Demand Planning is the critical driver of food supply chain operations from farmer to consumer. Complications from COVID-19 have amplified the need to forecast demand, and the accuracy of those forecasts has a direct impact on revenue and profits. And let’s not forget the effects of food waste on our environment and our communities in general.
Large enterprises across the food chain already realize the importance of demand planning, but small businesses are still anxious about making the leap. The problem for small retailers, suppliers, or producers is that the more they continue to rely on labor-intensive spreadsheets or inflexible planning tools, the more they limit their ability to stay current with trends in the foodservice industry. Meanwhile, big companies are developing massive data analyzing capabilities and are moving in on local businesses’ market share.
This article looks at why small businesses that still haven’t integrated demand planning in their business risk falling behind. Our next article looks at key performance indicators (KPIs) and best practices to help you transition to implementing a process to forecast demand for your products and act with this new information. Let’s begin with a key question: what is demand planning?
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What Is Demand Planning?
Simply put, demand planning is the use of available information to predict consumer demand. If companies know what products their customers are going to buy, they are better prepared to ensure they can meet their customers’ needs. Easier said than done, right?
So how does it work, and how can you use this in your company? The purpose of demand planning is to predict the future need for your products. For this, you need data, and the more data you have, the better your demand planning is.
To find relevant data, you can look at past sales or business outcomes like customer orders, sales, operations, finance, or marketing projections. You could also analyze existing inventory to calculate how much raw materials or components you’ll need to create products. Essentially, you want to keep a pulse on:
- All the products your company offers
- Where those products are in their life cycles
- Current inventory levels
- The typical demand patterns of each product
- The variability of the market
- What factors may influence demand
- How those factors are playing out in real-time
Once you introduce sufficient demand planning to your business, you’ll find your sales to be more proactive and yourself in a better position to avoid last-minute, costly surprises. In the food supply chain, in particular, this means:
- Lower costs of inventory
- Reduction in stockouts
- Reduced shrinkage and waste (excess and obsolete inventory)
- Increase in on-time, in-full deliveries
- Reduction in expedited shipping fees
- Opportunities to negotiate better pricing or terms with suppliers
Big Players Are Already Doing It
Big companies have been forecasting demand for years, if not decades. They have existing historical sales data from accounting summaries and consumer analysis. Their forecasting process is automated, which means the business forecasting software is integrated with its point of sale systems and information sources about the economic, market, and even weather changes.
As these companies get bigger, their technological and data-management capabilities grow. This means they can cross-reference ample amounts of data across months and years and develop a reliable account of trends that can help identify market changes and formulate strategies to encourage sales growth.In other words, the more data they have, the bigger they get.
Let’s look at Walmart, for example. With over 11,000 stores in 27 countries and an average of $32 billion in inventory, Walmart’s supply chain is both massive and complex. In 2013, Walmart suffered a serious in-store out-of-stock problem. Although products were available in warehouses, customers would come to the store and find many items missing from the shelves. Obviously, the mismanaged inventory led to many unhappy customers and a significant loss of business.
Eight years later, Walmart is more significant than ever. The demand forecasting system they introduced allows the company to crunch historical sales data on a weekly basis to come up with demand forecasts for roughly 500 million item-by-store combinations. They forecast a full 52-week horizon in weekly increments and generate a new set of projections every week. This means Walmart now has more products on the shelves, fewer out-of-stock situations, and increased sales.
For the little guy to compete against giants like Walmart with just an excel sheet and a pocket calculator is simply impossible. The only way for small businesses to stay in the game is to get on board with automated, integrated demand planning systems.
Why Your Business Can't Afford to Ignore Demand Planning
Introducing demand planning to your business is not just a necessity but will give you a real competitive edge. Valuable information about your business’ potential in your current market and other markets will allow you to make informed decisions about ordering, pricing, business growth strategies, and market potential.
Demand planning helps determine optimal inventory levels so that orders can be fulfilled in an efficient and timely manner and stock-outs avoided or at least minimized. In other words, forecasting your demand allows you to improve customer satisfaction and strengthen brand loyalty.
In terms of understocking and overstocking, demand planning goes a long way in helping you reduce overall costs. A proper demand plan will help ensure you’re not missing sales for not having in stock what your consumers want to buy. At the same time, chances are you would not store more inventory than you can sell, reducing all the associated capital costs and possible waste.
In 2021, demand planning is not just a nice-to-have tool. It’s an essential part of every company across the supply chain, big to small. The problem for small businesses is that demand planning can seem too complicated or costly to handle. But it doesn’t have to be.
Our next article looks at what key performance indicators you can use to ensure an effective demand plan and some best practices you can start implementing today.