Demand Planning: Part 2
Structuring Your Demand Planning Group to Make its Greatest Contribution
By Jeff Ziegler
Whether you are contemplating creating a demand planning group within your company, or questioning whether your current demand planning is as functional as possible, Part 2 of this four-part series is aimed to help you navigate the hurdles of structuring your organization and its supported processes, so as to ensure your demand planning group is established and organized for its greatest chance of success.
What your demand planning organization does is key to where it sits and how it needs to be structured. What follows is a high-level look at the processes that a robust demand planning function supports. As discussed in Part 1, the level of sophistication of the demand planning function will depend on the value a quality demand plan brings to the company.
Demand Planning Supported Processes
At its core, demand planning is the function of producing the demand plan, e.g. the operational sales forecast that drives manufacturing and/or the replenishment of product into a store or warehouse. And producing the demand plan is a combination of science and art.
The science applies forecast algorithms to historical sales and causal factors to generate a starting point to the forecast. A few rules to follow:
- Historical sales need to be continually cleansed.
- The right forecast algorithms need to be chosen and tuned to achieve the best forecast.
- New items, promotions and other events need to be quantified and added.
- The influence of other quantifiable information, like the weather and social media data, needs to be considered.
- And finally, forecast accuracy needs to be managed continuously, resulting in adjustments made to the forecasts.
The art involves collaborating and achieving consensus with various stakeholders of the forecast. This can include sales, marketing, sales and operations planning (S&OP), supply chain and others who have business intelligence that needs to be included in the demand plan, or who need to be brought into the forecast at a higher level to drive the business.
Other processes are often combined with this core function in a demand planning group. Here are a few of the major processes that are more commonly grouped together:
- Production of the financial sales forecast:
The inputs to the operational sales forecast are the same as the inputs to the financial sales forecast, perfectly positioning a demand planning organization to accomplish both. Further, the financial forecast needs to influence the operational sales forecast (so you have a chance to make your plan); and just as critically, the operational sales forecast needs to provide a reality check to the financial sales forecast. That way, gaps to the business plan can be identified and initiatives planned to close those gaps.
Note that the business plan here references the revenue forecast usually generated at the beginning of the year, and often by which bonuses and other incentives are generated. The financial sales forecast then provides a comparison to that plan, exposing gaps and opportunities. The demand planner utilizes their influence and consensus building skills to ensure the financial and operational sales forecasts stay aligned, and that gaps to the business plan are filled with real initiatives.
- Promotional/event lift analysis:
Often promotions are generated by a marketing or merchandising organization, which already has a sense of how a promotion should influence sales. Promotional demand is then added to base demand to generate a total demand plan. In some cases, a demand planning organization will be in a better position to produce this promotional lift, both because they make their living understanding how products sell, and because they have the analytical chops to do the appropriate analysis against past promotions.
It is important for the demand planning organization to have full accountability for the total sales forecast, so that the root cause of a forecast error can be fully investigated across both base and promotional forecasts, rather than two organizations pointing to each other as the root of the problem.
Some companies feel that the person who forecasts the product should also be responsible for ordering it, and perhaps even managing the inventory for that product. This puts the full accountability for service levels and inventory on one person. The biggest challenge here is how effectively demand planning can get done with the day-to-day firefighting that often consumes a replenishment group. This can be overcome, however, with proper focus and metrics.
- Vendor/customer collaboration:
From a retailer perspective, the manufacturer often has key product information about how their products will sell, making them an external collaboration point. Likewise, for a manufacturer, their retail customers own the sales forecasts. One caution here is that what you sell is only one input into what you buy. In addition to sharing and collaborating on sales forecasts, retailers and manufacturers should be talking about seasonal build plans, safety stock strategies, and other inventory influences that result in the buy plan, which may be better carried out by an inventory planning function.
- Assortment planning analysis:
For a retailer, the merchandising group normally owns what products will be in the line. However, the science of making those decisions is often quite similar to the analysis needed to forecast new items and promotions. This includes decisions around how items introduced into the line will affect sales of other items, and where sales for items removed from the line will go.
Since the demand planning organization is going to have to generate the forecasts for the new line anyway, several forward-thinking retailers have found that allowing demand planning to do the analysis allows them to get involved up front and ultimately prevents redundant analysis.
Establishing what processes your demand planning group will support is a critical step in determining the effectiveness of the group. Up next, Part 3 of this series will offer strategies for staffing up and building a demand planning group that’s skilled, experienced and poised to grow.
Jeff Ziegler is the senior director of solutions strategy at JDA Software.