demand planning is the process of forecasting levels of demand for particular goods or services in the future. The more accurate these predictions, the more informed and confident decision-making becomes, leading to better outcomes for customers and businesses alike in the long-term.

Comprehensive demand planning brings three key elements together:

Predicting future levels of demand

Detailed analysis of data is used to make predictions around future demand, taking into account a vast range of different internal and external factors. The preferences of consumers, previous sales performance of products, and influences such as the time of year and economic conditions are all considered.

Stock control

Forecasting the demand of goods allows businesses to make the right decisions around inventory, specifically how much stock to order and when, so as to match supply against expected demand as closely as possible. Being able to make these decisions based on evidence, modelling, and analysis delivers far more accuracy than making critical business choices based on human assumptions or guesswork.

Supply chain management

Stock control decisions can then be fed through the supply chain, to ensure the manufacture, delivery, storage, and fulfilment of goods in a timely and cost-effective manner. For example, if a particular product is likely to sell well in the summer, then demand planning in the winter can allow orders to be placed in the spring, so that goods can be received by the business and be ready for sale when customers want them in the summertime.

What are the key purposes of demand planning?

The benefits of demand planning stretch across many areas of retail and consumer-facing businesses, including:

Maximising customer satisfaction

Good demand planning ensures that customers can always purchase the products and services they want, even during periods of particularly high demand. This minimises the risk of them being disappointed and builds customer trust and loyalty as they feel they can depend on a brand to provide the items that they are looking for. At a time when it has never been easier to shop around, and when customer expectations of good service are higher than ever, this is critical for any retail operation.

Maintaining revenue and profitability

Right-sizing stock levels to fluctuating demand is crucial for maximising sales revenue and ensuring that opportunities are not missed because of a lack of supply. It is also important for smoothing out cash flow all year round and planning ahead to buy in stock for busy periods well in advance or in gradual stages.

Optimising costs

Any inefficiencies in demand can quickly get expensive, from unsold stock in excess of demand, to the storage and shipping costs of the excess goods, or (as mentioned above) the lost revenue caused by a lack of supply. Demand planning is useful for ensuring that cost efficiency is always as close to perfect as it can be, whatever the prevailing market conditions.

Informing sales and marketing strategies

A demand planning forecast can give sales and marketing teams some valuable insights that can inform their efforts and activities. If a sales team knows that a busy period is coming up, then they can start conversations with potential buyers ahead of time and work towards hitting higher targets. Similarly, the marketing team can devote their time and efforts to pushing particular products at certain periods, in order to take full advantage of expected rushes in demand.

Where and when can a demand planning forecast be particularly useful?

Demand planning is always useful for adding context and facts to important stock control and supply chain decisions. However, there are certain situations where it can be instrumental in maximising profitability and competitive advantage. For example, annual events such as Black Friday, Christmas or Chinese New Year can have a major impact on supply chains, and on product popularity when people buy gifts for each other.

Demand planning across different channels – such as retail, wholesale, and direct-to-customer – can be a real challenge unless they are unified under a single fulfilment partner. Differences in demand and stock requirements from one country to another also need careful forecasting in order to best serve customers in all the markets you operate in.

Another more difficult to predict factor is the effect influencers have on the products they promote on platforms such as Instagram and TikTok. It may seem trivial to some business-owners, but keeping an eye on social media can give you valuable insights and an edge over competitors.

Planning ahead for likely changes in demand at these times is essential for ensuring the right levels of stock are in place, and so that consumers always receive their orders in a timely manner. Customer retention during peak seasons relies heavily on effective demand planning and forecasting.

Why is stock control important to the demand planning process?

The benefits of stock control in demand planning are based around ensuring the right amount of stock is available at the right time, even as levels of demand fluctuate. If a business does not have enough stock at a particular time, then revenue and customer satisfaction will be lost as people switch to competitors to find and buy the items they want.

