Demand Planning: Definition, Importance, and Helpful Tips

By Indeed Editorial Team

Published April 20, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Proper planning is an essential aspect of managing a successful business. Companies often look for ways to forecast demand by factoring in variables, such as the seasonality of goods and raw materials. Knowing how to plan for demand can provide you with strategies to help a business run efficiently and assist you with understanding how different factors may affect a company's performance. In this article, we explore what it means to plan for demand, highlight its importance, and provide tips that can help you plan for demand.

What is demand planning?

Demand is the consumer's desire to purchase goods or pay for services. In contrast, demand planning determines what products a company requires and when to satisfy customer requests. Planning for demand can allow businesses and manufacturers to gather enough products to satisfy consumer demands based on market trends, consumer behaviour, or events. There are two types of demand, which include independent and dependent. Independent demand is where conditions in the market affect the demand for a product. There are no minor components that may affect the product's demand in this case.

An example of independent demand is selling a car as a finished product. You can base the demand for the finished car solely on a consumer's desire to get a car. Dependent demand is where the availability of other items influences the demand for a certain product. You can classify the demand for car parts, such as the engine and body, as dependent demand. This is because unless a consumer requires a car, the parts for one may not be in demand.

Related: Understanding Key Success Factors in Business Planning

The importance of planning for demand

Here are some reasons demand planning may be important for a business:

  • Allows for better inventory management: Proper planning can allow a business to gain enough products based on a predicted increase or decline in demand. Manufacturers that plan for demand can assess how much a company may produce to ensure that all retailers get enough products while avoiding excess production.

  • Dictates hiring schedules: Planning for demand can allow a company to predict how many professionals it may require at specific points to reduce redundancy at work. Having enough employees when demand is high can lead to higher productivity and better work quality, and employees may also be less likely to experience burnout.

  • Improves production efficiency: If a company predicts when demand for a product is likely to increase, it may allow it to plan to acquire raw materials, production, and shipping before the demand increases. For example, if a company manufactures Christmas decorations, planning for demand may allow them to estimate when demand for decorations may increase and when to begin production.

  • Ensures customer satisfaction: Planning for demand may allow a company to gain relevant and sufficient products to satisfy customer requirements. Such planning can also allow manufacturers and distributors to ensure retailers receive the products they ordered on time.

  • Guides marketing strategies: Once a company determines when demand is likely to increase, marketers can create early strategies to improve the company's visibility and boost sales. If digital trends determine the demand for a product, proper planning can also allow the company to create advertisements that align with current events or news.

Related: What is Strategic Planning? (With Benefits)

Tips for demand planning

Here are tips that may help you plan for demand:

Form a team

A demand team consists of employees who assess market trends and consumer behaviour and determine their effect on production, purchasing, and sales. Such a team is important as the members may provide crucial information that guides the company on what to purchase or produce, when to purchase certain items, and what marketing strategies to use. The team may comprise finance professionals, sales experts, production managers, and analysts.

Team members may find it useful to have excellent analytical, numerical, and communication skills. Such skills may allow the members to analyze data efficiently and work effectively. Companies may also select innovators and problem solvers to help if any supply chain issues arise.

Read more: How to Build a Successful Team in Eight Steps

Gather relevant data

Relevant data may include previous sales, consumer reviews, inventory, and production time. A company may also assess the campaigns and products of its competitors. This can help company analysts understand the effects that competitors may have on the demand for the company's product. For example, a restaurant business can predict a new nearby restaurant's impact on its sales. The restaurant can then make changes by creating unique meals to ensure consumer demand is constant.

A company can also gather information on the manufacturer's habits, distributors, and economic changes that may affect the product's demand and supply. For example, if the distributor has shipping issues, the company's planning team can ensure that the business orders products early enough.

Consider different forecasting methods

Forecasting refers to when a company tries to predict consumer demands. The type of forecasting method the company chooses may depend on the type of business, the product, and consumers, and it can also guide the rest of the planning. Here are some of the common ways you can determine the future demand of a product:

Assess previous demand

In this method, a company may evaluate previous sales to predict the demand for a product. For example, if the company determines that demand for products increased last June, analysts can assume that demand may also be high this June. This can be a reliable method if seasonal fluctuations affect the product's demand. Assessing previous demand is also an easy method, as it may only rely on sales data. This method may also assume that external factors, such as economic changes, create minimal demand.

Use active forecasting

Active forecasting is where a company assesses the effectiveness of plans, such as marketing campaigns, to predict changes in demand. For example, a manufacturing company may assess customer responses to an advertisement on new computers. If the analysis shows that consumers like the product, the company can plan to increase demand by acquiring more computer parts. Active forecasting may also involve analyzing external factors, such as a country's economy and the industry's growth. Startup companies may find this method useful, since data on previous sales may not initially be available.

Consider the Delphi method

The Delphi method assumes using multiple demand forecasts may be more reliable than using only one. A company can hire multiple analysts to provide demand forecasts individually. It can then compile and summarize all the forecasts to guide the planning process. The company can summarize the forecasts multiple times during the process until the professionals agree on the most accurate.

The Delphi method can be useful for companies with the resources to hire many professionals. For the method to be effective, hiring the professionals early enough may also be crucial since the process may be time-consuming due to multiple revisions.

Focus on internal factors

A company's internal operations and strategies can affect demand for a product. This type of forecasting can determine factors that may slow or increase the rate of production, including finances, labour, and management. For example, the company may determine that it has substantial sales employees to market its products. This information may indicate that demand for products is going to increase because of higher brand visibility. Such internal forecasting can be a reliable method for any business to predict potential issues that may affect demand and also helps management decide on what areas to improve.

Monitor results

It may be important to set key performance indicators (KPIs) that can measure the effectiveness of a strategy. Useful indicators may include data on the accuracy of sales forecasts, order fulfilment rates, and cost of goods sold (COGS). Monitoring such results allows a company to make real-time adjustments and guide the planning team during future assessments.

Read more: How to Define and Measure a Key Performance Indicator

Use planning software

Using software can allow a company to automate tasks, such as gathering data and evaluating KPIs. This can allow the demand team to focus on interpreting the results from the software and creating new strategies. An ideal planning software can also help the company predict how much inventory is sufficient, especially if the company integrates the planning software with the inventory management system.

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