Demand Planning: How to Properly Forecast Your Sales
Crystal balls are brilliant.
They let you know what’d going to happen in the future so you can act accordingly.
It’s sad that they only exist in fairy tales and stage shows.
We don’t have such a thing in the world of small manufacturing, but we do have something close:
Demand planning is the process of analyzing previous trends and future forecasts to predict demand for your products.
That means looking at the data, and then with a sprinkle of intuition, attempting to figure out how much of each product is going to be required in a particular time period.
If you can manage to do it accurately, the advantages are in plain sight:
Optimize inventory levels – saving resources and releasing tied up assets in safety stock;
Increasing profits – by only producing what you will sell;
Predict future revenue – with the use of accurate demand forecasting.
The approaches to achieving this are fairly broad, but there are some key elements which are central to the success of your demand planning...
Difference Between Demand Planning and Forecasting
Here’s one that gets a lot of people.
What is demand forecasting?
Also, how’s it different to the demand planning definition?
What it really comes down to is that planning has a much wider scope which takes factors such as context of business objectives and market environment into account.
You could say that forecasting is the most straight down the middle analytical part of the process. It means trying to work with data to get solid information on the potential demand you’re dealing with in the future.
Forecasting is certainly an important part of the puzzle, it just doesn’t always give a bigger picture.
Here are some common demand forecasting methods:
1. Market Expert Method
Ask the experts.
We’ve all heard that before. You can use your portfolio of expert contacts to fill out a survey on their opinions on demand forecasts in your industry and you can even get product specific.
This method requires some solid connections to be in place, but the cool thing is that it’s easy to do. Little statistical knowledge is required. Just make sure you have a big enough sample size of experts and that they are contacted separately.
Collusions between those that give answers might seem like a good thing, but it’s always best to first ask separately so you don’t create a bubble of discussion.
This approach might seem too simple to be true.
Just ask the people who buy your product: what do you plan on buying in the near future?
Because there’s no-one better to ask about requirements and needs than your customers. It can bring you a lot closer together as well.
Just be aware that although you can draw on the data this is a more supplementary method than others. It’s good to get a solid base using multiple methods so that you don’t get stuck on one angle.
3. Trend Prediction Method
Provided you have already had a fair amount of sales for your products over sufficient time, you can extrapolate on this data using statistical methods to draw a line for the future.
This is a method that is purely mathematical, so it especially works well in conservative industries which are easier to predict, such as necessity items (baby products and salt).
It’s a solid starting point for forecasting demand.
Of course, regardless of how many of the methods you choose, there is always space for more data.
Every piece of extra information you add will make your forecasts more accurate as factors become apparent.
But get your head around these methods and you’ll have some reliable data to work with when moving to the demand planning stage.
Demand Planning Process
So, you got the data, now what is demand planning?
It’s time to set down the crystal ball and look deep.
Search for patterns that tell the future of your business, and if you're lucky maybe even your own future too.
Demand planning is the step of bringing together your demand forecasts, making sense of them in the context of your business environment.
There are plenty of ways of doing this and you can construct your own plan over time which makes most sense for you.
But the first thing you want to do is get all your forecasts together and combine them.
You want to use the most up to date information on hand to create a kind of master forecast. It’s not necessarily going to be a single graph with a simple line through it.
That even means updating information as it becomes apparent after your initial plan.
More than likely it well end as a document which give estimates for demand for each product and product group.
Numbers which basically let you know what the demand is likely to be so that you can use them for optimizing your inventory and in your master production schedule later on.
These numbers aren’t necessarily going to be exact, so just make sure you have some solid ranges down.
It's great if at this point you can also create a process for your demand planning.
That way every time you go through the process again, you can keep a consistent method and spot anything that isn’t working well.
Because likely, the first time you run your plan, it won’t come out as you expected.
We’re talking long term here.
Fine tuning your crystal ball readings every time until the starry night that you start telling fortunes for your entire industry.
Demand Planning Strategies
Forecasts are together and the picture is built, you know what’s coming for the most part.
Now it’s a good idea to have a strategy – a battle plan.
Tactical ideas on how to deal with this magnificent painting in front of you.
Each stroke of the brush has represented a potential change in demand.
Now you got to make sure that your forecasts line up with the grander story of the surrounding environment.
Because what happens outside your business is as important as what happens on the inside.
Thankfully, there are a few methods such as SWOT, TOWS and PEST analysis which can give you a frame to approach wider contexts.
You can step back and think about the greater implications.
PEST analysis for example, has four parts:
Take a look around at politics on a local and national levels. Changes to regulations and taxes can have significant effects which are better tackled if seen in advance;
It’s good to know how the economy is doing on a large scale of course, but also what are consumer spending habits looking like?
What are the current trends and predictions for small manufacturing? Consumers are getting pickier with their purchases, so factors like effects on environment and community are as important as ever.
There’s no doubt that we are still deep in the age of technology. The changes in technological development and the way we use it are moving as fast ever.
It’s the area that you have no choice but to keep up with, or risk falling behind.
Take a look at Smart Workshop Software for example.
Katana has come about with solutions for small manufacturers which allows you to see your raw material and product inventory in real time.
You can use this to prioritize your production without having to constantly check if you have the materials to keep up.
It’s a great example of how technology can make a significant difference to future business decisions.
And you can always stay ahead of the curve by using PEST analysis.
Without this context it’s far too easy for your plans to fall by the wayside.
Tips for Excelling in Demand Planning
Take the time to examine all your opportunities for greater clarity before planning your production scheduling.
Here are some tips to help you have more focused goals:
1. Set your limits
Make sure you group your forecasts in ways that make sense. Products level, product group level and entire range makes the most sense. If they get mixed up, then your demand planning will be confusing.
2. Use your resources
Not just talking about books and internet here, it’s about all the people you know around you that have useful insights. Industry experts, customers, suppliers and even competition.
3. Make the purpose clear
If you’re getting input, whether data or just helpful insights, make sure the opposite party knows why your gathering it. Otherwise their contributions might end up misunderstood.
4. Use your results wisely
Once you have your results you want to start implementing them by setting up your safety stock and reorder points. Otherwise all that data will just be going to waste, won’t it?
Getting the Most Out of Your Demand Planning
Getting the fundamentals of demand planning and forecasting down is no easy feat.
If you get it right the first time, then honestly, give yourself a medal. Because you’re one of few, not many.
The reason it’s so difficult to get right is that every business has very different needs when it comes to demand, even with the help of demand planning software.
The analysis is just one part anyway.
After the demand forecasting you need to make sure that there is a significant degree of accuracy.
And then you need to make sure you are putting your data into context. Getting the story straight as they say.
Which is why you will always need the right tools available to you. Software that gives up-to-date information on your sales and inventory whilst also allowing you to implement your findings.
Katana Smart Workshop Software updates inventory in absolute real-time in tandem with your sales orders, so that you always get the story in order.
Plus, once you have your demand planning in place, you can use the data to start setting reorder points for your products.
You won’t be wasting resources on unnecessary stock whilst making sure there’s always enough in your inventory to keep your customers satisfied.
That means putting your crystal balls findings into real action.