On the other hand, too much stock can lead to unnecessary wastage if goods go unsold, especially if they have a limited shelf life. There will also be extra shipping and storage costs for excess stock, which can be avoided through accurate demand planning.

How to do demand planning right

Effective demand planning brings multiple functions together, so that the right decisions are made on the right products at the right times. Based on our experience, there are five key factors:

Analyse internal and external data

Quality data should be collected and consolidated across various sources. This includes internal data such as previous sales performance, current inventory levels and cashflow, and external data like wider economic and market trends, as well as interest and traffic for certain products on social media. The higher the quality, quantity and range of data that can be collected, the deeper and more relevant the insights will be.

Engage stakeholders in the process

There are several different areas of any business that will be heavily affected and influenced by demand planning, so stakeholders from those areas should be involved as much as possible. For example, sales need to know how many products are available for them to sell, marketing needs to know which products to focus on at certain times, and finance needs to know the procurement and logistical costs involved. Additionally, operations and third-party logistics (3PL) teams need insights to guide decisions around labour, resource, packaging, stock control and smooth supply chain management.

Analyse and develop a demand planning forecast

The data collected, along with the feedback and views of key stakeholders, can then be analysed using statistical forecasting and analytics tools. More advanced demand planning forecast tools incorporate artificial intelligence and machine learning to implement ‘demand sensing’, which can identify highly specific short-term trends upon which immediate decisions and actions can be taken.

Implement stock control and supply chain management strategies

Armed with these insights, businesses are then well-equipped to implement their detailed demand planning strategies. This may involve making alterations to stock control and the operations of the supply chain, in order to best cater for the peaks and troughs in demand.

Explore opportunities for continuous improvement

The world of retail, along with consumer preferences and trends, never stand still – and neither should demand planning. There is always room for improvement, whether it is ensuring data sources are up to date with the latest consumer behaviour and buying information, or driving even deeper and more granular levels of insights. Having the most refined information possible is vital for making the best and most timely decisions in an intensely competitive global marketplace.

How can good demand planning be implemented?

Demand planning requires detailed processing and analysis of large volumes of data, as well as the utilisation of advanced technology. This can be difficult, time-consuming, and expensive for brands to achieve in-house – but there are two strategies that, working in unison with each other, can make demand planning a practical reality:

Use demand planning forecast software

Demand planning software platforms ease the process of collecting data, generating automated demand planning forecasts, and using real-time data for continuous monitoring. That way, businesses can quickly get the insights they need to make informed, accurate decisions on stock control and supply chain management.

Partner with a logistics expert

Managing your demand planning and forecasting alongside your logistical and fulfilment operations is often out of scope for growing enterprises. This is when partnering with a trusted 3PL expert is the sensible option for businesses and entrepreneurs.

With state-of-the-art warehouses in key locations in the UK and Europe and the experience needed to see your business through fluctuations in demand and the peak season rush, ILG allows you to focus on growth while ensuring your operations remain efficient and well-prepared for any market changes.

Contact the ILG team today and discover our solutions, support and expertise that can help you make the right decisions for your business, every time.

FAQs

Which factors can influence demand planning?

Demand planning can be affected by much more than products becoming more popular or by economic changes. Wider issues can also have an impact, such as bad weather affecting footfall in the shops, natural disasters, political changes or instability, or health issues, such as the COVID-19 pandemic. This is why regular demand planning is so important to take account of circumstances in the world around us.

How much difference can artificial intelligence make to demand planning?

AI is already making a major difference in the demand planning stakes and will only play a bigger role in the years to come as its capabilities continue to advance. According to KPMG, around half of supply chain organisations have already invested in applications with AI and advanced analytics capabilities. AI can add extra insight and context to decision-making and identify trends in data at a level of detail far beyond human possibilities.

How often should a demand planning forecast be made?

Demand planning forecasts shouldn’t be viewed as periodic exercises. Given the fast-moving nature of retail and logistics, demand planning should be a continuous process with constant monitoring to identify trends and issues early. This enables faster, more informed decisions, driving competitive advantage.