Forecasting vs. Demand Planning

Often, the terms, “forecasting” and “demand planning”, are used interchangeably. 

The fact that one concept is a subset of the other obscures the resulting confusion. 

Forecasting is the process of mathematically predicting a future event.

As a component of demand planning, forecasting is necessary, but not sufficient.

Demand planning is that process by which a business anticipates market requirements.  

This certainly involves both quantitative and qualitative forecasting.  But, demand planning requires holistic process that includes the following steps:

1.      Profiling SKU’s with respect to volume and variability in order to determine the appropriate treatment:

For example, high volume, low variability SKU’s will be easy to mathematically forecast and may be suited for lean replenishment techniques.  Low volume, low variability items maybe best     suited for simple re-order point.  High volume, high variability will be difficult to forecast and may require a sophisticated approach to safety stock planning.  Low volume, low variability SKU’s may require a thoughtful postponement approach, resulting in an assemble-to-order process.  This analysis is complemented nicely by a Demand Plan Sanity Check, which should be an on-going part of your forecasting process.

2.       Validating of qualitative forecasts from among functional groups such as sales, marketing, and finance
3.       Estimation of the magnitude of previously unmet demand
4.       Predicting underlying causal factors where necessary and appropriate through predictive analytics
5.       Development of the quantitative forecast including the determination of the following:

  • Level of aggregation
  • Correct lag
  • Appropriate forecasting model(s)
  • Best settings for forecasting model parameters
  • Deducting relevant consumption of forecast

6.      Rationalization of qualitative and quantitative forecasts and development of a consensus expectation
7.      Planning for the commercialization of new products
8.      Calculating the impact of special promotions
9.      Coordinating of demand shaping requirements with promotional activity
10.    Determination of the range and the confidence level of the expected demand
11.    Collaborating with customers on future requirements
12.    Monitoring the actual sales and adjusting the demand plan for promotions and new product introductions
13.    Identification of sources of forecast inaccuracies (e.g. sales or customer forecast bias, a change in the data that requires a different forecasting model or a different setting on an existing forecast model, a promotion or new product introduction that greatly exceeded or failed to meet expectations).

The proficiency with which an organization can anticipate market requirements has a direct and significant impact on revenue, margin and working capital, and potentially market share.  However, as an organization invests in demand planning, the gains tend to be significant in the beginning of the effort but diminishing returns are reached much more quickly than in many other process improvement efforts.

This irony should not disguise the fact that significant ongoing effort is required simply to maintain a high level of performance in demand planning, once it is achieved.

It may make sense to periodically undertake an exercise to (see #1 above) in order to determine if the results are reasonable, whether or not the inputs are properly being collected and integrated, and the potential for additional added value through improved analysis, additional collaboration, or other means.

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About Arnold Mark Wells
Industry, software, and consulting background. I help companies do the things about which I write. If you think it might make sense to explore one of these topics for your organization, I would be delighted to hear from you. I am employed by Opalytics.

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