Demand Planning (Definition, Importance and Methods)

Updated 23 January 2023

Maintaining a balance between having enough inventory versus a surplus or shortfall can be a challenging task for businesses. Planning for demand helps organisations meet consumer demand efficiently and manage their inventory with greater precision. By learning about this process, you can plan business purchases and manufacturing quotas with increased confidence. In this article, we discuss demand planning, outline who uses it, explain why it's important and describe how you can plan for demand using five different methods.

What is demand planning?

Demand planning is a management process that helps organisations meet customer demand with minimal excess inventory or supply chain disruptions. Businesses use it to meet consumer demand with efficiency. When businesses plan for this demand accurately, they can increase customer satisfaction, reduce waste and storage costs and increase profitability. They do this by creating strategies that plan how much of a product to buy or manufacture to meet the current levels of demand.

Anticipating consumer demand involves analysing historical sales, consumer trends and seasonal data to forecast future sales. You can draw data from internal and external sources to predict future demand. Planning for demand combines sales forecasting with the supply chain and inventory management to optimise efficiency. By analysing factors such as raw material surplus and storage, distribution costs and warehousing, businesses can optimise their processes and produce sufficient quantities of products. Remember, planning for demand is a continuous process in the same way that demand is fluid and can change as a result of a variety of factors.

What kind of factors influence demand?

In many industries, consumer demand can fluctuate significantly owing to several factors. An important part of a demand planner's role is understanding what drives demand. Here are some factors that can influence consumer buying decisions and the level of demand for various products:

Product price: Price is one of the most important factors driving consumer demand and changes in price or the value associated with price can change the level of demand for a product. Likewise, changes to competitor pricing strategies can also affect the level of demand for your products.
Seasons: Seasonal changes can play a role in the level of demand for products associated with particular weather conditions or seasonal activities, like skiing or swimming.
Economic conditions: The general state of the economy can drive consumers in and out of certain markets. During boom periods, there may be higher demand for luxury items, while demand for low-priced generic goods may go up during market downturns.
Competition: The availability of product substitutes can significantly change the level of demand for products. If new players enter the market, demand for existing products can decrease.
Consumer tastes and preferences: Some markets are more fickle than others and can become highly reliant on consumer trends and tastes. Preferences can swing following marketing campaigns, and general market trends can lead to fluctuations in consumer demand.
Unforeseeable events: Severe weather events, natural disasters, pandemics, wars and other unforeseeable events can have significant effects on demand, both positive and negative. These factors are difficult to plan for and may require some level of risk analysis.

People who use planning for demand methods

There are many departments within an organisation that may predict and plan for future demand. Sales and marketing teams use this form of planning to find out where their time is best spent. Finance departments can use it to decide budgets and allocate funds. Planning for demand may also be useful to supply chain, purchasing, operations and production teams. Some beneficial skills for executives when planning for demand are:

Analytical skills: Predicting demand and planning for it can involve significant data analysis to make accurate forecasts. Some of the analytical skills you can benefit from are research, forecasting, data-mining, data interpretation and reporting.
Strong communication skills: Demand planners may draw information from several departments. Collating this information requires collaboration, confidence, active listening and open-mindedness.
Computer literacy: Demand planners can use supply chain management software to improve planning and save time and money, so it's important to understand how these programs work and have strong computing skills.

Importance of planning for demand

Planning for demand is important because it increases the likelihood of having the right level of inventory to support revenue and customers. Without enough stock, organisations can lose customers to competitors. Where demand is over-estimated, too much stock can mean losing money because of the cost of production and storage.

Maintaining a well-stocked inventory while avoiding a surplus is the key benefit of planning for demand. To achieve this, businesses need foresight about potential market shifts. Accurate demand plans are an important part of gaining this foresight, and it helps organisations adjust based on changing markets. Customer demand can be fluid, so being flexible, proactive and responsive to changes can help organisations meet demand. Here are some other reasons planning for demand is important:

Reduced waste
Minimised shipping costs
Decreased inventory costs
Increased on-time delivery

Demand planning vs. demand forecasting

Planning for demand and demand forecasting are two related processes for managing inventory. Demand forecasting forms the foundation for planning. It uses past sales data to predict future sales, determining what's likely to happen. Planning for demand takes forecasting a step further. It uses demand forecasts to plan the level of inventory necessary and the operational activities involved in producing that inventory. With this type of planning, organisations map out the steps needed for each part of the supply chain to run at an optimal level.

5 methods for planning demand

Demand planners can use several methods to meet customer demand and avoid under or overstocking. Here are five methods you might use in the organisation you work for:

1. Trend projection

Trend projection uses past sales data to predict future sales. It's a simple strategy that considers whether past sales trends are likely to reoccur and predict future sales accordingly. For example, if you have higher sales in summer every year, you can assume this trend may continue and use past data to predict future sales. Alternatively, if there was a sudden decrease in demand following an unforeseen natural disaster, this may be a one-off event that's unlikely to occur in the following year, and you can therefore remove related sales data from future forecasts.

In new organisations where there isn't enough past data to project future sales, demand planners can use sales data from similar businesses. Here are some methods you can use to project trends:

The graphical method: Using this method, you can plot annual sales data on a graph and draw a line through the plotted points. You can then use the line's trajectory to make predictions about future sales.
The Box-Jenkins method: This method looks at a time-series of data to reveal seasonal or monthly variations. It uses these differences to make predictions.
The fitted-trend equation or least square: This method helps you to plot data at regular intervals and create trend equations. Examples of trend equations include linear treads that show a trend line increasing at a constant rate and exponential trends that show a curved line increasing or decreasing at exceedingly greater rates.

2. Market research

Demand planners can conduct market research to gain insight into demand trends and devise future sales strategies. You can do this by gathering data about things like demographics and interests directly from your consumers through surveys. Market research can identify future trends and consumer characteristics that you can use to predict sales. Understanding your existing customers can also help you find new customers and new opportunities in the future.

3. Sales team forecasting

Sales team forecasting allows you to predict demand based on the information your sales team gains. Salespeople often establish close customer relationships and learn first-hand about customer desires and concerns. This means a sales team may have valuable information about product demand and competitor activity. By listening to sales team predictions about future demand, you can respond and adjust as necessary.

4. The Delphi method

The Delphi method uses a panel of external demand planners to make demand predictions based on a list of questions drawn from your demand plan. Participants provide anonymous responses to your questions to encourage honest feedback. The expert panel then reviews these responses to discuss the most viable options and reach a consensus. This method can be useful if you have limited sales data.

5. Econometric model

Econometrics forecasting combines sales data with economic factors to determine how the economic variables might affect future demand. This method uses mathematical equations that combine variables like consumer spending, household income, tax rates, interest rates and employment with past sales figures to predict future demand. They can forecast demand for a product, a group of products or an economic sector.

Two econometric methods you can use are:

Regression method: This can factor in one or multiple economic variables to project demand. For example, single-variable demand may depend solely on population, while multiple variable-demand may depend on population, product price and competitor prices.
Simultaneous equations method: This analyses interactions between single- and multi-variable demands by combining the equations simultaneously to forecast demand.