Demand Forecasting and Demand Planning – What is the Difference?
When quantifying and allocating products, retailers frequently reference “demand forecasting” and “demand planning” synonymously; while they share many similarities, they are essentially two distinct concepts that play different roles in the supply chain management process. Understanding the distinction and the complex link between the two is essential and can give retailers the perspective they need to produce reliable forecasts and improve profitability.
What is demand forecasting?
Demand forecasting is the science of generating a projection of consumer demand. A forecast relies heavily on historical data to identify past trends and cycles in purchase behavior, including future information for what the business is doing to influence demand. With the right scientific approach, retailers can build solid forecasts that can help them prepare for uncertainty, price optimally and successfully allocate resources.
For a forecast to be reliable, the following questions should be asked:
1. What decisions are being driven by the forecasts?
- What needs to be forecasted?
- How far out should the forecast be generated?
2. What historical data is available?
- Do we have historical promotional information?
- How much historical data do we have?
- Is the data reliable?
3. Is there other external information that needs to be applied?
4. How will we measure the forecast success?
5. What is our process for improving the forecast over time?
What is demand planning?
The demand planning process ensures that a business can provide customers with a specific product or service when, where, and how they want it, while keeping costs as low as possible. Therefore, demand planning encompasses demand forecasting and executing a supply chain operation to ensure all team members are prepared. Demand planners are needed to help understand changing demand patterns driven by new products, competition, internal and external factors, and changing market conditions.
An effective demand planning process will enable demand planners to translate forecasts into action, laying out the essential steps and ensuring all team members collaborate effectively and perform their parts well. However, this can only happen if the data and analysis provided by the forecasting process are accurate. Therefore, having access to real-time data from all stages of supply chain planning is crucial.
For a demand planning process to be successful, the following steps should be taken:
- Accessing the generated forecast
- Reviewing and adjusting the forecasts where pre-defined forecast criteria is not met
- Identifying target safety stock levels to be taken into consideration when generating the forecast
- Updating the financial plan
- Identifying and following performance metrics to keep track of progress
Benefits
Demand planning and forecasting are not stand-alone processes and although producing the forecast is a critical component, it’s only the first step. The process activates a series of additional duties and responsibilities that are all part of demand planning. Together, demand planning and forecasting give retailers the ability to generate a wide range of benefits across all retail functions, such as:
- Optimizing pricing decisions
- Improving inventory distribution
- Identifying risks associated with down trending products and the impact on certain products when new ones are introduced
- Highlighting opportunities where a higher inventory level will generate increased sales
- Maintaining a good cash flow by properly budgeting
- Improving customer service
- Reducing waste
Are you prepared to face the challenges of demand forecasting?
The post-COVID world appears tough to navigate without relying on AI and machine learning solutions, and while demand forecasting and planning are done by many organizations in some form, generating an accurate demand forecast is not an easy task.
Our Forecast as a Service™ offering is built on a solid foundation of data analysis and is designed to help you increase sales, in-stock positions and improve ROI. It has the ability to combine external contextual information with local patterns to provide accurate predictions, even as things change rapidly, resulting in a balanced supply and a demand plan that reduces inventory while achieving customer service goals.
Talk to one of our experts and learn how we can help you accurately forecast demand and effectively plan for it.
